A Guide On Tax Residency Determination In Canada – Income Tax

Under the Canadian taxation system, your income tax obligations
and entitlements are informed by your residency status. Whether
you’re a Canadian citizen, a permanent resident, or a foreign
national, your tax residency status depends on various factors
outlined by the Canadian Revenue Agency (CRA). This blog post
provides a comprehensive guide on the factors involved in
determining your tax residency status in Canada.

Residential Ties

The CRA considers several factors when determining whether an
individual is a tax resident of Canada. These elements, often
referred to as “residential ties,” include primary and
secondary ties.

Primary Residential Ties

Primary residential ties are among the most significant factors
the CRA will consider when determining an individual’s
residence status and include the following:

1. Location of dwelling (i.e., a home);




2. Location of a spouse or common law partner;
   and




3. Location of dependants.

Secondary Residential Ties

The CRA also collectively considers various secondary
residential ties when determining a taxpayer’s residence
status. These include:

1. Personal property in Canada (e.g., furniture,
   clothing, automobiles, and recreational vehicles);




2. Social ties with Canada (e.g., memberships in
   Canadian recreational or religious organizations);




3. Economic ties with Canada (e.g., employment with
   a Canadian employer, active involvement in a Canadian business,
   Canadian bank accounts, retirement savings plans, and securities
   accounts);




4. Landed immigrant status or appropriate work
   permits in Canada;




5. Hospitalization and medical insurance coverage
   from a province or territory of Canada;




6. A driver’s license from a province or
   territory of Canada;




7. A vehicle registered in a province or territory
   of Canada;




8. A seasonal dwelling place in Canada or a leased
   dwelling place;




9. A Canadian passport; and




10. Memberships in Canadian unions or professional
    organizations.

Secondary ties, along with other factors and conditions, are
examined to determine your actual residency status. Having one
secondary residential tie alone may not be adequate to establish
residency in Canada, especially if significant residential ties to
Canada are lacking.

It is important to note that the CRA may deem other residential
ties relevant in specific circumstances, such as maintaining a
mailing address, post office box, or safety deposit box, possessing
personal stationery with a Canadian address, and being listed in
Canadian telephone directories.

Length of Stay

The duration of an individual’s stay in Canada within a tax
year plays a significant role in residency determination.
Typically, if you spend 183 days or more in Canada during a tax
year, you’re considered a Canadian resident for tax purposes.
However, even if your stay is shorter, other factors, such as
primary and secondary residential ties, can affect your residency
status.

Tax Treaties

In cases where an individual is considered a resident of both
Canada and another country for tax purposes, treaty tie-breaker
rules come into play. These rules help resolve conflicts in
residency status between countries with which Canada has tax
treaties (such as the USA, UK, Australia, India, and the
Philippines) and helps to avoid double taxation. Tie-breaker rules
do not necessarily look at all the ‘facts and
circumstances’; rather they focus on factors such as the
individual’s permanent home, center of vital interests,
habitual abode, and nationality.

Types of Residential Status

Based on the above criteria, there are three categories that the
CRA may place an individual into for the purpose of residency
status:

1. Residents: Individuals who meet the criteria and
   have significant residential ties to Canada are considered
   residents for tax purposes. They are subject to Canadian income tax
   on their worldwide income.




2. Non-Residents: Individuals who do not have
   significant residential ties to Canada are considered non-residents
   for tax purposes. They are generally subject to Canadian tax on
   Canadian-source income only.




3. Deemed Residents: Certain individuals who may
   not meet the criteria but are deemed residents under specific
   circumstances, such as individuals who have established significant
   residential ties to Canada and are not considered residents of
   another country under a tax treaty.

Assistance in Determining your Residency Status

If you are uncertain as to which of these three categories your
situation falls under, you may want to speak to a tax lawyer. You
may also consider completing the following forms, to be filed with
the CRA to assess your ties to Canada and other countries,
facilitating the determination of your residency status for tax
purposes:

1. Form NR74 – Determination of Residency
   Status (Entering Canada): This form is typically completed by
   individuals who are new to Canada or who have returned after an
   extended absence.




2. Form NR73 – Determination of Residency
   Status (Leaving Canada): This form is typically completed by
   individuals who are leaving Canada permanently or for an extended
   period of time.

If you seek greater assurance regarding your residency status
upon arriving in or departing from Canada, you may consider
applying to the Income Tax Rulings Directorate for an advance
income tax ruling. Unlike Forms NR73 or NR74, a ruling from the
Directorate typically carries more weight with the CRA as it is
legally binding. However, the CRA will only issue a ruling if all
relevant facts can be determined before your departure or arrival
in Canada.

Although the CRA has the authority to determine an
individual’s residency status, these determinations are not
always reliable and can be subject to error. It is advisable to
seek guidance from a tax lawyer when completing these forms or
seeking an income tax ruling to ensure compliance and mitigate any
potential tax implications.

Conclusion

Determining residency status under Canada’s income tax
legislation can be intricate and sometimes unclear. Residents are
required to report their worldwide income to the CRA and are
eligible for various tax credits and deductions. Non-residents, on
the other hand, are only taxed on their Canadian-source income.
Given the complexities surrounding residency determinations, it is
important to speak to a tax professional with experience in
this area to ascertain your tax obligations.

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.