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David Rotfleisch on Canadian Tax Residence: Are Significant Residential Bonds Less Essential for Canadian Immigrants than for Canadian Emigrants in the Case of Tax Residence in Canada?

posted 1 year ago

Information about tax residence in Canada

The amount of income that can be taxed by Canada depends on a person’s status as a tax resident. It depends on the individual’s specific situations as to whether they qualify as a private citizen for tax residence in Canada. Each detail matters.

However, the existence of certain major residential links, a house, a spouse, or a dependent in Canada—more readily qualifies a person as a genuine resident in Canada, according to both Canadian courts and the Canada Revenue Agency.

Note that a number of tax examples indicate that these strong residential links are significantly less important for evaluating whether a foreigner has become a Canadian tax resident. Instead of proving that a foreigner migrated into Canada, the existence of a sizable residential tie frequently demonstrates that a Canadian resident failed to sever residence.

This article first discusses the fundamentals of Canadian tax residence before looking at the significance of strong residential links for determining the residence status of immigrants and emigrants in tax proceedings.

The sole topic addressed in this blog post is the tax residence of individuals, or natural persons. Check out our article “Determining the Residence of a Corporation for Tax Purposes” for details on a corporation’s tax residence.

Tax Residence and Its Importance

A resident of Canada is obligated to pay Canadian tax on their international income under Section 3 and Paragraph 2(1) of the Income Tax Act of Canada.

On the other hand, a Canadian non-resident is required to pay tax solely on income that is derived in Canada under paragraph 2(3) of the Income Tax Act of Canada. Canada specifically taxes the following sources of income for non-residents:

  • continuing to work in Canada;
  • becoming a Canadian business owner; or
  • disposition of a taxable Canadian asset

Therefore, the scope of Canada’s taxing authority over your income depends on whether you qualify as a resident for income tax purposes in Canada.

When Are You Considered to Be a Canadian Resident?

There are two types of inhabitants in Canada: actual residents and deemed residents. Furthermore, if a Canadian taxation agreement determines that you are a resident of one of Canada’s treaty partners; you can also be considered to be a non-resident in Canada

Actual residents

The phrases “resident” and “ordinarily resident” are used in the Income Tax Act of Canada, although neither is defined. Therefore, it is the obligation of Canadian courts—specifically, the Tax Court of Canada, the Federal Court of Appeal, and the Supreme Court of Canada—to define residence.

A taxpayer’s residency has been variably interpreted by the Supreme Court of Canada as:

  • “the location where he frequently, habitually, or customarily resides in his established daily pattern”; and
  • “the level to which an individual in mind and reality settles into, preserves, or centralizes his usual pattern of existence.”

Specifically, see paragraphs 50 and 71 of Thomson v. Minister of National Revenue (1946 SCR 209).

Additionally, courts are eager to point out that your unique situation determines whether you are a genuine resident of Canada. Any of the following considerations (and more) may be taken into account by a court when making its judgment about a person’s residence status:

  • Life behaviors from the past and present;
  • Duration and frequency of trips to the area where residency is claimed;
  • Relationships with all of that jurisdiction;
  • Other connections; or
  • The durability or objectives of remaining abroad. 

Jurisdictional connections are not all given the same weight. The Tax Court and the Canada Revenue Agency view certain residence connections as more substantial than others, as we mentioned in our preamble. 

The next section goes into further detail about these important residential links.

Deemed residents in Canada

If you “sojourned” in Canada for 183 days or more in a year, paragraph 250(1)(a) will consider you to have been a Canadian citizen during the year. If you travel, you sojourn. In contrast to a genuine resident, a sojourner does not need to have an “established habit” or “conventionally live” in Canada. In other sense, even if you do not really dwell in Canada, your sheer physical presence there for a little more than six months will designate you as a Canadian taxable person.

Regarded as residing outside of Canada

Canada and other nations are parties to a large number of bilateral tax treaties or tax accords. Tax treaties are the conventional name for these conventions or agreements. Aiming to prevent double taxation and countering tax evasion, tax treaties include different measures.

Tax treaties: What Effect on Canadians Who Are Considered Residents?

Noticeably, Canada’s taxation agreements typically include a tie-breaker provision that decides a person’s country of tax residence when the domestic tax laws of the two countries contend that they have the authority to tax the person’s worldwide income based on their domicile, residence, place of business, or any other comparable factor.

Accordingly, if a tax treaty declares that a person is a tax resident of Canada’s treaty partner, such person is deemed to be a non-resident of Canada under subsection 250(5) of the Income Tax Act of Canada. The compatibility of household Canadian legislation and tax treaties is ensured by subsection 250(5).

What Residential Links Provide “Significant” Evidence for Tax Residence Determination?

The following three residential relationships are deemed by the Canada Revenue Agency to be “nearly always… relevant… for the purpose of determining residence situation”:

  • a residence inside the territory;
  • a local resident’s spouse or common-law partner; and
  • a dependent inside the territory

(“Considering an Individual’s Residence Situation,” Income Tax Folio S5-F1-C1, paragraph 1.11)

The Canadian Revenue Agency (CRA) also sees the achievement of landed immigrant status or provincial health insurance as a strong residence connection to Canada (ibid, at paragraph 1.25).

Do Immigrants to Canada View These “Significant” Residential Ties As Less Important?

Contrary to what the CRA believes, a number of tax rulings indicate that these strong residence links are significantly less important for deciding whether a foreign national has become a Canadian tax resident.

On the one side, the existence of a strong residential connection to Canada often indicates that a Canadian resident did not successfully sever residence after departing Canada. For instance, in Thomson v. M.N.R (supra), a taxpayer who was born in Canada argued that because he left the country for Bermuda and then migrated to the United States, he ceased to be a Canadian resident. Since the taxpayer constructed a residence in New Brunswick that he and his immediate family frequently visited, the Supreme Court of Canada ruled that he continued to remain a resident of Canada.

However, it’s a different situation for foreigners arriving In Canada. In the cases Shih v. R. (2000 DTC 2072 (TCC)) and Mahmood v. The Queen (2009 TCC 89), taxpayers who were born outside of Canada were found to be non-residents despite owning properties there and living there with their immediate families.

The taxpayers in Shih and Mahmood, in comparison to the taxpayer in Thomson, weren’t Canadian citizens who claimed to have severed links with Canada; instead, they were immigrants who brought their wives and children to Canada for purposes other than relocating there themselves.

The taxpayer in Shin immigrated to Canada with his spouse and three boys, bought a house there, and then went back to Taiwan within a year to work. Each year, he traveled to Canada to visit his family, but he never stayed for more than three months at a time. His children’s opportunity to receive a western education was the principal motivation behind the family’s decision to relocate to Canada. The taxpayer was connected to Taiwan in a number of ways, including through other family members, employment, a property, a number of memberships, a driving license, and a bank account.

However, he had also created the following connections to Canada:

  • the taxpayer had Canadian investments;
  • the taxpayer had a residence in Canada;
  • the spouse and kids of the taxpayer resided in Canada;
  • The taxpayer often went to see his spouse and kids at their residence in Canada;
  • a driver’s license was received by the taxpayer in Canada; and
  • the taxpayer submitted his tax returns under the Canadian resident status.

The Tax Court of Canada, however, came to the decision that the taxpayer was not a Canadian resident. The court stated in its reasons that the taxpayer had not been in Canada “frequently enough or long enough to create any personal relationships with the various groups [in Canada], whether they be economical, academic, artistic, entertainment, or sociocultural.” 

Additionally, the Shin opinion is not unusual.

The court determined in Song v. The Queen (2009 FCA 278) that a Japanese taxpayer was unsuccessful to be a Canadian resident despite the fact that her spouse resided in Canada. The taxpayer’s established daily schedule was centered on her employment in Japan, despite the fact that she expected to ultimately relocate to Canada with her spouse.

A Guyanese taxpayer in Mahmood v. The Queen (supra) owned a property in Canada, used Canadian banks to conduct business there, and had a Canadian-born child. The taxpayer routinely visited his property in Canada and went to a mosque there. Nevertheless, the court found that the taxpayer was not a resident of Canada since his regular activities were related to the company he owned and operated in Guyana.

In Yoon v. The Queen (2005 TCC 366), a taxpayer who was born in Korea, immigrated to Canada in 1975. There, she later met and wed her husband, had a kid, and became a citizen. She returned to Korea in 2001 to pursue employment. She stayed in Korea for

224 days that year and in Canada for 135 days. The woman’s spouse stayed in Canada. In light of the Shin ruling, the court came to the conclusion that the taxpayer was not a resident of Canada throughout the 2001 tax year.

Yoon also demonstrates that, in spite of the CRA’s claim to the contrary, obtaining landed immigrant status doesn’t necessarily indicate a strong residential relationship. The Yoon taxpayer arrived in Canada, was granted landed immigrant status, and was also given Canadian citizenship. However, the Tax Court of Canada ruled that the taxpayer was not a Canadian resident.

As it upheld the Tax Court’s ruling, the Federal Court of Appeal stated that “residence is not merely a result of a person’s status under the Immigration Act….”

In conclusion, it appears that Canada’s tax-law doctrine has adopted a paradigm wherein the CRA’s ostensibly important residence ties turn out to be far less significant for evaluating whether a foreigner has become a Canadian tax resident.

Determine your residence status with this tax advice 

Your Canadian taxable income may be incorrectly under- or over-reported if you wrongly interpret your tax residence status. 

If you record your taxable income incorrectly, you risk economic sanctions, and if you report it correctly but with too much income, you risk having to pay too much Canadian tax.

You can file a residence-determination request to the Canada Revenue Agency using Form NR73 (Determination of Residency Status – Leaving Canada) or Form NR74 for further assurance when completing your Canadian tax return (Determination of Residency Status – Entering Canada). You will then receive a response from the CRA with its assessment of your status as a Canadian taxable person.

However, the CRA’s assessment depends on the accuracy of your information. Additionally, as this article has shown, the administrative perspective of the CRA is not always consistent with Canadian tax law. In order to frame the pertinent facts and draw attention to the case law that supports your viewpoint, your residency-determination application must do more than just define the essential facts. If not, the CRA agent evaluating your residence-determination application could make a conclusion that is against the law but is supported by CRA publications.

If you need guidance on whether you are a tax resident in Canada, a knowledgeable Canadian tax lawyer in Toronto can help. They can also help you with the preparation of your residence-determination application so that it is complete with the necessary factual and legal analyses.

Disclaimer:

Only general information is provided in this article. It is only up to date as of the posting date. It hasn’t been updated; therefore it could no longer be relevant. It cannot or ought not to be relied upon since it does not offer legal advice. All tax circumstances are unique to their facts and will vary from the circumstances described in the posts.

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