This Collins Barrow Tax Alert is also available in PDF format.
As is the case in much of the world, Canadian taxation is for the most part based on the concept of residence. But the issue of determining residence can be problematic, particularly where individuals leave or think they have entered or left Canada.
Simply stated, Canadian resident individuals are subject to tax in Canada on their worldwide income regardless of where the income is earned. Conversely, non-resident individuals are taxed only on employment and business income earned in Canada, or on gains on the disposition of Taxable Canadian Property (TCP).
The definition of TCP was amended recently to include privately held shares in corporations, or interests in partnerships or trusts, only if, at any time during the preceding 60 months, more than 50% of the fair market value was derived from real or immovable property situated in Canada (including resource properties).
The concept of residence in Canada is addressed in the Canadian Income Tax Act. A person resident in Canada includes a person who “ordinarily resides” in Canada. Several primary and secondary factors are used in determining whether an individual ordinarily resides in Canada. The primary residential ties include:
- where the individual’s dwelling place (or places) is (are) located;
- where the individual’s spouse or common-law partner resides; and
- where the individual’s dependants reside.
The secondary issues that, on a collective basis, can be used to determine residence 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);
- permanent resident 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;
- ownership of a vehicle registered in a province or territory of Canada;
- ownership of a seasonal dwelling place in Canada or a leased dwelling place referred to in;
- a Canadian passport; and
- memberships in Canadian unions or professional organizations.
None of these secondary factors, by itself, will necessarily determine residence status.
If an individual is found not to be a factual resident of Canada based on the factors above, that individual might still be deemed to be a resident in Canada if they sojourned in Canada for a period or periods totaling 183 days or more in a year. Note, however, that an individual who commutes to Canada for employment and returns each night to a normal place of residence outside Canada is not sojourning in Canada.
In addition to the above, when a person leaves Canada the presumption is that they have terminated residence immediately, which may or may not be the case in reality. In the past, as a general rule of thumb based on court decisions, residential ties were deemed to be severed if the period of stay outside the country was more than two years (absent any evidence that ties were not previously severed). However, the Canada Revenue Agency now maintains the position that the intention to permanently sever ties with Canada is a question of fact to be determined based on all the circumstances. The amount of time spent outside Canada is now only one factor. Generally, the intent of the person leaving Canada will be a strong factor, along with those cited above, in determining whether residential ties have been maintained.
The general comments above relate strictly to Canada’s domestic rules on this issue, and do not reflect any grandfathering provisions for individuals who entered (or exited) Canada many years ago. Depending on the destination country, there are income tax treaties that might override the domestic interpretation when another country deems a person to be a resident in that country as well. Further, the comments in this article focus strictly on the residence of a particular taxpayer; there are many other income tax considerations relating to immigrating to and emigrating from Canada.
Contact your Collins Barrow advisor for further assistance on the complicated nature of determining residence for tax purposes.
David Gardner, CPA, CA, CPA (Michigan), Tax Associate, Dan Dwyer, CPA, CA, CPA (Illinois), Tax Partner, and Scott Dupuis, CPA, CA, Tax Partner, practice in the Windsor office of Collins Barrow.
