Determining Tax Residence

Introduction

Tax residency status is a critical factor in determining the extent of a person’s tax obligations in Canada. Canadian tax residents are taxed on their worldwide income, while non-residents are taxed only on income sourced from Canada. 

This article explores the intricacies of tax residency, including its significance, the factors that influence residency determinations, and the nuances of significant residential ties.

The Significance of Tax Residence

Under Canada’s Income Tax Act:

• Residents: Taxed on worldwide income (subsection 2(1) and section 3).
• Non-Residents: Taxed only on Canadian-sourced income, including:
  • Employment income in Canada.
  • Business income earned in Canada.
  • Gains from disposing of taxable Canadian property (subsection 2(3)).

Tax residency status, therefore, determines the scope of Canada’s taxing jurisdiction.

Determining Canadian Tax Residency

Canadian tax residency can be classified into three categories:

1. Factual Residents

The Income Tax Act does not explicitly define "resident" or "ordinarily resident." Courts have interpreted these terms based on personal circumstances, evaluating:

• Past and present life habits.
• Duration and regularity of visits to Canada.
• Ties within and outside Canada.
• Purpose and permanence of stays abroad.

Significant Residential Ties:

• A home in Canada.
• A spouse or common-law partner in Canada.
• Dependents in Canada.

Secondary Residential Ties:

• Ownership of property (e.g., vehicles, furniture).
• Canadian identification (e.g., passport, driver’s license).
• Economic ties (e.g., Canadian bank accounts, investments).

2. Deemed Residents

An individual who sojourns in Canada for 183 days or more in a year is deemed a resident, regardless of other ties. This rule applies even without a “settled routine” or permanent ties to Canada (paragraph 250(1)(a)).

3. Deemed Non-Residents

Canada’s tax treaties often include tie-breaker rules to resolve dual residency conflicts. These rules evaluate:

1. Location of a permanent home.
2. Centre of vital interests.
3. Habitual abode.
4. Nationality.

If a treaty determines an individual to be a resident of another country, they are deemed a non-resident in Canada for tax purposes (subsection 250(5)).

Are Significant Residential Ties Less Relevant for Immigrants?

Tax cases suggest that significant residential ties hold greater weight for Canadians attempting to sever residency than for foreigners establishing Canadian residency.

Examples:

1. Canadian Residents Attempting to Sever Residency:
   • Thomson v. M.N.R.: A Canadian-born taxpayer who moved abroad but maintained a home in New Brunswick and frequented Canada was deemed a resident.
2. Foreigners Entering Canada:
   • Shih v. R.: Despite owning a home and having a family in Canada, a taxpayer who returned annually to Taiwan for work was not deemed a Canadian resident.
   • Song v. The Queen: A taxpayer residing in Japan with a husband in Canada was not considered a resident.
   • Mahmood v. The Queen: A taxpayer with a condo, Canadian bank accounts, and family in Canada was not deemed a resident due to business activities abroad.

These cases illustrate that significant residential ties weigh less heavily for foreigners unless they reflect an intention to settle in Canada.

Tax Tips for Determining Residency

1. Submit a Residence-Determination Request:
   • Use Form NR73 (Leaving Canada) or Form NR74 (Entering Canada) to request the CRA’s opinion on residency status.
2. Provide Comprehensive Details:
   • Ensure all relevant facts and legal arguments are included to support your position.
3. Understand Tax Treaty Provisions:
   • Familiarize yourself with applicable tax treaties to resolve dual residency conflicts.
4. Maintain Documentation:
   • Keep records of residential ties, travel history, and economic activities to substantiate your residency status.

Conclusion

Determining tax residency in Canada involves a thorough assessment of personal circumstances and residential ties. Misinterpreting residency status can lead to errors in tax reporting, resulting in penalties or excessive tax liabilities.

For tailored advice on tax residency or assistance with filing residence-determination forms, consult a qualified tax professional to ensure compliance and minimize risks.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

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