The basis for Canadian taxation
The Canadian income tax system is based on residence status. Under subsection 2(1) of the Income Tax Act, an income tax is payable on the taxable income of every person resident in Canada at any time in the year. There is a common misunderstanding that it is based on citizenship or immigration status. In fact, you can be considered a resident of Canada for tax purpose even if you are not a Canadian citizen or landed immigrant. On the other hand, you may not be considered resident of Canada for tax purpose even if you are a Canadian citizen under certain conditions.
Residence of individuals – Common Law test
The definition of the term residence does not exist in the Income Tax Act which simply deems certain individuals to be residents in certain circumstances. The meaning of residence is defined in common law. In Thomson v MNR, the Supreme Court of Canada made the following comments regarding residence:
- It is quite impossible to give it a precise and inclusive definition. It is highly flexible, and its many shades of meaning vary not only in the contexts of different matters, but also in different aspects of the same matter.
Case law indicates residence is a factual determination and defines residence to be “a matter of the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living with its accessories in social relations, interests and conveniences at or in the place in question”. The court has identified certain factors in prior cases regarding the determination of residence:
- It must be assumed that every person has at all times a residence;
- A person may be a resident in more than one country at the same time;
- Residence is primarily a question of act;
- Intention may be relevant but not determinative;
- Residence generally involves either the taxpayer’s physical presence in the jurisdiction or the ownership of or right to occupy a building in the jurisdiction;
- Where a taxpayer has resided in Canada for a lengthy period of time, clear and irreversible measures are required to terminate this residency. In these circumstances, evidence of social and economic ties may play an important role.
Subsection 250(3) of the Income Tax Act extends the ordinary meaning of residence by providing that “a person resident in Canada includes a person who was at the relevant time ordinarily resident in Canada”. Although early cases regarded the wording in the provision as superfluous, it can be relied upon together with the common law test to determine whether a person who has been absent from Canada for a significant period of time retains his or her Canadian residence. Justice Taschereau made the following statements in Thomson v MNR:
- … the words “ordinarily resident” are broader than the word “residing,” and that the former were used to cover a filed that the latter did not occupy. The aim of Parliament was to tax, not only the residents of Canada, those who have their permanent home, their settled abode, but also those who live here most of the time, even if they are absent on temporary occasions. The first group comes under the classification of “residents”, and the second under that of “ordinarily residents”.
Deemed provision – sojourners
Paragraph 250(1)(a) of the Income Tax Act provides that a person shall “be deemed to have been resident in Canada throughout a taxation year if the person sojourned in Canada in the year for a period of, or periods the total of which is, 183 days or more”. The term “sojourner” means something less than residence. A sojourner is a person who is physically resident in Canada, but on a more transient basis than a resident. For example, a person who is a resident of another country and who comes to Canada on a vacation or a business trip.
This deeming rule is only important when an individual is a non-resident throughout the year under common law. It does not apply to part-time resident such as an individual who becomes or ceases to be a resident of Canada during the year. The tax implication for sojourners is quite significant as deemed residents of Canada for tax purpose are subject to Canadian income tax based on their worldwide income for the entire year.
Canada Revenue Agency’s position regarding residence
The Canada Revenue Agency (CRA) will consider various factors that are broken down into two categories when determining a taxpayer’s residential ties: significant factors and secondary factors.
Significant residential ties to Canada typically include:
- Dwelling place or places;
- Spouse or common-law partner; and
Secondary residential ties generally include:
- Personal property in Canada such as furniture, clothing, automobiles and recreational vehicles;
- Social ties with Canada such as memberships in Canadian recreational or religious organizations;
- Economic ties in Canada (e.g. employment with Canadian employer, active involvement in Canadian business, bank account, retirement accounts, credit cards and investment accounts);
- A Canadian driver’s license;
- A Canadian passport; and
- Medical and hospitalization insurance with a Canadian province or territory.
There are other residential ties the CRA may consider to be relevant in particular situations which include retaining mailing address, post office box or safe deposit box, personal stationery with a Canadian address, Canadian telephone listings and Canadian newspaper and magazine subscriptions.
If you are a factual resident of Canada and you decide to move to another country, the CRA will consider whether you have maintained factual residency status in Canada. Generally, unless you have severed all significant residential ties with Canada upon leaving Canada, you will continue to be a factual resident of Canada and subject to Canadian tax on your worldwide income. if an individual leases a dwelling place located in Canada to a third party on arm’s-length terms and conditions, the CRA may consider the dwelling place not to be a significant residential tie with Canada. Where an individual was living separate and apart from his or her spouse or common-law partner prior to leaving Canada, by reason of a breakdown of their marriage or common-law partnership, that spouse or common-law partner will not be considered to be a significant tie with Canada.
The secondary ties are reviewed together with all the other facts and circumstances to determine your factual residency status. If you have one secondary residential tie, then it is not necessarily sufficient to establish residency in Canada (especially in the absence of having significant residential ties to Canada).
If you have severed sufficient residential ties to Canada during the year, you will be considered to be a factual resident for part of the year and a non-resident for the rest of the year. For the period you are resident for part of the year, you are subject to income tax on your worldwide income. The CRA generally considers the date you cease residency in Canada and acquire non-resident status, as of the date you have severed all residential ties with Canada. This date usually corresponds with the latest of the dates:
- you leave Canada;
- your spouse or common-law partner and/or dependents leave Canada (if applicable);
- you become a resident of the new country.
If you were a resident of another country prior to being resident in Canada and are leaving to reestablish residency in that country, you will be considered a non-resident on the date you leave Canada, even if, your spouse or common law partner or dependents remain in Canada temporarily. Section 128.1 of the Income Tax Act has the effect of imposing a “departure tax” on person giving up Canadian residence. The policy is to prevent Canadian residents from leaving the country without reporting capital gains that had accrued (but not been realized) while they were residents of Canada. Section 128.1 deems a taxpayer who ceased to be a resident of Canada to have disposed of each taxable Canadian property at fair market value immediately before ceasing to be a resident and to have reacquired the same property at a cost equal to the deemed proceeds of disposition.
Moving to Canada.
If you move to Canada, the CRA will consider whether you established residential ties in Canada in order to determine if you are a factual resident for tax purposes. Specifically, the CRA has stated they will consider:
- Whether you have established significant residential ties such as having a dwelling place in Canada and a spouse or common-law partner that lives in Canada (Note: if you don’t relocate to Canada and simply acquire a dwelling place in Canada for your retirement in the future and in the meantime you ease the property to a non-arm’s length third-party for the period between acquiring the property and residing in it, then unless you have other residential ties with Canada, the dwelling place, in and of itself, may not be a significant residential tie).
- Whether you applied for and obtained landed immigrant status and provincial health coverage, which generally constitutes significant ties with Canada.
- Whether you establish or maintain residential ties in other countries. For example, if you are moving to Canada, the sale of a former residence in another country would support the establishment of residency in Canada.
- The CRA says that there must also be a degree of permanence to an individual’s stay in Canada or outside Canada. Therefore, they will consider regularity and length of visits to Canada in addition to the residential ties you have inside and outside Canada.
If you establish Canadian residency part way through the year, you are subject to Canadian income tax on your worldwide income during the period of time you are a resident of Canada. In the following year, provided you maintain Canadian residency, you will be a factual resident for the entire year and subject to tax on your worldwide income for the entire year. During the period that is part way through the year in which you were a non-resident of Canada, you are subject to Canadian tax on Canadian source income only. When you move to Canada and become a factual resident of Canada, you will generally be considered to have become a resident of Canada for income tax purposes on the date you entered Canada.
Dual residents and tax treaties
It is possible to be a resident of Canada under the Canadian income tax rules and at the same time, a tax resident of another country under the other country’s tax rules (i.e. you may be a dual resident). In that case, the individual may be subject to double taxation in both countries. If you are a dual resident and Canada has an income tax treaty with the other country, the treaty may provide “tie-breaker rules” so that you are deemed to be a resident of only one of the countries to avoid double taxation. The relevant tax treaty should be consulted with an experienced tax lawyer to determine if tie-breaker rules are available.
Pro tax tips – residency determination is a question of fact
Residency determination is a question of fact. A taxpayer can get additional certainty by filing NR73(Determination of Residency Status – Leaving Canada) or Form NR74 (Determination of Residency Status – Entering Canada) and CRA will provide their opinion regarding your tax residence status. One thing to keep in mind is that the CRA’s opinion is not legally binding and it’s based on the facts you presented to them. If you are leaving or moving to Canada and would like to discuss the tax implications, contact our office for a consultation with an experienced Canadian tax lawyer.