If you are contemplating a move to Canada, note that you should consider tax implications well ahead of your actual move date. Your tax liability in Canada is dependent on your tax residency status:
- Canadian resident taxpayers are taxed on their worldwide income
- Canadian non-resident taxpayers are taxed on their Canadian source income
This presents opportunities to structure your financial affairs before being subject to the full Canadian tax system.
Summary and Takeaways
As part of your preparation for a move to Canada, it’s prudent to factor in the tax residency rules, to understand your potential tax liability. Resident taxpayers are subject to taxes on their worldwide income, while non-resident taxpayers are only taxed on income sourced within Canada. But there is no strict legal definition of what the term “resident” means under the Income Tax Act of Canada. That complicates tax planning, but there are four different main things to consider, explained in this article, that can help you determine your tax residency status. Then you may be able to structure your finances in a way that minimizes tax liability.
- Statutory provisions in the Income Tax Act of Canada and principles established by Canada’s courts may determine tax residency.
- So can administrative decisions handed down by the Canada Revenue Agency
- But there are more than 90 international income tax treaties in place that can override a deemed or factual residency.
- Interpreting the rather subjective residency definitions and the complex rules can be challenge, so give yourself as much time as possible to make tax plans.
- Is it recommended that you take advantage of the services of an expert cross-border tax planner.
How Canadian Tax Residency is Determined
The term “resident” is not defined in the Income Tax Act of Canada. Instead, Canadian tax residence is a question of fact and somewhat subjective. It depends largely on the nature and quality of the ties you establish in Canada compared to those retained in your previous jurisdiction. In determining whether you are a Canadian tax resident or not, there are four different sources to consider:
- Statutory provisions as stated in the Income Tax Act of Canada
- Common law principles established by the Canadian courts
- The Canada Revenue Agency’s (CRA’s) administrative pronouncements
- The use of an income tax treaty to override Canadian factual or deemed residency
Each of these is discussed in detail below in addition to Canadian provincial/territorial tax residency and the deemed acquisition of property when you become a Canadian tax resident.
Statutory Provisions (Income Tax Act of Canada)
Generally, you are considered a factual tax resident of Canada if you are living in Canada, and the nature and quality of the ties you establish in Canada are greater than those retained in your previous jurisdiction. Factual tax residents of Canada are taxed on their worldwide income starting with the date they become factual tax residents of Canada.
You can also be deemed to be a tax resident of Canada if you sojourn in Canada for a period of, or periods the total of which are, 183 days or more in a calendar year. This rule is outlined in the Income Tax Act of Canada. A sojourn implies a temporary stay in Canada, and you cannot already be a factual tax resident of Canada – you must be a tax resident of another country. You are said to sojourn in Canada if you are physically present in Canada for any part of a day.
Deemed tax residents of Canada are taxed in Canada on their worldwide income (the same as factual tax residents of Canada) as of January 1, even if their first day in Canada is any other day of the year. In comparison, factual tax residents of Canada are taxed on their worldwide income as of their first day of factual residency (eg. June 1, not January 1). If you are deemed to be a tax resident of Canada, but also reside in a country that has a tax treaty with Canada, it is likely that the tax treaty will remove you from the provisions of being a deemed tax resident of Canada.
Most individuals do not move and become Canadian tax residents on January 1. If your unique facts determine that you have become a factual Canadian tax resident during the year, you will be considered a “part-year” resident of Canada. For the part of the year in which you are a tax resident of Canada, you are taxed on your worldwide income in Canada. For the part of the year in which you are a non-resident of Canada, you are only taxed on your Canadian source income. Tax credits will need to be prorated based on period of tax residency in Canada.
Below is a helpful summary of the various Canadian tax residency classifications, and what each is taxed on:
|Deemed Resident||Part-Year Resident||Non-Resident||Deemed Non-Resident|
|Worldwide income earned from January 1||Worldwide income earned only during the period of Canadian tax residency||Canadian sourced income only||Canadian sourced income only|
Common Law (Canadian Courts)
In the leading case of Thomson v. MNR,  CTC 51 (SCC), the Supreme Court of Canada considered the circumstances of a Canadian who sought to become a non-resident of Canada and established key principles regarding the meaning of “ordinarily resident in Canada,” setting the standard still referred to by courts today. The general principles established by this case are as follows:
- For income tax purposes, an individual must reside somewhere
- An individual does not need to have a principal residence in a country to be considered resident of that country
- Residency is more than the simple fact of being present in one country
- Residency does not require a constant presence in that country
- An individual can be resident in more than one country at the same time
- The intention of the individual is relevant, but not determinative
- The number of days spent in a country is not a determinant factor in itself, but can become one
As tax residency in Canada is largely a question of facts, here are the criteria established by the courts and largely used to assess the facts:
- Primary criteria:
- Maintenance of a home in Canada which is available for occupation
- The location of the individual’s spouse and children
- The intention of the individual in regard to return to Canada
- The frequency and duration of visits to Canada
- Secondary criteria:
- The location of other family members
- The relative strength of social and economic ties, if any, to Canada vs. those established in another country
- History of fiscal compliance (or non-compliance) with the other country (e.g., have you routinely filed resident tax returns in the other country you claim is your tax home?)
CRA’s Administrative Pronouncements
The CRA issued Income Tax Interpretation Bulletin IT-221R3, which does not have the force of law, but outlines their interpretation of the factors considered in determining Canadian tax residency. The CRA’s interpretation places an emphasis on residential ties in Canada as an indicator of residency:
- Primary residential ties
- The location of the individual’s dwelling place (or places)
- Where the individual’s spouse or common-law partner resides
- Where the individual’s dependants reside
- Secondary residential ties
- Personal property
- Social and economic ties
- Landed immigrant status or appropriate work permits
- Medical insurance coverage from a province or territory of Canada
- Driver’s license
- Vehicle registered in a province or territory
- Seasonal dwelling place in Canada or a leased dwelling place
- Canadian passport
- Memberships in Canadian unions or professional organizations
Income Tax Treaty
At the time of this writing, Canada has a tax treaty in force with 94 countries. If you are arriving from one of these countries to Canada, it is likely that the residency article of the respective tax treaty will help determine your Canadian tax residence status. As an example, the Canada-U.S. Tax Treaty Article IV states:
- Paragraph 1 – A “resident of a Contracting State” is defined to mean a person who, under the laws of that state, is liable to tax by virtue of their domicile, residence, citizenship, or other criterion. This basically outlines that tax residency is first determined under each country’s tax rules.
- Paragraph 2 – By virtue of paragraph 1, an individual may be a resident of two contracting states at the same time – a “dual resident.” When this occurs, the Canada-U.S. Tax Treaty provides tie-breaker rules for determining the country in which you are a tax resident. The tax residency tie-breaker rules look at the following, in order:
- The country in which you have a permanent home available to you
- The country where your centre of vital interests is strongest. Your centre of vital interests is defined as your personal and economic ties, such as the location of your family and social relations; your occupations; your political, cultural, or other activities; your place of business; the place from which you administer your property; etc.
- The country in which you spend the greatest amount of time (habitual abode)
- The country of your citizenship (note that a U.S. Green Card holder is not a U.S. citizen)
- Competent authorities of both countries will settle the question of your tax residency by mutual agreement
Canadian Provincial/Territorial Residency
In general, you are subject to a province’s/territory’s tax rates for the entire tax year if you are a resident of that province on December 31 of that year. Your provincial/territorial tax residency is determined in the same manner as your Canadian tax residency. If you reside in more than one province/territory on December 31, you are considered resident in the province/territory where you have the most significant residential ties.
Deemed Acquisition of Property
When you commence or recommence Canadian tax residency, you are deemed to dispose of and immediately reacquire, at fair market value, most properties (except for certain specified property, such as Canadian real estate and stock options) owned immediately before becoming a tax resident of Canada. If the properties are then subsequently disposed of during the period of Canadian residency, only the gain or loss accrued since the commencement of Canadian tax residency is taxable in Canada.
As you likely gathered from this article, Canadian tax residency is not exactly black-and-white. It is best to review your unique situation with a qualified cross-border tax advisor and financial planner well ahead of your actual move date. There may be opportunities to structure your financial affairs before being subject to the full Canadian tax system and the deemed acquisition of property. For more information, please contact Cardinal Point.