Canada taxes its residents on worldwide income.
When a person (individual) moves to Canada (Immigrate) or moves out of Canada (emigrate) he is considered to be a part-year resident for tax purposes.
Part-year residents of Canada and their taxation
In Canada, part of the year when an individual is considered a resident of Canada is taxed on his worldwide income for that part of the year whereas the remaining part of the year when he is considered a Non-Resident, he is subject to taxes in Canada on certain Canadian sourced income.
There are multiple factors that go into each individual’s case depending on his/her circumstances. However, all the cases will somehow need the understanding of below:
- How the tax residency status is determined in Canada for immigrants and emigrants?
- Date of Change of Residency status in Canada.
- A deemed resident of Canada and factual resident of Canada
- Canadian Sourced Income Vs Foreign sourced income.
- Foreign tax credits for income tax purposes in Canada
- The tax treaty between Canada and the country where else you were resident in (non-resident part) part-tax year
How is the tax residency status determined in Canada?
How is the tax residency status determined in Canada – is the first and most critical – question for all the newcomers or leavers face in Canada!
The determination of the residence status of an individual in Canada is based on the facts particular to that individual. Income Tax Folio S5-F1-C1: Determining an individual’s residency status listed different factors used to determine an individual’s residency status in Canada.
An individual becomes a resident when he establishes significant residential ties with Canada. While looking into residential ties for the purpose of residency determination, two terms are frequently used; significant residential ties and secondary residential ties. This is often a confusing topic for leavers which overwhelms them during their tax preparation process for the year they left Canada.
Significant residential ties for tax purposes in Canada
Significant ties are usually:
- An Individual’s, spouse’s or common-law partner’s and dependents’ dwelling place is a key factor that is almost always considered significant
- An immigrant who enters Canada, obtain landed immigrant status, and obtain a provincial health card is considered to have established significant ties as well. There might be certain exceptions to this.
- If an individual leaves Canada but maintains a residence (dwelling) in Canada that is available for his/her occupation. This does not apply to dwelling places leased out in arm’s length transactions. This has certain exceptions too.
- If an individual (married or common-law partnership) leaves Canada but his/her spouse and/or dependents remain living in Canada is considered to have significant residential ties while (s)he is abroad. This doesn’t apply to situations such as the breakdown in a marriage or common-law partnership.
Secondary residential ties for tax purposes
Secondary residential ties are also considered with significant residential ties in order to determine an individual’s residence status in Canada. Some of the examples of secondary residential ties are:
- Personal property in Canada such as vehicles, furniture, and clothing, etc.
- Having a work permit in Canada or landed immigrant status
- Economic ties with Canada such as business, bank accounts, credit cards, retirement savings plans, or investment accounts
- Social ties such as membership with religious or recreational organizations in Canada
- Having health coverage or a driver’s license in Canada
- Being a member of Canadian unions or professional organizations
- Canadian citizenship
Other Residential ties for tax purposes
These are the situations that courts have considered while determining residency status for individuals in Canada. CRA may consider them but they having very limited importance such as maintaining a mailing address, PO Box, safety box, business cards showing Canadian address, newspapers, or magazine subscriptions.
As mentioned above tax residency is determined on a case by case basis due to specific circumstances of every individual. If you are hiring the services of a professional tax consultant in Canada, most of the time they should be able to help you file the tax returns under the right status. If you do not wish to hire a tax professional, you can easily request for determination of residence status from the Canada Revenue Agency by filling up and sending the relevant form. There are two forms used for this purpose; Form NR74 is used when you enter Canada and Form NR73 is used when you leave Canada. There are usually processing time involves with these requests so you should consider sending these forms earlier to avoid any delays.
What is the Date of Change of Residency Status for tax purposes in Canada?
As mentioned previously Canada taxes the worldwide income of its residents. For the newcomers and leavers, Canada taxes all individuals as residents for the part of the year when they are considered residents and other parts of the year as non-residents when they are not.
Along with the determination of residency status, the other most critical factor is the date when the residency status change for income tax purposes in Canada. This is also important to know that tax residency in Canada does not necessarily have to be the same as residency status for immigration purposes; an individual can be a tax resident while not having a permanent resident status or vice versa. So, do not confuse yourself with immigration status.
An individual becomes a Non-Resident for tax purposes on the date when (s)he severs all residential ties with Canada. If an individual still does have “sufficient” residential ties with Canada, he is a factual resident of Canada. When a factual resident of Canada becomes a tax resident of another treaty country, he becomes deemed non-resident of Canada.
Two important terms deemed residents and factual residents are explained later here.
You can find here more details about the date when an individual becomes a tax resident of Canada and its effects in more detail here – for immigrants.
For the details regarding the emigrants when an individual becomes Non-Resident for tax purposes in Canada, please read here along with the effects of this status change.
Taxation of Deemed Residents and Factual Residents of Canada
As mentioned previously, if you leave Canada and maintain sufficient residential ties you are considered to be a factual resident of Canada. Factual residents in simple words mean residents of Canada temporarily out of Canada.
If you do not have residential ties with Canada but have spent 183 or more days and you are a resident of a country where a treaty with that country does not make you a resident of that country (for tax purposes in Canada), you are deemed a resident of Canada. If you are not a factual resident of Canada but spending time outside Canada such as government employees outside Canada or a military person outside you are also a deemed resident.
Taxation of Deemed Residents & Factual Tax Residents
The key difference between the taxation of deemed residents and factual residents is provincial or territorial taxes and credits. This is mainly because of the fact that deemed residents usually don’t have residential ties whereas factual residents still have some sort of residential ties affecting their tax residency.
Deemed residents of Canada report their worldwide income, claim all the deductions and non-refundable tax credits. Individuals who are deemed residents of Canada are subject to Federal tax and federal tax credits, and instead of paying the provincial or territorial tax they are subject to a federal surtax. They can only claim federal tax credits and cannot claim provincial or territorial tax credits. Deemed residents can apply for GST/HST tax credit.
Factual residents of Canada also report their worldwide income, pay federal and provincial or territorial taxes where they maintain their residential ties and claim all the federal and provincial or territorial non-refundable tax credits. Factual residents are eligible for GST/HST credit too.
Child Care Benefit for Deemed Residents and Factual Residents
Factual residents of Canada are eligible for Canada Child benefit including provincial or territorial benefits even when they are absent from Canada. Whereas deemed residents are eligible for Child Care benefits but do not receive provincial or territorial benefits when they are absent from Canada.
Canadian Sourced Income Vs Foreign sourced income
Canada taxes its residents on worldwide income. However, when an individual is a part-year resident in Canada, both Canadian sources and foreign-sourced income have different tax treatments depending on which time of the year such income is earned.
If we put it to simple words, part-year residents are taxed on their Canadian sourced income only for the part of the year they have been Non-Resident in addition to their worldwide income when they were residents of Canada. If you are a newcomer, you will be taxed for the part of the year you were resident on both Canadian and foreign-sourced income whereas for the part of a year before becoming the resident only the Canadian sourced income will be taxed. When you emigrate from Canada, you will also be taxed on Canadian sourced income for the part of the year you will be Non-Resident whereas on worldwide income when you were resident. If you are a deemed resident or a factual resident of Canada, you have to report your worldwide income.
For correct personal tax preparation in Canada, it is very important that you differentiate your Canadian sourced income from foreign-sourced income. Further, the date of change of residency status is important to be determined in such situations. If you have a simple tax situation, you can do your tax preparation yourself, however, if you have a complex income tax situation, you are recommended to use professional tax preparation services who are familiar with residents and non-residents tax filings in Canada.
Foreign tax credits for income tax purposes in Canada
Foreign tax credits reduce the income taxes in Canada usually reduce the Canadian income taxes on this income and provide tax relief from double taxation. Wherever foreign-sourced income is included in your income tax returns, the question of foreign tax credits always comes. What foreign tax credits you can claim from your foreign-sourced income in Canada needs a thorough analysis of your individual tax situation.
Foreign tax credits are separately calculated for:
- Foreign non-business-income tax
- Foreign business-income tax
Foreign tax credits are calculated country-wise to which the foreign income belongs.
Canada Revenue Agency has published Income Tax Folio S5-F2-C1: Foreign Tax Credit which can be found here.
Foreign tax credits and Non-Resident taxation in Canada are complex topics and the use of a reputable and professional individual tax preparation service provider or the services of a reliable corporate tax accountant in Canada are highly recommended.
Tax Treaties between Canada and other Countries
Canada has tax treaties with the majority of the countries in the world. These tax treaties provide information on tax treatments for non-residents or the residents who have income connected to those countries. Tax treaties often reduce the rates of withholding taxes on Canadian sourced income.
Tax treaties in force between Canada and other countries can be found here.
Canada US Tax Convention is one of the most looked one in Canadian income tax due to the nature of the economy and can be found here.
Maroof HS CPA Professional Corporation offers a wide range of services including tax issues for residents and non-residents of Canada. If you are a non-resident of Canada and worried about your reporting requirements, contact us today to understand your Canadian tax filing requirements.