Maroof HS CPA Professional Corporation, Toronto

Short-term residents of Canada and Income Tax

Canada is an attractive country consistently ranking as a premium destination for immigrants. Many individuals move to Canada either for employment purpose, or to settle here permanently. As much as we love our welcoming and diverse Canada, many newcomers and immigrants find it challenging to stay here in the long run. Long and cold winters and higher taxes can play a significant role for many to consider relocation. 

This article is for informational purposes only. Readers must exercise caution while relying solely on this reading. Departure tax issues are complex and require a proper tax planning, therefore, this article is not a tax advice of any kind. 

Canada taxes its residents on their worldwide income. When an individual becomes a resident of Canada by immigration or leaves Canada as an emigrant, there are specific income tax rules. Please note that immigration residency and tax residency are two different concepts. 

It is very common for an employer to request an individual to come to Canada for employment purposes and as a result that individual becomes a resident of Canada. As a resident of Canada that individual is subject to Canadian income tax on his/her worldwide income.

What happens if an individual leaves Canada and becomes a Non-Resident? Should he be subject to departure tax as applicable for emigrants?

Individuals who move to Canada for a short-term or temporary basis are called Short-term residents of Canada. The short-term resident is a term that is generally used for income tax purposes despite the fact that it is not defined in the Income Tax Act. The term also does not literally mean the short-term. 

Read: A detailed overview of departure tax at emigration.

How long is the Short-Term?

This short-term is decently long! 

Income Tax Act (ITA) subparagraph 128.1(4)(b)(iv) provides certain exemptions from departure tax for a taxpayer who is a resident of Canada for not more than 60 months in the past 120 months. 

In other words, just check if a taxpayer has had Canadian residency under five years in past 10 years, they may qualify for these exemptions. However, please note that the ITA uses the ‘months’ not the ‘years”, use of the term years here is just for perspective purposes. 

Reliefs Available to Short-term Residents in Canada for Income tax purposes

There are two important areas where short-term residents of Canada are provided relief which are not available to tax residents otherwise.

  1. Relief from Departure Tax
  2. Relief from rules related to foreign pension plans

Relief from Departure Tax to short-term residents of Canada

Usually, emigrants, individuals leaving Canada, are subject to departure tax on the deemed disposition of their assets (subject to certain exceptions). Short-term residents are provided with some relief here.

Short-term resident is an individual who is a resident of Canada for not more than 60 months in the 120 months preceding the month of departure.

  1. Short-term resident of Canada is not subject to departure tax on the property which (s)he owned before becoming a resident of Canada.
  2. If a short-term acquired property as a result of inheritance or by bequest, such a property is not subject to departure tax on the deemed disposition of this property.

These so-called short-term residents need to watch for their assets and portfolios carefully! For example, if a portfolio keeps on reinvesting the distributions, the assets acquired during this residency period as a result of this dividend or distribution reinvestment are not exempt from departure tax. International employees must watch for their employee stock options (ESO). If these stock options are exercised the acquired shares are also not exempt. 

Relief from rules related to participation in foreign pension plans

There are rules related to foreign pension plan participation for residents of Canada. Short-term residents of Canada are provided some relief from these strict rules. If an individual moves to Canada at the request of an employer, (s)he can keep on contributing to the foreign pension plan of the former employer for which (s)he is a member of – for the first five years. This is applicable for only the first five years and such an individual must consider and plan properly to avoid Canadian taxes on employer’s contributions to such a plan.

Whether you are a newcomer, short-term resident, an emigrant or a Non-Resident; navigating the maze of tax laws and rules is often confusing. It is always recommended to seek professional tax advice from a professional tax accountant in Canada to determine your Canadian income tax filing requirements.

You can reach Maroof HS CPA Professional Corporation for both personal and corporate taxes in Canada, for residents and non-residents.

Maroof Hussain Sabri

Maroof Hussain Sabri

Maroof is a CPA, CA in the province of Ontario and Alberta in Canada. He is also a licensed CPA from New York & North Dakota in the United States. He lives in Toronto.

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Maroof Hussain Sabri

Maroof Hussain Sabri

Maroof is a CPA, CA in the province of Ontario and Alberta in Canada. He is also a licensed CPA from New York & North Dakota in the United States. He lives in Toronto.

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7 thoughts on “Short-term residents of Canada and Income Tax”

  1. Our family has been approved under the Quebec Investor immigration and have received the COPR which expires November 2022.

    We plan to land in Montreal in October 2022 and stay there for 2-4 weeks to complete the documents (SIN card, PR etc) and eventually come back to our tax residency country (Thailand) to wind down. We plan to migrate mid 2023 to settle down in Montreal. The address in Canada to send the PR card will be my sister’s address in Toronto so she can sent it across to me once she gets it.

    My short question pertains to if we are liable to Canadian tax as a PR for the year 2022/2023? We do NOT plan to purchase/rent a house till the eventual move next year in 2023 and will just live at a hotel. I would like to open a bank account to facilitate finances for the future but it is not necessary if the bank account means we will have a connection to Canada. I’m just not sure about the FMV (fair market value) of our assets – whether that’s based on the first date we enter or the second time we enter next year. We would like to delay being a Canadian tax resident till our eventual move in 2023.

    I thank you in advance for any guidance that you could provide to this question.

    1. Maroof Hussain Sabri

      Tax residency and immigration residency are two different things. From your comment, it does not look like you are going to be a tax resident until you move and establish residential ties. This comment, however, does not replace the need to seek any specific tax advice in this connection.

  2. I moved to Canada in July 2019 on a temporary work permit.
    I’m planning to go back next year hopefully by April or May and have realised the 60 Months disposition rules.
    I have a house in the UK but I bought all my belongings here to Canada. Would I still need to pay a tax even though all my furniture, Clothing etc is personal? I’m not sure if I’m understanding that correctly.

  3. If I pay out all the dividends from my corporation in Canada before the date I leave the country am I still a subject to 25% departure tax on these dividends that year? Or that would only apply to dividends taken out after the departure date? Thank you!

    1. Maroof Hussain Sabri

      If you paid out all the retained earnings as dividends before the date of emigration, of course, there is no non-resident tax withholding involved. For the dividends taken out after the departure date, yes!

  4. Hi Maroof!

    This post is extremely helpful as it touches on the key term on ‘short term resident’. Very much appreciated.

    I’m an Australian citizen and by the time I leave Canada and return to Australia I will have been in Canada continuously for a bit less than 60 months. My employer in Australia at the time (an Australian company) transferred me to Canada for work. I have been with this same employer here on a work permit all this time. I don’t have the Canadian permanent residency. Never applied for it. I don’t own any property in Canada either (neither house nor stocks). I don’t have Canadian ties (my wife is Australian too). I only own a house in Australia which I bought about 3 weeks after I first landed in Canada a bit more than 4 years ago. At the time I bought this house I was also a tax resident of Australia. In fact I bought this house and I was a tax resident of both countries simultaneously for another 6 weeks. After those 6 weeks I was entirely a Canadian resident only.

    This property is rented out and over these less than 5 years I have been declaring in Canada the rental income of my Australian house. I’m panicking because even if I’m a short term resident, it looks like I may be subject to departure tax when I move back to Australia.

    What are your thoughts?

    1. Maroof Hussain Sabri

      Foreign real properties are subject to departure tax (unlike Canadian real properties). Please note that landing alone does not make you a tax resident of Canada, you need to establish the residential ties. You might want to review the filings you had done in the past in both countries. Generally when you end residency in one country, the residency in other starts next day. So you should not be resident of the two countries at the same time. My suggestion, go back and check the dates used on both countries’ tax returns. You can also check treaty tie breaker rules to apply to that transition year. Capital gains are always messy when taxpayers do not pay close attention to tax residency status.

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