The client was born and raised in Canada. After obtaining his MBA in 1968, he began working as a consultant. In July 1976, the corporation of which he was a major shareholder entered into a contract with a Canadian Crown corporation to furnish consulting advice in Nigeria. Services were to commence July 15, 1976 and end January 14, 1978. A daily rate of fees was set, but total billings were not to exceed a specified maximum. The contract also provided for moving, travel and living expenses for the client and his dependants up to a specified maximum.
All fees and expenses were paid to the client's corporation in Toronto. He continued to be a shareholder, director and officer of the corporation and he remained very interested in its activities. The corporation paid the client and was instructed to deposit these payments in the client's Canadian bank account which he continued to maintain for this purpose and for the operation of the rental property that he owned. He felt that the Canadian bank account was necessary because of foreign exchange difficulties that he might otherwise encounter. He instructed the corporation not to withhold any income taxes on these payments because he intended to give up his Canadian residence status to establish an international consulting business abroad upon termination of the Nigerian contract.
Since the client had little time before leaving for Nigeria, he quickly rented the unit that he had been occupying in a duplex that he owned, on a month-to-month basis. He intended to sell the property when the market would provide him with a reasonable profit. He arranged to have his corporation manage the renting of this property for a fee which he paid to the corporation.
He stored his major furnishings and winter clothing in Canada. His smaller household and personal effects were shipped to Nigeria. He sold his car, cancelled his auto insurance and a gasoline company credit card and obtained an international driver's licence. He retained credit cards such as American Express, Visa and MasterCard, as well as his RRSP accounts. Under the contract he was also required to maintain his provincial health insurance coverage.
When he left Canada for Nigeria, he was accompanied by his friend, Martha, who had been a part of his life for over a year before their departure. She had obtained leave from her university program of studies for the fall 1976 term. The couple took up residence in a hotel suite that was converted into an apartment at the Holiday Inn in Lagos, Nigeria. No conventional living quarters were available, because of the housing market. During his stay in Nigeria, the client obtained a Nigerian driver's licence and maintained two bank accounts and two cars. He joined sports, dining and social clubs in Lagos. He was provided with an office by the Nigerian government and he carried business cards which identified him as a consultant with that government. He promoted the consulting business of his Toronto corporation actively in Nigeria in the hope of establishing the business abroad, but he did not generate sufficient business to stay in Nigeria beyond the period of the existing contract. He did not seek to extend his visa or pay any form of tax on his income in Nigeria.
Martha returned to Canada for the winter 1977 term, and then returned to Nigeria for the summer of 1977, but returned again to Canada in September 1977 to begin a new program.
By December 1977 the client had billed the limit under the contract. He vacated his apartment, sold his cars, packed up his possessions, including some artwork, textiles and other souvenirs that he had acquired, and returned to Canada.
REQUIRED
Prepare a memo for the tax person in your firm who will advise the client on the income tax consequences of these facts. Evaluate in detail the alternatives in the residence issue as they relate to this fact situation. Discuss each possible degree of residence and its tax consequences. State your conclusions on the case after weighing the significance of the facts considered.