Tax Residency - Explained!

Let's talk about Canadian residency!

This is not a post about living in the very expensive housing market of Toronto or Vancouver, but about residency for tax purposes.

I find a lot of people who I've worked with or through my network who consider themselves to be "snowbirds".  It gets very cold up here in Canada and these "snowbirds" will typically travel to warmer areas like Florida to get away from the cold.  However, with those either travelling to escape the frigid air or digital nomads, there are tax considerations that must be given some thought.

Photo by Helloquence on Unsplash

A resident for tax purposes is not the same as a residence for citizenship or immigration purposes.  Residents of Canada must pay tax on their worldwide income.
  • The Income Tax Act ("ITA") does not define the term "Residence"
  • Individuals can be considered either:
    • be a full time resident, 
    • a non-resident, 
    • a part year resident, 
    • a deemed resident
  • In order to determine if an individual is a non-resident after they leave Canada, we have to look at whether they have/have not maintained residential ties or a “continuing state of relationship” with Canada which arises from looking at strong evidence of ties through a variety of circumstances

Possible Residency Alternatives:

  1. Full time resident - These individuals are taxed on worldwide income for the full year due to a “state of continuing relationship”
  2. Deemed resident - also taxed on worldwide income for the full year
  3. Part year resident taxed on worldwide income for part of the year, however, must have evidence of clean break, or fresh start
  4. Non-resident – taxed in Canada on income earned in Canada - Non-residents for income tax purposes will only pay income tax in Canada on the basis they have a connection to Canada
    • A non-resident will have a connection to Canada if they:
      • Earn Canadian employment income
      • Earn Canadian business income 
      • If they dispose of taxable Canadian property   
Photo by Helloquence on Unsplash

Determining a Person’s Residence for Income Tax Purposes
  • Taxpayers can be resident of more than one country
  • An individual who lives and works in Canada and who has family that lives in Canada is a clear a resident of Canada for Income Tax purposes
  • Every single taxpayer must have at least one country of residence for income tax purposes
  • In situations when a taxpayer is resident in more than one country, then the relevant international tax treaty should be examined as it will specify which country has priority taxing rights to tax income at source
    • This is very important with those with multiple residency to consider in order to avoid paying more taxes than necessary
  • NOTE:  Tax treaties override domestic tax law

The ITA can Deem Individuals Residents – by virtue of extending the meaning of resident

This concept is known as the "Sojourner" rule
  • The ITA will deem a non-resident person resident for tax purposes even if they were temporarily present in Canada and if the individual spends 183 days or more in Canada during the year even though they are resident of another country during the rest of the year
  • These individuals are taxed on their worldwide income for the entire year
Example:
  • Individuals who commute to Canada for employment purposes are not sojourners
  • However, a vacationer who spends 183 days in Canada will be deemed a resident
In order to become a Non-resident for tax purposes, there are some questions that must be considered to determine if this applies. Here are some thoughts:
  • First, let's consider, Intent: Did they show the intent to return in some way?
  • Secondly, travel consideration such as - Frequency of Visits: Regular?  Continuous basis?
  • Thirdly, where do you live most of the time, such as - Residential ties outside of Canada: have you settled somewhere or are you constantly traveling?
One of the most important factors is there a “Continuing state of relationship” criteria established through case law/common law

Primary indicators of residency

  1. Having a home, owned or rented in Canada that is available to live in
  2. Having immediate family members living in Canada (spouse, minor children less than 17 years old) unless living separate or apart prior to departure
  3. Dependents remain in Canada

Secondary Indicators of residency are less important than primary ones

  1. Owning Canadian assets (personal property such as furniture, cars, clothing)
  2. Social ties with Canada (having memberships in Canadian organizations or social clubs)
  3. Economic ties with Canada (Canadian employer, employment contract, an active investment in a Canadian business, bank accounts, RRSPs, credit cards, securities)
  4. Having a provincial driver’s license or a provincial health card, work permit, union membership, Canadian Passport
  5. Resident’s return cannot be foreseen by social ties

Let's look at an example to bring some of these concepts into perspective

Sarah and her husband John are leaving Canada this year to live in Spain and do not intend to return to Canada for the foreseeable future. They have three children, aged 7, 15 and 18. Sarah will leave Canada to visit her family in the U.S. on September 14. She will arrive in Spain, via the U.S., on October 17 at which time she will begin her Spanish residency. John and their two youngest children will fly to Spain to join Sarah on October 21. The eldest child will remain in Canada where she attends college and is supporting herself with scholarship funds and a part-time job.

Based on this example, on what date will Sarah be considered a non-resident for Canadian tax purposes?

In order to determine this, let's look at some key dates:
  • Sarah leaves Canada on October 14
  • Her spouse and children leave Canada on October 21
  • Sarah becomes a resident of Spain on October 17, the country she has chosen for immigration
According to paragraph 15 of Interpretation Bulletin IT-221R3,
Generally, the CCRA will consider the appropriate date to be the date on which the individual severs all of his or her residential ties with Canada, which will usually coincide with the latest of the dates on which
(a) the individual leaves Canada,
(b) the individual's spouse or common law partner and/or dependants leave Canada (if applicable), or
(c) the individual becomes a resident of the country to which he or she is immigrating. 
the date on which an individual becomes a non-resident is the latest of the above mentioned facts. In this case, it would be October 21.

Disclaimer:  As always, please consult your own tax professional / advisor on the specific rulings that may apply to your own case.  As each personal situation is different.  This piece is meant to provide a general understanding about Canadian Tax Residency but may not be applicable to you.

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