The Higher Canadian Tax Burden for Resident Individuals
As globalization and the use of technology continue to influence the lives and careers of individual taxpayers, often resulting in the requirement to work and/or live in different countries within the same tax year, issues concerning residence for tax purposes continue to be at the forefront. Residence for tax purposes is an important factor in determining an individual's tax liability and compliance requirements in Canada. While a number of provisions in the Income Tax Act apply to impose tax and compliance requirements on non-residents who have or will engage in transactions in Canada, a resident for tax purposes must report their worldwide income, and thus likely expect a greater overall Canadian tax liability.
Determining Residence for Canadian Tax Purposes
There are various rules in the Income Tax Act which deem a non-resident to be a resident in Canada for tax purposes. They include the "sojourner rule" which deems a non-resident a resident if the taxpayer was in Canada for at least 183 days in the particular taxation year, and deeming rules for members of Canadian public services, such as the Canadian Forces and ministers of Canada. Other than specified rules which deem certain individuals to be residents in very precise situations, the Income Tax Act does not provide any further direction with respect to the determination of an individual's residence status for tax purposes.
Residence for Canadian tax purposes is instead determined through case law. In Thomson v. MNR, Justice Rand of the Supreme Court of Canada described the nature of determining residence as "quite impossible to give it a precise and inclusive definition... 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". Residence is thus determined after an investigation and consideration of the facts of each unique case. More specifically, the Canadian government assesses residence for tax purposes based on an individual's degree of settlement in each country. In Thomson v. MNR, Justice Kurwin explained that an individual will be considered a resident in the country in which he/she "dwell(s) permanently or for a considerable time, to have one's settled or usual abode". On the contrary, Justice Rand described non-residence as "occasional or casual or deviatory residence....only temporary in time and exceptional in circumstance, but also accompanied by a sense of transitoriness and of return". Thus, the Canadian government is interested in the degree of presence and/or settlement in Canada for purposes of determining an individual's residence status for taxation purposes.
Policy Rationales Supporting Canadian and U.S. Residence Rules
It can be inferred that the Canadian government's policy rationale behind the higher taxation of residents is aligned with how it determines residence for tax purposes. While as already mentioned, there are rules which deem certain non-residents to be residents for tax purposes, Canada otherwise mainly determines residence based on an individual's familial, social, and economic ties to the country. Although there are various political theories which justify the Canadian tax residence regime, it is probable that the rationale behind Canada's approach is that those with significant ties to the country benefit from public expenditures which are financed with tax revenues, and thus have a greater obligation to pay taxes to the government.
On the contrary, U.S. citizens are automatically U.S. residents for U.S. tax purposes, regardless of where they reside. There have been speculations this may be because U.S. citizens are afforded a certain level of protection from the U.S. government even when they live in a different country.
Factors Considered by the Courts for Determining the Residence Status of an Individual for Tax Purposes
The availability of a residential home is a primary factor considered by the courts when determining the residence status of an individual for tax purposes. If an individual has an available place to stay when he/she is in Canada, this is an influential factor which provides weight towards being a resident in our tax court system. However, its influence on past decisions has been based on the specific nature of the residence. For example, a house built in Canada by the individual where the individual stays would provide more weight on the individual being a resident, than if the individual sleeps on a couch at a friend's house in Canada for the same period of time.
Whether the taxpayer's spouse and descendants live in Canada are also primary factors weighing towards the individual being a resident in Canada. However, this alone is not a determinative factor. For example, in certain cases (e.g. Schujahn v. MNR & Shih v. R) where the taxpayer's spouse and children were not originally from Canada and were living in Canada temporarily, the courts found that these factors had far less weight than in cases where the spouse and children are from and live in Canada on a more permanent basis.
In addition to the primary factors already mentioned, secondary factors are also considered in the case law. They include owning personal property, such as a car, boat, or furniture; having social ties, such as memberships in recreational or religious organizations and a telephone listing in Canada; having economic ties, such as a bank account, credit cards, memberships in partnerships, and active participation in business activities; owning a driver's license; having a newspaper subscription; and having health insurance with a Canadian province or territory.
The outcome of Thomson v. MNR noted that the intention of the taxpayer as a factor of determining his/her residence does not, on its own, possess much if any weight. Thus, an individual indicating he/she had the intention of living in a certain country is not enough or in some cases not even relevant in determining their residence status for tax purposes. The external facts of a situation possess more leverage than the taxpayer's intention.
As already alluded to, a specific formula does not exist for purposes of the specific weight of the primary and secondary factors when determining whether an individual is resident for tax purposes. As the court indicated in Thomson v. MNR.,
"The gradation of degrees of time, object, intention, continuity, and other relevant circumstances, shows... that... "residing" is not a term of invariable elements, all of which must be satisfied in each instance..... In one case it is satisfied by certain elements, in another by others, some common, some new."
Determining a taxpayer's residence for tax purposes is thus something that requires the assistance of an experienced Canadian tax lawyer, who is familiar with the case law, and possesses experience in defending non-residence claims.
The Application of a Relevant Treaty Could Eliminate Dual Residence for Tax Purposes
If a taxpayer is a resident in a different country for tax purposes, this does not necessarily mean the taxpayer cannot be a resident in Canada for tax purposes, unless the country has a tax treaty with Canada which contains a "tie-breaker" rule. The tie breaker rules in tax treaties result in individuals only being a resident for tax purposes in one of the two countries that signed the agreement and in which of those two countries they will be considered to be tax resident.
Tax Tips for Individuals Wanting to Avoid Residence for Canadian Tax Purposes
If you are working or living in another country and are interested in ensuring you do not have to claim tax in Canada as a resident, you should take active steps to limit your ties to and the amount of time you spend in Canada. You should also consider hiring an experienced Canadian tax lawyer to complete Form NR73 – Determination of Residence Status on your behalf, which will help to avoid any risk of the Canada Revenue Agency assessing your tax residence status unfavourably. An experienced tax lawyer will also possess knowledge of the relevant case law and relevant treaty applicable to your case, and thus will be able to advise on your level of risk, and properly defend your case should this be required.