Due to COVID-19 application of some rules are suspended, some are modified, and some get temporary exceptions. Since governments are advising against travel, many people are not where they planned to be and that affects their residency, residency of their businesses and residency of their companies. The CRA recognizes that individuals who were present in Canada at the time that travel restrictions were imposed may have been unable to return to their country of tax residence. Accordingly, the CRA accepts that where an individual has remained in Canada solely because of travel restrictions, that factor alone will not suffice to satisfy the common-law test of residency. The CRA will take this position where an individual is usually a resident of another country to which he/she intends to return, and in fact does return to that country as soon as travel is possible.
Determination of residency is the most fundamental to tax obligations of a person in Canada. It is also one of the most convoluted ones. There is, of course, no definition in the Income Tax Act (the “ITA”) and must be determined in each individual situation taking into consideration all the circumstances and intentions of the individual.
A person can be a resident of Canada even if they are not a Canadian citizen or a landed immigrant. And a person who is a Canadian citizen may not be a Canadian resident for income tax purposes. Tax residency is different from immigration status of a person, tax residency determines individual’s Canadian tax obligations and has significant tax implications: tax residents of Canada are subject to tax on their worldwide income and tax non-residents of Canada are only subject to tax on income tied to Canadian sources.
The term “resident” is not defined in the ITA, it must be determined in each individual situation based on all the facts of that situation. Determination is done by applying residential ties criteria developed by courts, certain deeming ITA sections and tie-breaker rules of the treaties.
An individual can be:
- Ordinarily (factual) Resident (common law): an individual who meets the ordinary, dictionary definition of “resident”. The Supreme Court of Canada in Thomson v. M.N.R, 2 DTC 812 held that an individual “is ‘ordinarily resident’ in the place where in the settled routine of his life he regularly, normally or customarily lives”. One must examine the degree to which the taxpayer in mind and fact settles into, maintains or centralizes his ordinary mode of living, with its accessories in social relations, interests and conveniences, at or in the place of question. Materials factors include (a) past and present habits of life, (b) regularity and length of visits in the jurisdiction asserting residence, (c) ties with this jurisdiction, (d) ties elsewhere; and (e) permanence or otherwise of purposes of stays abroad;
- Deemed Resident (ITA): Under section 250(1) of the ITA, an individual who is not a factual resident may still be deemed to be a resident under certain circumstances; or
- Resident by international tax treaty (Treaty): a person can be a dual resident. This may require the person to report their worldwide income and pay tax on it in both countries. Canada has entered into numerous tax treaties with other countries to avoid double taxation. The rules in the treaties ensure that the person is only a resident of one of the countries.
Common Law – Residential Ties Test
Courts have considered numerous cases and developed criteria to be applied for the purposes of determination of residency in addition to the factors listed above in Ordinary Resident above.
The residential ties of an individual that will almost always be significant residential ties for the purpose of determining residence status are the individual’s:
- Spouse; and
Where an individual keeps a dwelling place in Canada/another country (whether owned or leased), available for his/her occupation, that dwelling place will be considered to be a significant residential tie. However, if an individual leases a dwelling place to a third party on arm’s length terms and conditions, the Canada Revenue Agency (the “CRA”) will take into account all of the circumstances of the situation (including the relationship between the individual and the third party, the real estate market, and the purpose of the stay in Canada or abroad), and may not consider the dwelling place to be a significant residential tie with the country it is located in except when taken together with other residential ties.
If an individual who is married leaves from or comes to Canada, but his or her spouse or common-law partner remains in the country of origin, then that spouse or common-law partner will usually be a significant residential tie with the country the spouse remains in. Similarly, if an individual with dependents leaves from or comes to Canada, but his or her dependents remain behind, then those dependents will usually be considered to be a significant residential tie with the country they are in.
In addition, the CRA considers that where an individual entering Canada applies for and obtains landed immigrant status and provincial health coverage, these ties will usually constitute significant residential ties with Canada. Thus, except in exceptional circumstances, where landed immigrant status and provincial health coverage have been acquired, the individual will be determined to be resident in Canada.
Generally, secondary residential ties must be looked at collectively in order to evaluate the significance of any one such tie, therefore, it would be unusual for a single secondary residential tie to be sufficient in and by itself to lead to a determination that an individual is factually resident in Canada. Secondary residential ties that will be taken into account in determining the residence status of an individual are:
- Personal property (such as furniture, clothing, automobiles and recreational vehicles);
- Social ties (such as memberships in Canadian recreational and religious organizations);
- Economic ties (such as employment and active involvement in a business, and bank accounts, retirement savings plans, credit cards, and securities accounts),
- Landed immigrant status or appropriate work permits in Canada;
- Hospitalization and medical insurance coverage from a province or territory of Canada;
- Driver’s license;
- Seasonal dwelling place;
- Passport; and
- Memberships in unions or professional organizations.
Other residential ties that the courts have considered in determining the residence status of an individual, and which may be taken into account by the CRA, include the retention of a mailing address, post office box, or safety deposit box, personal stationery (including business cards), telephone listings, and local newspaper and magazine subscriptions. These residential ties are generally of limited importance except when taken together with other residential ties.
Tax Treaties – Tie-Breaker Rules
Treaties provide that:
- Residency depends on whether the individual is liable to tax in the country;
- An individual who is a resident of Canada for tax purposes is also considered a resident of Canada for purposes of an income tax treaty between Canada and another country – paragraph 1 of the residence article of a treaty (the “Residence Article”);
- Such an individual may also be a resident of the other country for purposes of the same paragraph in the same treaty – a dual resident. Where an individual is a dual resident, the Residence Article in the tax treaty will provide tie-breaker rules to determine in which country the individual will be resident for purposes of the other provisions of the treaty;
- If such tie-breaker rules apply and it is determined that an individual is a resident of another country for purposes of a tax treaty between Canada and that country, then subsection 250(5) will deem the individual to be a non-resident of Canada for purposes of the ITA.
All Canadian Tax Treaties contain Tie-Breaker rules and they generally provide the mechanism for deciding in which state a person is a resident based on several tests:
- First a permanent home test is used to resolve the residence issue. Generally, the permanent home test provides that an individual is resident for purposes of the treaty in the country in which the individual has a permanent home available to him or her. A permanent home (as that term is used in income tax treaties) may be any kind of dwelling place that the individual retains for his or her permanent (as opposed to occasional) use, whether that dwelling place is rented (including a rented furnished room) or purchased or otherwise occupied on a permanent basis. It is the permanence of the home, rather than its size or the nature of ownership or tenancy, that is of relevance;
In applying the tie-breaker rules, a dual resident individual who is determined to have a permanent home available to him or her in only one country, will be deemed to be a resident of that country for purposes of the treaty. Where an individual has two permanent homes the permanent home test will not result in a residency determination;
- If the permanent home test is not determinative, the tie-breaker rules of most treaties then refer to a center of vital interests test. The center of vital interests test requires a close examination of the individual’s personal and economic ties with each country in question, in order to determine with which country those ties are closer. The personal and economic ties to be examined are similar to those used in determining factual residence for purposes of Canadian income tax (the Residential Ties Criteria);
- Other tests will apply if the “center of vital interests” test is inconclusive.
Residence Article of Canadian Tax Treaties
Generally the residency articles states as follows:
- For the purposes of this Agreement, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.
- Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
- he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (center of vital interests);
- if the State in which he has his center of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;
- if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a citizen;
- if each State considers him as its citizen or if neither State considers him as its citizen, the competent authorities of the Contracting States shall settle the question by mutual agreement.
Income Tax Act – Definitions and Deeming Provisions
- in subsection 250(3) that a reference to a person resident in Canada includes a person who is ordinarily resident in Canada;
- Where an individual is determined not to be ordinarily resident in Canada, he or she may still be deemed to be resident in Canada for tax purposes by virtue of subsection 250(1):
- An individual who has not established sufficient residential ties with Canada to be considered factually resident in Canada, but who is temporarily present in Canada for a total of 183 days or more in any calendar year, is deemed to be resident in Canada for the entire year;
- Individuals, who are members of Canadian Forces, servants of Canada or province and their family members;
- If the tie-breaker rules in a tax treaty between Canada and another country result in a determination that the individual is resident in the other country, an individual who would otherwise be factual or deemed resident in Canada will be deemed not to be resident in Canada, pursuant to subsection 250(5).
Taxpayer’s Position Must be Supportable
Determination of the residency status in tax law is not straight-forward and depends on many variables and their interpretation. If the CRA is not convinced by the taxpayer’s own determination of residency status, it can make its own finding. If that is to occur, the CRA will ask for information and various documents to confirm the taxpayer’s position, including titles to real estate, corporate documents, subscription for magazines and newspapers, tax returns etc. Though the CRA’s determinations are not final and can be disputed and it is the courts that have the final say in determining residency status, it is better not get to it.
There are always risks of the CRA challenging taxpayer’s position and it is always advisable to take a reasonable position and the one taxpayer can defend and support by facts, documents, information and acceptable explanations.
Province of residence will be a province in which the individual resided on December 31.