With Canadian residency impacting an individual’s tax status, it is important to have a clear understanding of what it means to be a Canadian resident for tax purposes, including the tie-breaker rules under the U.S.-Canada tax treaty. Individuals immigrating to, or emigrating from Canada, those with residences elsewhere in the world, or who have employment or a business in Canada, often have unique issues related to their Canadian residency status.
An individual resident of Canada is only taxable in Canada on certain types of income earned in Canada. While not defined in the Canadian Income Tax Act, based on court decisions, tax professionals are able to determine who are factual residents, deemed residents and non-residents in the Canadian context.
Factual Residents of Canada
Because the Canadian Income Tax does not define who a resident or non-resident of Canada is, tax practitioners often look to both case law and guidance from the Canada Revenue Agency to determine whether an individual is a factual resident of Canada. This includes assessing primary factors such as housing, the location of spouses, common-law partners and dependents, as well as the frequency and duration of visits to Canada.
In addition, secondary factors such as social and economic ties, medical coverage, driver’s license and professional memberships may be considered.
Basically, a taxpayer’s intent to create or sever ties with Canada, ties outside of Canada and frequency of visits to Canada are assessed when determining Canadian residency.
Deemed Residents of Canada
However, individuals who are not in fact residents of Canada, may still be deemed to be a factual resident of Canada if certain criteria are met. A key factor is spending at least 183 days in Canada, which may cause an individual to be deemed to be resident there.
Canadian Non-Residents, Tax and U.S.-Canada Tax Treaty Exemption
Individuals who are neither considered to be factual or deemed residents of Canada are non-residents. However, it is important to note that even Canadian non-residents may be taxable on income earned for services performed while they are physically present in Canada.
Fortunately, for Americans performing work in Canada, Article XV (2) of the Canada-U.S. tax treaty provides that where the following criteria are met, that income is only taxable in the country of the individual’s residence:
- The income earned in Canada is less than $10,000; or
- The traveler spends less than 184 days in Canada in a 12-month period and the remuneration is not be paid or borne by a resident or permanent establishment in Canada.
So, it’s important for Canadian inbound business travelers from the U.S. to consider this tax treaty exemption to determine whether their income earned in Canada will be taxed there.
Canadians Deemed Non-Resident
Now, there are individuals who would otherwise be considered to be resident in Canada, that are deemed to be non-resident. This may apply to individuals resident of another country where the tax-treaty tie breaker rules may be applied.
Tax-Treaty Tie Breaker Rules for Residency
Generally, the tax-treaty tie breaker rules are applied in the following order if a taxpayer is resident in two countries:
- Permanent home: A taxpayer is first determined to be a resident of the country where they have a permanent home available for their use.
- Centre of vital interests: If a permanent home does not exist in either country, the taxpayer is resident in the country where they have a closer personal and economic relationship – often referred to as centre of vital interests.
- Habitual abode: If it not possible to determine an individual’s centre of vital interests, the taxpayer is resident in the country in which they have a habitual abode.
- Citizenship: In the absence of a habitual abode in either country, the taxpayer is resident in their country of citizenship.
- Mutual agreement: If the taxpayer happens to not be a citizen of either country, residency is determined by the authorities of each country through their mutual agreement.
Part-Year Canadian Residents
Interestingly, the year an individual enters or departs Canada, they are generally considered to be both resident and non-resident in the same tax year. Under Canadian tax rules, these individuals are considered part-year residents of Canada (dual-status under U.S. tax rules) – so, they are both resident and non-resident in the same tax year.
There are unique issues applicable to part-year Canadian residents. The first is that while they are taxed on their worldwide income in Canada for the portion of the year they are considered resident, only certain income earned in Canada for the portion of the year they are non-resident is taxable in Canada. In addition, part-year Canadian residents are only eligible to claim certain credits as it relates to their period of residence.
To determine the date Canadian residency commences or ends, the Canada Revenue Agency has indicated in it’s Income Tax Folio S5-F1-C1, Determination of an Individual’s Residence Status that an individual would cease to be a resident of Canada on the later of the date an individual departs Canada, their spouse or common law partner and or dependents leave Canada, or on which they become resident of the country to which they are immigrating.
Canadian Deemed Disposition Rules and Excluded Assets
Under Canadian tax rules, an individual who terminates residency is generally deemed to have disposed of their property just prior to ending their residency, for proceeds that are equivalent to the fair market value of that property.
Fortunately, several items are exempt from Canadian departure tax including:
- Excluded rights or interests such as Canadian Registered Retirement Savings Plans (RRSPs), Canadian Registered Educational Savings Plans (RESPs), Tax Free Savings Accounts (TFSAs), Registered Retirement Income Funds (RRIFs), Canada Pension Plan (CPP) or Old Age Security (OAS) rights;
- Real Property in Canada such as a taxpayer’s former residence, as well as timber resource property and Canadian resource property;
- Certain property used in a Canadian business, such as capital property used in a business carried on through a permanent establishment in Canada;
- Property held by short-term residents, such as individuals who have been resident in Canada for less than 60 of the prior 120 months on the date of departure. This would apply with respect to assets acquired through an inheritance or bequest after the taxpayer last became a resident of Canada, or that was owned at the time the taxpayer last became a resident of Canada;
- A former Canadian resident who re-establishes residency can make an election under the Canadian Income Tax Act so that certain assets are not subject to the deemed disposition rule. This provision can only be applied in the year an individual resumes residency.
Deferring Canadian Departure Tax
By filing a Form T1244, Election, Under Subsection 220(4.5) of the Income Tax Act, to Defer Payment of Tax on Income Relating to the Deemed Disposition of Property, a taxpayer may defer the tax on a deemed disposition. This would allow the tax to be deferred until the earliest of when:
- the taxpayer’s death;
- the taxpayer’s re-establishment of residency; and
- the taxpayer’s sale of the asset.
However, if the gain is greater than $100,000, or $50,000 of taxable income, security equivalent to the amount of the departure tax must be provided.
Reporting Requirements for Emigrants of Canada
In the year an individual emigrates from Canada, several of forms may need to be filed including:
- Form T1161, List of Properties by an Emigrant of Canada;
- Form T1243, Deemed Disposition of Property by an Emigrant of Canada;
- Form T1244, Election, Under Subsection 220(4.5) of the Income Tax Act, to Defer the Payment of Tax on Income Relating to the Deemed Disposition of Property;
- Form T2061A, Election by an Emigrant to Report Deemed Dispositions of Property and any Resulting Capital Gain or Loss; and
- Schedule 3, Capital Gains (or Losses).
The views expressed in this article are those of the author and should not be relied on to make decisions. Consider discussing your specific circumstances with an appropriate specialist.