Canadian Non-Resident Tax
We receive many questions regarding obligations to file tax returns. For example, an individual is in Canada for six months to a year and is not sure whether he/she has a tax filing obligation. When does an individual have to file a tax return? Subsection 2(1) of the Income Tax Act (ITA) provides some guidance:
An income tax shall be paid, as required by this Act on the taxable income of each taxation year of every person resident in Canada at any time in the year.
Based on this statement, we can conclude that Canada taxes based on residency. The term resident is not exactly defined in the ITA, however, subsection 250(3) provides the following:
In this Act, a reference to a person resident in Canada includes a person who was at the relevant time, ordinarily resident of Canada.
This definition doesn’t help much. This general concept uses a common-law approach to determine a person’s residency. The term residency is a crucial concept in Canada’s taxation system. If you are a resident of Canada, you will be required to file a tax return and include your worldwide income. Non-residents are only taxed on Canadian source income.
Because of the vagueness of subsection 250(3), it is required to examine the jurisprudence to help determine when someone will have residency status in Canada. The leading Canadian case on the meaning of the word “resident” is Thomson vs the Queen. One of the key principles established by this case is whether or not the individual maintains residential ties with Canada while being abroad. It also states that the person will continue to be subject to Canadian tax on his worldwide income and a factual resident if the individual does not cut all residential ties upon leaving Canada. The United States of America, on the other hand, has different rules regarding residency; such that it uses a substantial presence test, based on a moving average calculation, to determine the number of days the person remains in the country.
A person that is not otherwise a resident by virtue of having residential ties to Canada may, nevertheless, be a resident of Canada based on a deeming provision in subsection 250(1). Accordingly, a person shall be deemed to have been resident in Canada throughout the year if the person sojourns (temporarily present) in Canada for a period or periods, which total 183 days or more.
Once an immigrant is resident for the purposes of the ITA, the immigrant will be subject to Canadian tax on his/he worldwide income. Canada’s taxation system is designed to be attractive to new immigrants by allowing certain “tax holidays” (i.e no tax for 5 years) on property owned prior to immigrating to Canada. Certain trust structures have received favorable tax treatment for immigrants.
Are you unsure about your residency status? Let the tax accountants at Tax Doctors Canada take care of all your resident and non-resident income tax needs.
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