For the purposes of determining tax liability, taxpayers are categorized into two groups: residents (of Canada) and non-residents (of Canada). Generally, taxpayers who are Canadian residents are subject to tax on all worldwide income; however, taxpayers who are not Canadian residents are generally only subject to tax on income tied to Canadian sources.1 Therefore a taxpayer’s residency status can have significant tax implications.
Quite a few people assume that taxation in Canada is based on citizenship or immigration status. This is a common misunderstanding. The test is whether or not you are a resident of Canada. A person can be a resident of Canada even if they are not a Canadian citizen or a landed immigrant. On the other hand, a person who is a Canadian citizen may not be a Canadian resident for income tax purposes.
It can be confusing. Sometimes it is best to start by thinking about where you live rather than what your citizenship or immigration status is.
Residency is determined annually. If it is determined that a taxpayer was a resident at any time during the year, that taxpayer is considered to be a resident for the whole year. There is an exception for a “part-time resident” under section 114 of the Income Tax Act of Canada (ITA). Under this provision, if a taxpayer enters or leaves Canada permanently, the taxation year will be split and the taxpayer will be categorized as a “part-time resident.” Part-time residents are subject to special rules for calculating income, including income-splitting; however, this will only arise in the year that the taxpayer enters or leaves Canada permanently.
The term “resident” is not specifically defined in the ITA. As a result, it is necessary to review Court decisions (case law) to provide guidance on the meaning of resident and in what circumstances a person will be considered to be a resident and in what circumstances they will not be a resident.
The Canada Revenue Agency (“CRA”) publishes regular information sheets, called “folios”, setting out the CRA’s interpretation. The folios can be very helpful in attempting to predict how the CRA will categorize a taxpayer (i.e. resident or non-resident); unfortunately, the folios are not legally binding (unlike the case law). For example, refer to folio S5-F1-C1.
The CRA may also ask a person to complete a questionnaire (NR 73: Determination of residency status (leaving Canada) and NR 74: Determination of residency status (entering Canada)) and may make a determination of your residency status. But it is important to recognize that this is a determination by the CRA and a person is entitled to disagree with the CRA and have the question determined by the Court.
There are special rules for determining the residency of corporations and trusts, but that is beyond the scope of this article. Here, we will confine our discussion to residency of taxpayers who are individuals.
The ITA provides for residency of individuals into the following types:
1. Ordinarily Resident. An individual is ordinarily resident if he or she meets the ordinary, dictionary definition of “resident”. In determining residence, the Courts consider residential “ties” to Canada, including visits or stays in Canada, assets in Canada, and social connections to Canada. The Supreme Court of Canada held that an individual “is ‘ordinarily resident’ in the place where in the settled routine of his life he regularly, normally or customarily lives.”2
2. Deemed Resident. A non-resident can be “deemed” to be a resident in certain circumstances. Under section 250(1) of the ITA, an individual may be considered a deemed resident if he or she stayed in Canada for a total of 183 days or more throughout a taxation year (it need not be consecutive). Section 250(1) also sets out other circumstances where an individual may be considered a deemed resident, including people who serve in the Canadian Forces, an ambassador or high commissioner of Canada or others listed in s.250 (1) of the ITA.
3. By international tax treaty. Because a person can have a home in more than one country it is possible to be a resident of two (or more) countries at the same time. A person can be a dual resident. This may require the person to file tax returns in two countries and possibly report their worldwide income in both countries. To avoid this problem, Canada has entered into numerous tax treaties with other countries to avoid double taxation. These treaties contain “tie breaker” rules to resolve the question of residency when a person is resident in both countries. The rules ensure that the person is only a resident of one of the countries.
Residency status in tax law is not straight-forward, and in some cases it can be counter-intuitive. While the CRA can make a finding of residency status for a taxpayer, it is possible for the CRA to make an incorrect determination. The CRA’s determinations are not always final and can be disputed. Ultimately, it is the Courts that have the final say in determining residency status.
If you currently live and/or work outside of Canada for all or part of the year, are planning a change that may affect your residency status, or have been assessed by the CRA based on a residency finding that you feel may be incorrect, you should seriously consider contacting me to discuss the tax implications of your situation and your options.
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1For more information on the tax and reporting obligations of residents and non-residents, see my article in last month’s issue of Legal Alert titled Foreign Income and Assets: Tax Implications under the Canadian Income Tax Act.
2Thomson v Minister of National Revenue, [1946] SCR 209, 1946 CarswellNat 76, at para 71.
Tom Fellhauer heads up the Tax Group at Pushor Mitchell LLP. You can contact Tom at (250)869-1165, or at [email protected]
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