Introduction – Canadian Income Tax Residence
Whether a person is a taxpayer is a Canadian Tax Resident is a key factor in determining his or her Canadian tax obligations. Canadian tax residents are liable for Canadian income tax on their worldwide income. People who are not Canadian tax residents are typically only liable for Canadian income tax on Canadian source income. Corporations that are Canadian tax residents are always required to file a Canadian income tax return. Individuals who are Canadian tax residents are required to file a Canadian tax return for any year they have any Canadian income tax liability for that year. People who are not Canadian tax residents do not need to file a Canadian tax returns except in specific circumstances, which typically involve the people receiving certain types of Canadian source income or sale of Canadian assets.
Changes in Tax Residence – Canadian Income Tax Residence
Canadian tax residence status is not permanent. People can cease to be tax residents of Canada. Similarly, people can become tax residents of Canada. Change in Canadian tax residence status is important for a number of reasons.
As mentioned above, tax residence status changes a person's filing obligations and whether they are liable for Canadian income tax on their worldwide income or merely certain Canadian source income. A person's Canadian tax residence status can change part way through that person's taxation year. When this happens, that person is only liable for Canadian income tax on his or her worldwide income for the part of the year he or she was a Canadian tax resident. This makes it important to know the specific date at which a person's Canadian tax residence status changed.
Another reason why a change in Canadian tax residence status is important is that it results in a deemed disposition of the relevant person's property. This means that, subject to specific exclusions, the person is treated by Canadian tax law as having sold all his or her property at its fair market value and then immediately repurchased it at the cost of its fair market value immediately prior to the change in residence. This is commonly known as a departure tax and gives rise to a tax liability on any deemed capital gain.
For individuals ceasing to be Canadian tax residents, this has the effect of causing them to realize the unaccrued gains and losses on all of their property prior to ceasing to be a Canadian tax resident. This allows Canada to tax all of the net capital gains on that property that accrued while those people were Canadian tax residents.
For individuals becoming Canadian tax resident, this serves to step up the cost base of all their property, so they do not need to pay Canadian income tax on gains that accrued prior to them becoming Canadian tax residents. Since the fair market value of the property specifically at the time a person's Canadian tax residence status changes effects that person's Canadian tax liability, it is important to know the specific date at which their Canadian tax residence status changed.
Legal Conditions for Residence – Canadian Income Tax Residence
At first instance, an individual taxpayer is a tax resident of Canada if, as a question of fact, he or she is ordinarily resident in Canada. The Courts have determined that an individual is ordinarily resident "in the place where in the settled routine of his life he regularly, normally or customarily lives". The Courts have identified a number of primary and secondary residential ties which serve as indicia of where an individual is ordinarily resident. The primary factors are given more weight than the secondary factors in evaluating where an individual is ordinarily resident. The primary factors recognized by the Courts and the Canada Revenue Agency include the location of an individual's:
- dwelling place,
- spouse or common-law partner, and
The secondary factors recognized by the Courts and the CRA include:
- personal property in Canada (such as furniture, clothing, automobiles, and recreational vehicles);
- social ties with Canada (such as memberships in Canadian recreational or religious organizations);
- economic ties with Canada (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);
- landed immigrant status or appropriate work permits in Canada;
- hospitalization and medical insurance coverage from a province or territory of Canada;
- a driver's license from a province or territory of Canada;
- a vehicle registered in a province or territory of Canada;
- a seasonal dwelling place in Canada or a leased dwelling place;
- a Canadian passport; and
- memberships in Canadian unions or professional organizations.
It is also possible to be deemed to be a Canadian tax resident by particular rules of the Income Tax Act even if the requirements for being ordinarily resident in Canada are not met. An individual who sojourns in Canada for more than 183 through the course of a year is deemed to be a tax resident of Canada throughout the entirety of that year. To sojourn in Canada is to visit on a transient or short-term basis.
An individual taxpayer who is ordinarily resident in Canada or a deemed resident of Canada may still not be a tax resident of Canada if he or she is deemed not to be a tax resident of Canada because the tie-breaker rules of a tax treaty with another country designate him or her as a tax resident of the other country and not a resident of Canada.
The timing of when a person's Canadian tax residence status changed requires considering in detail when that person ceased to be factually resident, whether that person sojourned for at least 183 days, and whether tie-breaker rules from a tax treaty apply.
CRA Policy on Residence Timing – Canadian Income Tax Residence
The timing of when a person ceases to be a tax resident of Canada is complicated and potentially quite uncertain due to the holistic nature of the concept of being ordinarily resident in a place. The Canada Revenue Agency's normal administrative practice is to base the timing of when an individual ceases to be a tax resident of Canada on the latest of when:
- he or she departed from Canada,
- his or her spouse or common law partner departed from Canada, or
- he or she became a resident of the country to which he or she is immigrating.
The CRA's administrative policy is a simplification of Canadian income tax law that does not necessarily yield conclusions about residence timing that would correspond to what the Courts would hold. If applying the Canada Revenue Agency's policy would result in undesirable tax consequences, it is worth consulting an expert Toronto tax lawyer to determine whether the CRA's policy corresponds with the law in your particular case.
Tax Tips – Canadian Income Tax Residence
Determining when your Canadian tax residence status has changed is complex and can have severe consequences. If you believe your Canadian tax residence status has changed or will change, you should consult an experienced Toronto tax lawyer. It is often worthwhile to have a Canadian tax lawyer prepare a residence determination application for you to get an opinion from CRA regarding when your tax residence status changed. If you realize that you have not met your Canadian tax obligations due to a change in your Canadian tax residence status, you may be able to have a certified specialist Canadian tax lawyer file a voluntary disclosure application to lower your liability from penalties and interest and to avoid criminal prosecution.