Canadian Taxation of Seafarers
If you are a Canadian citizen or resident working or planning to work at sea, then it may seem counterintuitive to learn that the income you earn from that job will be subject to Canadian income tax as though it was earned here in Canada. After all, we often associate tax liability with the place where the taxpayer is physically present and like many countries, Canada taxes a person's income based on residence. Foreign taxes notwithstanding, Canadian citizens are usually not taxed on income earned outside of Canada by the Canadian Revenue Agency (CRA) when they are non-resident in a given tax year. So why is it not the same when you are working on a cruise ship? It's because of the way Canada determines a taxpayer's resident status for tax purposes.
Taxation and Residence for Tax Purposes
If you are a Canadian resident, then you are subject to a Canadian income tax on your worldwide income. This means that while you may be eligible for potential credits or deductions for foreign taxes paid in other countries, the CRA will tax your full income regardless of where it was earned or received, subject to any tax treaties between Canada and the country where the income was earned. It should be noted that being a resident for tax purposes is not the same thing as being a permanent resident in terms of immigration status. Residence for taxation is a heavily fact-dependent exercise and determined on a case by case basis. So even if you leave Canada to work at sea, the CRA may still consider you to be a resident of Canada for income tax purposes. This can sometimes place Canadian seafarers working on internationally designated ships at a tax disadvantage to many of their foreign counterparts. For example, the income of Indian seafarers working aboard foreign ships outside India is exempt from Indian income tax provided the seafarers are non-resident even if the account is maintained with an Indian bank. In India, an individual is only a resident in the tax year if he/she is:
- physically present in India for at least 182 days during the tax year, or
- physically present in India for at least 60 days during the relevant tax year and at least 365 days during the four preceding tax years.
If neither of the above two conditions is met, the individual is said to be non-resident in India in that tax year. For Canadians, the rules to become non-resident for tax purposes are a lot less permissive.
Leaving Canada – Residential Ties and Tie Breaker Rules
Since the CRA insists that a taxpayer must be resident of somewhere for tax purposes even if that taxpayer spends the entire year working at sea, the most prudent way to avoid Canadian income tax is to establish residence elsewhere. In the past, both the CRA and the courts have held the position that a Canadian resident who attempts to cease to be resident in Canada without taking up residence in another country remains a Canadian resident for tax purposes. So any taxpayer that wants to emigrate from Canada will have to establish residence in another country. Merely working on a cruise ship will not suffice. Emigrating can still be advantageous if you are immigrating to a country that does not tax individual income, for example, the Bahamas or the Cayman Islands. Keep in mind that this would trigger a "departure tax" in Canada in which there will be a deemed disposition where you are deemed to have sold and immediately reacquired certain properties you own in Canada at fair market value. This means you will have to report any capital gain on the deemed disposition of those properties before leaving Canada. But even if you do decide to make that leap and emigrate from Canada for tax purposes, you still have to be careful to sever your residential ties with Canada.
As previously mentioned, determining an individual's residence status is a fact dependent exercise and the CRA will consider all relevant facts to each individual's case. The residential ties you have established or maintained in Canada are the most important factors the CRA will consider in determining your residence status as they represent a certain degree of permanence regarding your presence inside or outside Canada. Significant residential ties include a home, a spouse or common-law partner, and dependents still in Canada. Additionally, the court in Denis M. Lee v. MNR laid out several secondary residential ties that may be considered in determining residence for tax purposes such as the use of Canadian identification (like a driver's license or passport) or the continued ownership of personal property in Canada (such as a car or furniture). The court noted that while no one group of two or three residential ties will in themselves establish that the individual is resident in Canada, a sufficient number of residential ties considered together could establish that the individual is a resident of Canada for income tax purposes. Over the years, the tax court has generally held that these secondary residential ties must be looked at collectively to evaluate the significance of any one such tie. While it would be unusual for a single secondary residential tie to be sufficient by itself to lead to a determination of residence, several secondary residential ties have been sufficient to establish residence in Canada for tax purposes. Additionally, if you do not maintain significant residential ties to Canada and establish them in another country, then maintaining secondary residential ties with Canada will be less likely to lead to a determination that you are a factual resident in Canada while abroad.
If you do leave Canada without severing your residential ties in Canada, you will likely be considered a factual resident and not an emigrant. Additionally, if you stay in Canada for 183 days or more then you will be a deemed resident for tax purposes under what is called the sojourner rule. Deemed residents must report their worldwide income but are not eligible for provincial tax credits. However, if you are also considered to be a resident of another country with which Canada has a tax treaty, you may be considered a deemed non-resident. As a deemed non-resident, you would still pay tax on any income you receive from sources in Canada, but you would not be taxed on your worldwide income the way a resident would. In cases where a taxpayer is found to be a resident of both Canada and another country with which Canada has a tax treaty, there are typically tie-breaker rules within those tax treaties that will determine the taxpayer's residence for tax purposes. Usually, these rules will first rely on a 'permanent home test' which provides that an individual is resident for tax purposes in the country where the individual has a permanent home. A permanent home can be any kind of dwelling retained for permanent use regardless of whether it is being rented or if it had been purchased. In cases where the dual-resident has a permanent home in both Canada and the competing tax jurisdiction, the tie-breaker rules in most tax treaties will fall back on the 'center of vital interests test' which will examine an individual's personal and economic ties with each country in question for a determination of residency for tax purposes. For seafarers, severing your residential ties in Canada and establishing residence in another jurisdiction, often through a permanent home, may be your best bet to avoid Canadian income tax.
Tax Tip – Confirming Tax Residence and Voluntary Disclosure
The point is that residence for tax purposes is not the same as living and working in the country claiming the tax. It is possible to have multiple countries coming after you for taxes. If you are a Canadian resident working abroad or at sea, then it is highly recommended that you check in with a Canadian tax lawyer to make sure you won't get blindsided by significant back taxes. If you think you may have not paid or incorrectly filed your taxes on your cruise ship income, then a knowledgeable Canadian tax lawyer can help you through a Voluntary Disclosure Program (VDP) to correct that mistake. The VDP allows you to correct a tax return you previously filed or file a return that should have been filed. If the CRA accepts your VDP application, you will have to pay the taxes owing but will be eligible for relief from prosecution and, in some cases, penalties you would otherwise have had to pay.
Additionally, if you do intend to leave Canada for tax purposes, one of our experienced Canadian tax lawyers can assist you with submitting a residency determination. While this may reduce some uncertainties about your residence status, be advised that the NR73 is merely the CRA's opinion and does not preclude the CRA from changing this initial opinion and reviewing your file at a later date.