Introduction – The Notion of "Residence" in Canadian Tax Law
Canada's jurisdiction to tax an individual's income turns on two connecting factors. The first is tax residence, which looks at the individual's social and economic ties with Canada. If the individual is a Canadian tax resident, the individual is liable to pay Canadian income tax on income earned worldwide. The second connecting factor is the source of the individual's income. If the individual is not a Canadian tax resident, the individual is only liable to pay Canadian income tax on Canadian-sourced income—that is, income from employment in Canada, income from a business in Canada, income from the disposition of a Canadian property, and income from Canadian investments (e.g., interest, dividends, rent, and royalties).
Three rules bear on an individual's status as a tax resident in Canada. First, an individual may be a Canadian tax resident under common law. Second, even if the individual is not a common-law resident, the individual may be deemed to be a Canadian tax resident under paragraph 250(1)(a) of Canada's Income Tax Act. Third, an individual may be deemed a non-resident in Canada under subsection 250(5) of the Income Tax Act.
Notably, tax residence is distinct from residence for immigration purposes: You can be a Canadian tax resident even if you aren't a Canadian permanent resident or citizen, and you can be a Canadian citizen or permanent resident yet fail to be a Canadian tax resident.
By examining two cases, each involving Canadian airline pilots, this article illustrates the subtlety that comes with determining a person's status as a tax resident. Hauser v the Queen (2005 TCC 492; aff'd. 2006 FCA 216) and Laurin v the Queen (2006 TCC 634, aff'd. 2008 FCA 58) each involved an Air Canada pilot who sold his Canadian dwelling and moved permanently to the tropics. Yet, in one case, the taxpayer remained a Canadian tax resident; in the other, he didn't. The results show that the common-law notion of residence calls for a fine-grained factual analysis.
Before turning to these two cases, this article reviews the Canadian tax rules relating to common-law residence, deemed residence, and deemed non-residence.
Common-Law Tax Resident (i.e., Factual Resident)
Although Canada's Income Tax Act uses the terms "resident" and "ordinarily resident," it doesn't define either one. So, Canadian courts bear the responsibility of defining residence for tax purposes. Since Canada's judiciary subscribes to the common-law system, the court definition of tax residence is often called "common-law residence." (It's also referred to as "factual residence" because the common-law analysis calls for a comprehensive exam of the individual's circumstances.)
In its landmark 1946 decision, Thomson v Minister of National Revenue, the Supreme Court of Canada defined a taxpayer's tax residence variously as: "the place where in the settled routine of his life he regularly, normally or customarily lives." The Court also explained that evidence of a taxpayer's residence stems from "the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living."
Several factors that speak to whether an individual is a factual resident in Canada:
- The taxpayer's past and present life habits;
- The taxpayer's regularity and length of visits in the jurisdiction asserting residence;
- The taxpayer's ties within that jurisdiction;
- The taxpayer's ties elsewhere; and
The taxpayer's permanence or purposes of a stay abroad.
To evaluate a taxpayer's ties to a particular jurisdiction, Canadian courts and the CRA observe the following:
- a dwelling place in the jurisdiction;
- a spouse or common-law partner in the jurisdiction; and
- a dependant in the jurisdiction.
- personal property in the jurisdiction (such as furniture, clothing, automobiles, and recreational vehicles);
- social ties to the jurisdiction (such as memberships in Canadian recreational or religious organizations);
- economic ties to the jurisdiction (such as employment with a Canadian employer and active involvement in a Canadian business, and Canadian bank accounts, retirement savings plans, credit cards, and securities accounts);
- immigration status or appropriate work permits in the jurisdiction;
- hospital or medical-insurance coverage in the jurisdiction;
- a driver’s license in the jurisdiction;
- a registered vehicle in the jurisdiction;
- a seasonal dwelling or leased dwelling in the jurisdiction;
- a passport issued by the jurisdiction;
- memberships in unions or professional organizations in the jurisdiction.; and
- other residential ties, including a mailing address, post office box, safety deposit box, personal stationery (including business cards), and telephone listings.
Not all jurisdictional ties are given equal weight. Canadian courts and the CRA both consider the first three ties—dwelling, spouse, and dependent—as significant ties to a jurisdiction. That is, the presence of a taxpayer's spouse, child, or dwelling in Canada will strongly suggest that the taxpayer is a Canadian tax resident.
In essence, no one factor emerges as singularly important for determining whether an individual is a factual resident in Canada. Typically, several factors in aggregate will determine the issue. As a result, the jurisprudence often appears inconsistent.
Deemed Resident: The Sojourner Rule of Paragraph 250(1)(a)
Paragraph 250(1)(a) deems a person "to have been resident in Canada throughout a taxation year if the person sojourned in Canada in the year for a period of, or periods the total of which is, 183 days or more." Basically, the sojourner rule deems you to have been a Canadian resident for the entire tax year if you "sojourned" in Canada for 183 days or more in that year.
You sojourn if you visit. So, unlike a common-law resident, a sojourner need not either have a "settled routine" in Canada or "customarily live" in Canada. Put differently, a sojourner is presumptively a non-resident. Paragraph 250(1)(a) therefore applies only if you remained a non-resident in Canada throughout the year in question; it doesn't apply if you became or ceased to be a factual resident in Canada during that year.
Deemed Non-Residence: Subsection 250(5)
Subsection 250(5) of the Income Tax Act deems a person to be a non-resident in Canada if a Canadian tax treaty renders that person a tax resident of Canada's treaty partner. This rule assures consistency between Canada's domestic law and Canada's tax treaties.
Moreover, subsection 250(5) trumps both common-law residence and the deemed-resident sojourner rule in paragraph 250(1)(a). In other words, if subsection 250(5) applies, then the taxpayer is a non-resident in Canada—even if the taxpayer would otherwise have been either a deemed resident under paragraph 250(1)(a) or a factual resident under common law.
Canada's tax treaties typically contain an article concerning residence. The treaty residence article will initially defer to each country's domestic tax law. That is, the tax treaty will consider a person to be a tax resident in the country whose domestic tax laws claim that person as a resident. But if each country's domestic tax laws make this claim, the treaty sets out tie-breaker rules to identify only one country as the person's tax residence.
For example, the tie-breaker clause appears in Article 4(2) of the Canada-US Tax Treaty. Under Article 4(2), if an individual is a tax resident of both Canada and United States, then the following tests determine the individual's residence status:
- The individual shall be deemed to be a resident only of the jurisdiction in which the individual has a permanent home available.
- If the individual has a permanent home available in both jurisdictions or in neither jurisdiction, the individual shall be deemed to be a resident only of the jurisdiction with which the individual's personal and economic relations are closer (centre of vital interests).
- If the jurisdiction in which the individual has a centre of vital interests cannot be determined, the individual shall be deemed to be a resident only of the jurisdiction in which the individual has a habitual abode.
- If the individual has a habitual abode in both jurisdictions or in neither jurisdiction, the individual shall be deemed to be a resident only of the jurisdiction in which the individual is a citizen.
- If the individual is a citizen of both jurisdictions or of neither jurisdiction, the competent authorities of each jurisdiction shall settle the question by mutual agreement—that is, the Canada Revenue Agency and the Internal Revenue Service will come to an agreement on the issue.
Again, these tie-breaker rules apply only if the taxpayer is a resident under both treaty countries' domestic tax laws; they don't apply if the taxpayer is a resident in only one country.
Hauser v the Queen (2005 TCC 492; aff'd. 2006 FCA 216)
In Hauser v the Queen, the taxpayer, an Air Canada pilot, sold his home in Canada and moved his family to the Bahamas, where he had obtained an immigration-residence permit. In the Bahamas, he leased (with an option to buy) a furnished townhouse. He cancelled his Canadian health and car insurance, shipped all his personal belongings to the Bahamas, and opened a bank account with a Bahamian bank. He maintained a Canadian bank account so that he could receive salary by direct deposit from his employer, Air Canada. He also updated his contact info with his Canadian bank by listing his mother-in-law's Canadian address as his mailing address. He also used her address as his general mailing address. After moving to the Bahamas, the taxpayer continued to spend about one-third of each subsequent year in Canada because: his employer required him to be in Canada to fly airplanes; he reported for work at Canadian airports; most of his flights left from and returned to Canadian airports; and most of his training took place in Canada. During his trips to Canada, he stayed as a guest with his mother-in-law, his parents, or his friends. He generally brought all his necessities back and forth with him during these visits, but he kept some seasonal clothing and an Air Canada uniform at his mother-in-law's house.
The Canada Revenue Agency assessed the taxpayer as a tax resident of Canada. The taxpayer objected, and the dispute ultimately went to the Tax Court of Canada.
The Tax Court concluded that the taxpayer remained a tax resident in Canada because his "presence in Canada... was not occasional, casual, deviatory, intermittent, or transitory. He was in Canada in great part because he had to be, to earn a living."
The Federal Court of Appeal upheld the lower court's decision.
Laurin v the Queen (2006 TCC 634, aff'd. 2008 FCA 58)
In Laurin v the Queen, the taxpayer initially lived in Canada with his common-law spouse. During that time, the two lived in a Canadian home that they each co-owned. Later, their relationship fell apart, and the taxpayer sold his half interest in the home to his ex-spouse. He also cancelled his health and car insurance, exchanged his driver's licence for an American one, sold his Ford Bronco, and closed all his Canadian bank accounts, except the one in which his employer, Air Canada, deposited his pay cheques. The taxpayer ultimately moved to Turks and Caicos Islands, where he rented a furnished apartment. During this entire period, the taxpayer continued to work for his Canadian employer, Air Canada. As a result, he frequently returned to Canada so that he could report to work and accommodate his flights, which mostly departed from Canadian airports. The taxpayer still had family and friends who lived in Canada, and he returned to Canada on a number of occasions to visit. During his trips to Canada, he stayed as a guest with friends or family, and he carried all his necessities during these visits, never establishing himself at any one of these homes.
The Canada Revenue Agency assessed the taxpayer as a tax resident of Canada. The taxpayer objected, alleging that he ceased to be a Canadian tax resident. The dispute ultimately went to hearing before the Tax Court of Canada.
The Tax Court sided with the taxpayer. The court concluded that the taxpayer had ceased to be a Canadian resident. The court found that he had severed residential ties with Canada, and that he had no home available in Canada: "He broke up with his girlfriend, he got rid of his house, his car, his licence and his health insurance. When he came to Canada, he stayed with friends, but it was at their sufferance."
The Federal Court of Appeal upheld the lower court's decision.
The Differences that Made a Difference: Making Sense of Hauser and Laurin
The decisions in these two cases might strike one a perplexing. After all, the facts are very similar: A Canadian airline pilot moves to a tropical country and leaves behind no dwelling, spouse, or children in Canada. Both taxpayers returned to Canada to meet the demands of their employment. Both taxpayers maintained a Canadian bank account to accommodate salary payments. Granted, the Hauser taxpayer left a spare Air Canada uniform at his mother-in-law's home in Canada. But is one pilot's uniform what really sets these cases apart?
The Tax Court decided Hauser before Laurin. So, when deciding Laurin, the court considered Hauser. And the court's comments illustrate that it occasionally does come down to hairsplitting:
Unlike Mr. Hauser, the appellant had neither a mailing address in Montreal, nor did he establish a sense of permanency at any one of the homes of his three hosts during his stays in Montreal. Furthermore, the evidence adduced demonstrated that the appellant did not have any investments or business activities in Canada, unlike Mr. Hauser. While he did have family in Montreal, he rarely saw his sons. Additionally, his sons came to visit him in TCI. Two of the occasions when he stayed in Montreal were for medical reasons and one was on the death of his mother.
The distinguishing features don't seem all that significant. Hauser received mail at his mother-in-law's address, where he perhaps also established a "sense of permanency" by leaving behind some clothing and a spare pilot's uniform. Hauser's "investment or business activities" consisted of a project for which he couldn't secure financing and didn't even get off the ground. So, it all apparently came down to a mailing address, a pilot's uniform, and a pipe dream.
Tax Tips – Obtaining Certainty with Residence Status or Relief for Unreported Foreign Transactions or Property
The Hauser and Laurin decisions illustrate how seemingly insignificant details might make the crucial difference in your status as a Canadian tax resident.
If you misconstrue your tax-residence status, you may erroneously under-report or over-report your Canadian taxable income. Under-reporting your taxable income may lead to monetary penalties, while over-reporting may result in excessive Canadian tax liability.
A residence-determination request is one measure for obtaining certainty when preparing your Canadian tax return. You can submit a residence-determination request to the Canada Revenue Agency using Form NR73 (Determination of Residency Status – Leaving Canada) or Form NR74 (Determination of Residency Status – Entering Canada). In response, the CRA will provide you its opinion on your status as a Canadian tax resident.
Still, the CRA's opinion is only as reliable as the details you provide. And the CRA's administrative view doesn't always correspond with Canada's tax law. As a result, your residency-determination application must not only frame the relevant facts but also bring attention to the case law favoring your position. Otherwise, the CRA agent appraising your residence-determination application might render an unfavorable decision that follows the CRA's view yet ignores the law.
Moreover, the CRA's residence-determination forms (i.e., the NR73 and NR74 forms) ask rather intrusive questions about a taxpayer's finances and assets. So, you should seriously consider whether you want to send that information to the Canada Revenue Agency unprompted.
Our experienced Canadian tax lawyers can provide you with advice on your status as a tax resident in Canada. We can discuss whether a residence-determination request is appropriate in your circumstances. If so, we can prepare your residence-determination application so that it contains the needed factual and legal analysis. If not, we can discuss other alternatives to suit your needs.
Furthermore, a change in your residence status may result in tax liability from a deemed capital gain or a penalty from failing to file a foreign-reporting information return (e.g., T1134, T1135, T106, T1141, or T1142).
These reporting requirements don't entail tax liability. So, many taxpayers mistakenly consider them to be unimportant. But the Income Tax Act imposes steep penalties upon taxpayers who fail to file a required foreign-reporting information return. For example, a simple failure to file can result in a penalty of up to $2,500 (plus interest) for each overlooked year—for each outstanding form! And if the failure to file constitutes gross negligence, the maximum penalty can reach $12,000. Moreover, an additional 5% penalty may apply if a T106, T1141, or T1135 is over 24 months late. A T1135 form is due if you own specified foreign property with a cost of $100,000 or more. So, if you're over 24 months late in filing a T1135, your minimum penalty is $5,000.00 per outstanding year.
An application under the Voluntary Disclosures Program (VDP) may allow you to avoid these penalties. Contact one of our expert Canadian tax lawyers to discuss whether a voluntary disclosure is a viable option.
For more information on determining your status as a tax resident, see our article "Tax Residence in Canada – Are Significant Residential Ties Less Significant for Immigrants to Canada than for Emigrants from Canada?"
For information on the tax residence of a corporation, see our article "Determining the Residence of a Corporation for Tax Purposes"