What is Canadian Tax Residence?
There are two types of residence for taxpayers; their immigration residence and their tax residence. A taxpayer can be resident of one country for immigration purposes and resident of an entirely different country for tax purposes. In determining whether an individual is a tax resident of Canada, his or her residential ties to Canada are considered. None of these factors are individually determinative but are instead weighed together to determine residence.
The primary factors, those that have more weight in the determination of an individual's residence, are: home in Canada, spouse or common-law partner in Canada and dependents in Canada. Secondary factors include driver's license in Canada, maintaining a Canadian passport, bank accounts in Canada and social ties to Canada. Canada additionally has a number of tax treaties which contain "tie-breaker" rules for residence when a taxpayer is considered a tax resident of both countries.
Canada taxes all residents of Canada on their worldwide income. Non-residents of Canada for tax purposes are taxed solely on their Canadian-source income. What income Canada taxes may also be varied by tax treaties, if applicable.
Taxpayers needing to know whether they qualify as a tax resident or non-resident of Canada can file the form NR73 Determination of Residency Status (Leaving Canada) with the Canada Revenue Agency. The form asks a series of questions about the taxpayer's circumstances. It can be filed concerning a past tax year, current tax year or in consideration of a future move. In response to filing the form, the Canada Revenue Agency will provide the taxpayer with their opinion of the taxpayer's residency status. This opinion is non-binding on the Canada Revenue Agency and as such, they may not follow it when assessing or reassessing a taxpayer.
Our experienced Canadian tax lawyers find the NR73 form often fails to capture the nuance of a particular taxpayer's situation and can obscure or exclude relevant information. For example, Beth moved to Australia in November 2020. She brings her clothing and personal items with her, except her dog. She has to leave her dog in Canada until July 2021 while she ensures she can bring him over in compliance with Australia's strict biodiversity regulations and quarantine requirements for animals. The NR73 form asks yes or no on whether "You will have personal possessions in Canada such as your clothing or personal items or pets." Beth answers "yes", because her dog is still in Canada when she leaves. Having personal possessions, including pets, in Canada weighs in favor of Beth being a Canadian resident, but the actual circumstances of the dog being temporarily left behind in Canada do not. To solve this issue, our top Canadian tax lawyers prepare explanatory submissions to accompany the NR73 forms submitted on behalf of clients to ensure the entirety of the taxpayer's circumstances are considered.
The Canada Revenue Agency may also request that a taxpayer provide a completed NR73 form. This generally arises where a taxpayer objects to a tax assessment claiming either they or the Canada Revenue Agency incorrectly determined the taxpayer's residence status. The NR73 form allows the Canada Revenue Agency to easily canvas information they believe relevant to the determination of residence.
Pro Tax Tips: For Past Tax Years, Consider a Legal Memorandum
A taxpayer may become concerned he or she incorrectly reported his or her tax residence in a previous taxation year or years. In these cases, the taxpayer may consider filing form NR73 for that taxation year and get an official, but non-binding, opinion from the Canada Revenue Agency on his or her tax residence. However, this may not be a prudent strategy for the taxpayer.
If the taxpayer did incorrectly report his or her tax residence, the Canada Revenue Agency has now been notified of the taxpayer's error. The Canada Revenue Agency may reassess the taxpayer according to their findings, without the ability to file a voluntary disclosure, resulting in a large amount of unpaid tax, interest and penalties for the taxpayer. Consider an example. Connor moves to Mali in 2010. He reports himself as a non-resident of Canada for 2011 through 2019 for tax purposes and pays no Canadian tax on his income in those years. His wife and minor daughter stay in Canada and Connor continues to own a home in Canada. He visits Canada several times a year, including spending summer vacation with his daughter and wife, though never more than 183 days are spent in Canada each year. He maintains a Canadian passport, driver's license and bank accounts to facilitate his visits to Canada. In 2020, Connor becomes concerned that he never ceased to be a Canadian tax resident and files a residence determination for confirmation. Connor has significant residential ties to Canada and is determined to be a resident of Canada. The Canada Revenue Agency reassesses Connor accordingly, meaning Connor should have paid Canadian taxes on his worldwide income the entire time he was living in Mali. Connor receives an expensive tax bill for 8 years of unpaid Canadian taxes plus related penalties and interest.
What Connor, or other taxpayers in Connor's position, should do is seek a legal opinion from one of our experienced Canadian tax lawyers. Our Canadian tax lawyers will review the taxpayer's circumstances and provide a legal tax memorandum on whether the taxpayer reported his or her residence status correctly or incorrectly. If our Canadian tax lawyers determine there was an error made, they may advise the taxpayer file a Voluntary Disclosure application. The Voluntary Disclosure program allows taxpayers to correct errors in previous years' tax filings without incurring or limiting the amount of penalties or interests. A taxpayer can only file a Voluntary Disclosure application where the Canada Revenue Agency is not already aware of the error(s) the taxpayer is seeking to correct. Unlike the residence determination, the legal opinion on the taxpayer's residency is completely confidential and will not alert the Canada Revenue Agency that the taxpayer has potentially made an error. As a result, getting a legal opinion instead of filing a residence determination maintains the taxpayer's ability to use the Voluntary Disclosure program to correct any mistaken reporting of tax residence.
A legal tax memorandum can also be completed in respect to a prospective move, and is particularly beneficial where the taxpayer is considering several options. Taxpayers considering a prospective change in tax residency, or concerned they may have incorrectly reported their tax residency in a previous tax year or tax years should contact our experienced Canadian tax lawyers for tax guidance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.