Since 2010, the Global Law Experts annual awards have been celebrating excellence, innovation and performance across the legal communities from around the world.
posted 3 years ago
Your residency status plays a large role in determining how much tax you’ll pay in Canada. So, what makes you a resident of Canada? If you’re an emigrant or immigrant, the answer is more complicated than you might think.
The Canadian courts and the Canada Revenue Agency (CRA) agree you need significant residential ties to the country. Things like having a home, a spouse, or a dependent in Canada increase the likelihood you’ll receive resident status. However, case law reveals that these supposed significant residential ties are far less significant for immigrants than natural-born Canadians.
Despite what many people may believe, your tax status has nothing to do with your citizenship as an immigrant or emigrant. Instead, your tax status and obligations are tied to your residency.
Your residency status determines how much income you have to report and how much tax you ultimately must pay on this income. It also establishes what kind of taxes apply, as residents are not subject to the non-resident speculation tax.
Residents of Canada: Canadian residents must declare all world income and pay Canadian taxes on it, according to subsection 2(1) and section 3 of the Income Tax Act.
Non-Residents of Canada: Under subsection 2(3) of the Income Tax Act, non-residents must only declare and pay taxes on income from sources inside Canada. This may include income from Canadian employment, carrying on a business in Canada, or disposing of taxable Canadian property. Non-residents are also usually subject to non-resident withholding tax in Canada.
Moving beyond the binary above, let’s focus on the different ways one may be categorized as a resident of Canada.
To be a factual resident of Canada means you’re considered a resident of Canada because you have enough significant residential ties to the country. Therefore, you’re obligated to pay taxes on worldwide income — even if you don’t spend the entire year in the country. On paper, you get taxed as though you do. This may include Canadians who are temporarily working or vacationing in another country.
If you spend 183 days or more in Canada during one calendar year, you may be deemed to be a resident of Canada. While you may not have the same residential ties as a factual resident, you will share similar tax obligations.
Under subsection 250(5), you may be deemed to be a non-resident of Canada if you’re simultaneously a factual resident of Canada and another country with which Canada has a tax agreement or tax treaty. Subsection 250(5) applies a tiebreaker clause between these two countries to determine your country of tax residence.
Depending on the results of the tiebreaker, a deemed non-resident might be considered a resident of another country. They will only have to pay non-resident income tax in Canada on Canadian-sourced income.
The tax implications of residency can be significant, so it’s crucial you understand where you fall.
Here’s where it can get tricky. What does it mean to be a resident of Canada if you’re an immigrant or emigrant? If you split your life between two countries, do you have significant residential ties?
Normally one could look to the Income Tax Act for guidance, but while it uses the terms “resident” and “ordinarily resident” interchangeably, it fails to define them. One must look beyond the Income Tax Act to the Supreme Court of Canada for answers.
According to Thomson v Minister of National Revenue, [1946] SCR 209, a taxpayer’s residence is defined as:
While these definitions provide some clarity on the matter, it does so by using very broad language that leaves a lot of room for interpretation. As a result, the courts must examine your particular circumstances to determine your residential ties to the country.
These circumstances may include but are not limited to the following factors:
While the courts and CRA may consider all the jurisdictional ties listed above, some carry more weight in their decision making. The most significant residential ties for the purpose of determining resident status include the following three factors:
According to the CRA, these factors almost always constitute significant ties with Canada. Meanwhile, landed immigrant status and provincial health coverage usually constitute significant residential ties as well.
Note the language used above. With qualifiers such as “almost always” and “usually” bookending these ties, these factors are not guarantees someone will become a Canadian tax resident. They’re guiding principles, not black-and-white rules, that give the courts and CRA have considerable latitude in determining a taxpayer’s residency status.
Numerous tax cases suggest that these jurisdictional ties are only significant when applied to an emigrant of Canada. Immigrants, on the other hand, may be considered a non-resident despite satisfying all significant ties listed above.
Here are five such cases that expose this double standard.
In 1946, the Supreme Court found that Thomson, a Canadian-born individual, was a resident of Canada, despite living in the United States. Thomson had built a vacation home in New Brunswick for his family but claimed he had otherwise cut ties with the country.
Despite spending fewer than 183 days at this dwelling each summer, the Supreme Court thought it was significant enough of a tie to make Thomson a resident. He settled into a routine where his family normally lived in New Brunswick for a portion of the summer, even though he lived in the U.S. for the rest of the year.
Roughly 55 years later, the Tax Court of Canada ruled the other way despite a taxpayer owning a home in Canada and spending roughly the same amount of time there.
Shih, an immigrant from Taiwan, brought his wife and three sons to Canada. While his spouse and dependents lived in Canada in the house he purchased, Shih returned to Taiwan to work.
Shih worked in Taiwan and had several ties to the southeast Asian country, but he also satisfied all the usual factors that would be considered significant ties to Canada. Not only did his wife and sons live in Canada while Shih lived in Taiwan, but Shih also owned a home, had Canadian investments, had a Canadian driver’s licence, and made frequent visits to see his family in Canada.
Despite having many significant ties to Canada, the TCC decided Shih was not a resident because he was not in Canada “often enough or long enough to establish any personal connections with the various communities [in Canada] whether they be commercial, educational, cultural, recreational, or social.”
If you think having the addition of a cultural connection in Canada could be a tipping point, you’re mistaken. In 2009, the TCC ruled Mahmood, a Guyanese taxpayer who attended a Canadian mosque, was not a resident in Canada.
At the time, he owned a condo in Canada, relied on Canadian banks to facilitate business transactions, and had a son who lived in Canada. Additionally, Mahmood would regularly live in his condo and attend a mosque in Canada, presumably where he established personal connections within the local Muslim community.
Ultimately, the TCC deemed his day-to-day activities were based out of Guyana, despite having significant ties to Canada.
Another immigrant to Canada was ruled a non-resident by the Federal Court of Appeal. The FCA believed Song’s settled daily routine to revolve around her job in Japan, even though her spouse lived in Canada.
Lastly, we look to Yoon, a Korean-born taxpayer who met and married her spouse in Canada in 1975 and later became a Canadian citizen. Together, they had a child and lived in Canada until 2001, at which point she moved back to Korea for work while her husband remained in Canada. During that time, she visited Canada but spent roughly two-thirds of the year in Korea.
The TCC referred to the Shih decision from five years before to determine she was not a resident in 2001 simply because she didn’t spend enough time there. In Yoon’s case, her spouse and child living in Canada, and even her Canadian citizenship, did not offset her time out of the country.
After comparing these four cases against Thomson v M.N.R. (supra), you can see how the CRA’s purportedly significant residential ties are far less significant when an immigrant has become a Canadian tax resident.
If you aren’t sure what your status might be for the tax year, the CRA can provide its opinion on your status. As an emigrant, you can fill out Form NR73 (Determination of Residency Status — Leaving Canada) and Form NR74 (Determination of Residency Status — Entering Canada) if you’re an immigrant.
You may not be able to predict how the CRA will rule. While the CRA forms its opinions using the details you provide in these forms, its administrative view may not always align with Canada’s tax law.
In many cases, the CRA bases its decision on past CRA publications. With this in mind, it’s a good idea to bring attention to the appropriate case law that supports your position to avoid an unfavourable decision.
Tax residency is a grey area of the courts and CRA when determining your tax liability in Canada. Rather, the CRA determines residency on a case-by-case basis, and their process may not align with Canada’s tax law.
This leeway can complicate your next filing and may even result in costly tax consequences if you erroneously determine your status and under- or over-report your Canadian taxable income.
To avoid these penalties, you can speak with tax lawyers in Toronto for advice on residency status. Toronto tax lawyers ensure your residence determination application (Forms NR73 and NR74) contain the necessary information to render a favourable decision.
Credit: freepik via FreePik
posted 1 day ago
posted 1 day ago
posted 1 day ago
posted 2 days ago
posted 4 days ago
posted 4 days ago
posted 6 days ago
No results available
ResetFind the right Legal Expert for your business
Global Law Experts is dedicated to providing exceptional legal services to clients around the world. With a vast network of highly skilled and experienced lawyers, we are committed to delivering innovative and tailored solutions to meet the diverse needs of our clients in various jurisdictions.