1 Connection Factors
1.1 To what extent is domicile or habitual residence relevant in determining liability to taxation in your jurisdiction?
Domicile is generally not relevant to the determination of an individual's Canadian tax liability. Rather, the rationale for imposing Canadian income taxes on individuals is based on the concept of tax residence in Canada (domicile and habitual residence, however, may be relevant in the context of Wills and family law matters).
1.2 If domicile or habitual residence is relevant, how is it defined for taxation purposes?
"Domicile" is not defined under the Income Tax Act (Canada) (the "Act") and the concept of habitual residence is only relevant insofar as an individual is resident in Canada for tax purposes. This latter concept is further discussed in questions 1.3 and 1.4, below.
1.3 To what extent is residence relevant in determining liability to taxation in your jurisdiction?
As noted, residence forms the basis for determining an individual's liability to pay income taxes in Canada.
1.4 If residence is relevant, how is it defined for taxation purposes?
Under subs. 250(1) of the Act, individuals are deemed to be residents of Canada if they spend more than 183 days in Canada during a calendar year. Otherwise, individuals may still be deemed to be residents of Canada if they meet the common law test for Canadian tax residency. The most important common law consideration is whether individuals maintain residential ties to Canada. A dwelling place or places in Canada and a spouse and/or dependants who remain in Canada are indicative of residential ties to the country. Individuals who maintain a significant amount of personal property in Canada, who keep a Canadian driver's licence and maintain social and economic ties to the country may also be considered to have residential ties to Canada, but each case will turn on its own facts and circumstances. In certain cases, a tax treaty between Canada and another country will be relevant to the determination of an individual's tax residence.
1.5 To what extent is nationality relevant in determining liability to taxation in your jurisdiction?
On its own, nationality is irrelevant in determining whether a person is liable to pay taxes in Canada, making Canada an attractive place to invest. As noted in question 1.3 above, only residence is relevant in determining a person's annual income tax liability. However, if a taxpayer is deemed to be resident in two countries, one of which is Canada, "tie-breaker rules" under international tax treaties may apply to determine the taxpayer's country of residence. Although not a primary consideration, nationality may be a factor that is considered when applying such rules.
1.6 If nationality is relevant, how is it defined for taxation purposes?
Further to question 1.5, nationality is not relevant to the determination of a person's liability to pay Canadian income taxes and is not defined in the Act.
1.7 What other connecting factors (if any) are relevant in determining a person's liability to tax in your jurisdiction?
As residence forms the basis for determining whether a person will be liable to pay tax in Canada, the general connecting factors are those which would be applied to determine Canadian tax residence, as outlined in question 1.4, above.
2 General Taxation Regime
2.1 What gift or estate taxes apply that are relevant to persons becoming established in your jurisdiction?
There are no specific estate and/or gift taxes in Canada, only provincial probate taxes, as outlined in question 3.1, below. However, when capital assets are transferred by way of gift, any accrued gain generally becomes taxable to the donor of the gift, with some exceptions. On death, the deceased is deemed to have disposed of all capital assets and, again with certain significant exceptions, the gain on such deemed disposition is taxable to him or her.
2.2 How and to what extent are persons who become established in your jurisdiction liable to income and capital gains tax?
Under s. 3 of the Act, both federal and provincial income taxes are payable by all residents of Canada on their total worldwide income, from all recognised taxable sources. The concept of the tax residence for individuals is discussed in question 1.4, above. Under subs. 38(1) of the Act, taxable capital gains are generally assessed on the basis that half of the value of the gain is to be added to the taxpayer's taxable income in the year in which the gain is realised.
2.3 What other direct taxes (if any) apply to persons who become established in your jurisdiction?
Canadian provinces may only levy direct taxation, and do so most commonly in the form of income taxes imposed on persons. Under the Canada Pension Plan and the Employment Insurance Act (Canada), individuals who work in Canada as employees are also required to make periodic pension and employment insurance contributions. Under the Act, these, along with federal and provincial income taxes, must be withheld and remitted by employers in the form of payroll deductions.
Canadian municipalities also collect property taxes from taxpayers who own real property. The amount of property taxes payable in a year depends on the municipality's assessment of the property's value. The tax rates applicable to properties differ among provinces and municipalities.
2.4 What indirect taxes (sales taxes/VAT and customs & excise duties) apply to persons becoming established in your jurisdiction?
Under the Excise Tax Act (Canada) (the "ETA"), all merchants are required to collect a value-added tax of 5%, known as the Goods and Services Tax ("GST"), applicable to the supply of all goods and services in Canada, with the exception of goods and services that are either exempt or zero-rated. In certain provinces, the GST is harmonised with provincial sales taxes and collected by the Federal Government in the form of a Harmonized Sales Tax ("HST"), which functions in the same manner as the GST.
Customs and excise taxes and duties apply to persons who are formally established in Canada at the time of importation of goods into the country. The Customs Act (Canada) and the Customs Tariff (Canada) outline the duties and tariffs that are applicable to different classes of goods entering the country. Under s. 212 of the ETA, every person who is liable under the Customs Act to pay duty on goods imported into Canada is also required to pay the GST applicable to the goods. These goods are also outlined in the list of tariff provisions set out in the schedule to the Customs Tariff.
2.5 Are there any anti-avoidance taxation provisions that apply to the offshore arrangements of persons who have become established in your jurisdiction?
New non-resident trust ("NRT") rules were enacted in June 2013 as amendments to s. 94 of the Act. These rules may apply to offshore trusts that have Canadian-resident contributors or beneficiaries. S. 94.1 of the Act also provides rules that apply to portfolio investments held by foreign investment entities ("FIEs"), while s. 94.2 of the Act contains rules regarding investments in non-resident commercial trusts by Canadian residents or other particular persons Under the NRT rules, an offshore trust may be subject to taxation in Canada if a Canadian-resident taxpayer has, at any time, made a contribution to the trust, or if the trust has at least one Canadianresident beneficiary and a "connected contributor". A "connected contributor" is, in general, an individual who was a Canadianresident taxpayer at the time he or she made contributions to the trust or in the preceding 60 months. If an offshore trust is subject to the NRT rules, it will be deemed resident in Canada and liable to pay annual income taxes on the portion of its income that relates to contributions made by resident or "connected" contributors. The FIE rules generally apply to non-resident entities that hold portfolio investments and may, in certain circumstances, also apply to non-resident trusts. Beneficiaries of such arrangements may be subject to the annual payment of Canadian income taxes on the income generated by their investments, which are held by the nonresident entity. The FIE rules may be applied in circumstances where Canadian-resident taxpayers hold an interest in a nonresident entity and one of the main reasons for holding the interest is to pay less tax than otherwise payable under the Act. For taxpayers who hold interests in certain non-resident commercial trusts, s. 94.2 of the Act may also deem them to hold a controlling interest in a controlled foreign affiliate with regard to their beneficial interest in the non-resident trust.
2.6 Is there any general anti-avoidance or anti-abuse rule to counteract tax advantages?
S. 245 of the Act provides a general anti-avoidance rule (the "GAAR") to counteract tax advantages obtained through a transaction or a series of transactions when more specific antiavoidance provisions in the Act may be inapplicable or do not suffice. In general, transactions or a series of transactions that result in a:
reduction, avoidance or deferral of income tax;
(b) direct or indirect tax benefit that can reasonably be considered to not have been undertaken or arranged for bona fide purposes other than to obtain a tax benefit; and
(c) direct or indirect misuse of the provisions of the Act, the Regulations under the Act and/or a tax treaty, may trigger the application of the GAAR.
If the GAAR applies, the Canada Revenue Agency (the "CRA") has broad powers under subs. 245(5) of the Act to disallow deductions, allocate income or a loss to any person, recharacterise the nature of a payment or amount, and ignore any tax effects that would otherwise have been obtained under the Act. The CRA has applied the GAAR in a variety of cases and the provision has been litigated at all levels of the Canadian federal courts, including before the Supreme Court of Canada.
2.7 Are there any arrangements in place in your jurisdiction for the disclosure of aggressive tax planning schemes?
Through the CRA's Informant Leads Program, the public can provide information to the CRA to assist in identifying taxpayers who are violating tax laws. Members of the public can report suspected tax evasion over the Internet on the CRA's website or by contacting the National Leads Centre by phone, mail or fax. In addition, s. 237.1 of the Act seeks to ensure that promoters of investments in property that are considered a "tax shelter" (as defined in subs. 237.1(1) of the Act) obtain an identification number from the CRA through a registration regime before offering the investment for sale to potential investors. There are serious consequences for both the promoter and any investor who acquires an interest in an unregistered tax shelter.
Taxpayers who deliberately make false or misleading statements to the CRA, or who negligently or fraudulently misrepresent their tax circumstances to the CRA, may face the possibility of civil and/or criminal penalties and sanctions under the Act. Penalties may also be levied under the Act against unscrupulous, dishonest or highly negligent tax preparers. In certain circumstances, charges may also be laid against taxpayers who fraudulently misrepresent their tax circumstances under the Criminal Code (Canada).
The GAAR generally provides that where a transaction or a series of transactions results in a reduction, avoidance, or deferral of taxes owing, and the transaction or the series of transactions are only being attempted for the tax benefits, the transaction or transactions themselves may be invalidated. The GAAR is discussed in greater detail in question 2.6, above.
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