Tax Nexus
| Author | Vern Krishna |
| Profession | Professor of Common Law, University of Ottawa Barrister at Law |
| Pages | 51-77 |
51
CHA PTER 3
TA X NEXUS
A. INT RODUC TION
In this chapter we exa mine the first of the five basic tax questions: who
is taxable? The answer to this question determines the substantive and
administrative structure of the statute that one devises to raise rev-
enue. Even the most rudimentary t ax system based on head count (for
example, a poll tax) raise s the question: whose heads should we count
for the purposes of tax collect ion? Thus, we start with the question: on
what basis do we asser t taxable nexus?
There are several options for taxing individuals. We can tax them
based on citizenship or nationality on the theory th at citizenship con-
fers a legal status that is not constrained by geographical boundar ies.
One can argue that t he citizens of a country should pay their taxes to it
regardless of where they reside because they derive benefits from their
citizenship. Even non-resident citizens of a state are entitled to its po-
litical protection and, therefore, should bear some of the costs to reflect
the benefits of citizen ship.
Citizenship implies duties and responsibilities that require a bal-
ancing of the costs and benefit s of national belonging. During the Israeli
incursion into Lebanon in 2006, for example, Canadian, American, Brit-
ish and Scandinavian governments evacuated thei r citizens from the
war zone. Canada evacuated 15,000 of its citi zens from Lebanon at a
cost of $85 million. Approximately 7,000 of the evacuees then returned
to Lebanon after hostilitie s ceased. Canadian taxpayers paid the bill.
However, using citizenship as the sole connecting factor has prob-
lems. Citizenship is t he political connection between an individual and
INCOME TAX L AW52
her country and has litt le bearing upon economic activities. There are
also admini strative difficulties in assert ing claims against non-resident
citizens and mea suring the value of the benefits they derive during
their absence from their countr y of citizenship. Thus, Canada decided
early on that it would not use citizenship as a connecting factor for tax
purposes.
Indeed, even those countries (and there are very few1) that use
citizenship or nationality to establish tax able nexus usually couple it
with other factors, such as ta xpayer residence or source of income. The
United States, for example, assert s full tax liabil ity on the worldwide
income of its citizens and aliens who reside in the country. Thus, Can-
adians with dual Canadian-US citi zenship are required to annually file
US tax returns even if they do not owe US taxes.
Domicile is another form of legal status. Unlike citizenship, how-
ever, domicile uses different criteria: physical presence and an inten-
tion to reside indefinitely in the countr y. We can justify ta xation based
upon domicile on the theory that an ind ividual should pay tax com-
mensurate with the individual’s economic and social association with
the country.
Domicile depends upon intention and free choice. Every person
has a domicile of origin at birt h, usually the father’s domicile. An indi-
vidual may also adopt a domicile of choice, which entail s physical pres-
ence in a country coupled with an intention to reside t here indefinitely.
Depending as it does on physical presence and intention, domicile is
never easy to admini ster for tax purpose s. Unlike Britain, C anada does
not use domicile for income tax purposes.
Residence is another option to connect legal status with a country.
The theory underlying the use of res idence as a connecting factor is that
a person should pay taxes to the countr y with which she is currently
most closely connected in economic and social term s. The obligation
to pay tax based on re sidence derives from the principle that persons
who benefit from their economic and social affiliation with a country
should be obliged to contribute to its public finances. Residence as a
connecting factor is also adm inistratively practical and convenient. It
is generally easy for a country to ensure compliance with its ta x laws if
the person over whom it asserts the law has close economic links w ith
the country and has assets within its administrat ive reach.
Taxation based upon source of income is essentia lly a territorial
form of jurisdiction. It is administratively practical and easily enforce-
1 Few countries (Unit ed States, Philippines, Korea , Vietnam and Eritrea, for ex-
ample) use citizen ship as a basis of person al taxation.
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