Canadian Resident or Not?
If you are moving from Canada to another country for work purposes, how do you avoid paying income taxes to the Canada Revenue Agency (CRA) as well as to your new country of residence? The most important action to take is to make sure that you are not assessed by the CRA as a Canadian resident. However, simply moving out of Canada to another country does not guarantee this.
The most important factor to be considered is determining whether you will be classified as a “factual” Canadian resident for tax purposes, despite residing elsewhere. In order to avoid this classification, you need to sever all significant residential ties with Canada upon leaving the country. Otherwise, you may be required to pay Canadian income tax on income earned outside of Canada.
What are examples of these significant residential ties?
- Maintaining a residence in Canada
- Having a spouse or common-law partner who remains in Canada
- Having minor-aged children who remain in Canada
There are secondary residential ties that the CRA will also consider. If an individual moved from Canada to another country and none of the three main residential ties are applicable, he/she can still be deemed to be a Canadian resident under the following conditions:
- If he/she has personal property in Canada
- Has economic ties with Canada (Canadian Employer, Canadian bank accounts)
- Has landed immigrant status or appropriate work permits in Canada
- Has an active driver’s license from a province or territory in Canada
- Has a Canadian passport
The CRA will collectively consider these secondary ties. Generally, it would be unusual for a single secondary tie to be sufficient for an individual to be classified as a Canadian resident.
What Happens When an Individual Has Dual Residency? (E.g. Canada and the USA)
In this scenario, the individual could be required to pay income taxes on their income to both countries, a situation otherwise known as “double taxation”. This situation created the need for international tax treaties. These bilateral treaties contain provisions called tie-breaker rules, which were designed to prevent double taxation in dual residence situations.
The order of consideration of tie-breaker rules are as follows:
- Permanent Home – if the individual has a permanent home available in only one of the countries where he/she works, the individual will be considered a resident of that country.
- Centre of Vital Interests – the country where the individual’s personal and economic relations are the greatest.
- If the first two tie-breaker rules don’t help to resolve the country of residence, the next test is time – which country does the individual spend more time in?
- If these three tests have not determined the residency, the individual will be deemed to be a resident of the country where he/she is a citizen.
- The Competent Authority Test is used when the four tests mentioned above fail to properly determine residency. In this situation, representatives of the two countries (the Minister of National Revenue on the Canadian side) will enter into a dialogue in an effort to resolve the residency question.
While the residency question is the primary factor when determining taxation, there are other considerations that have an impact as well, such as Temporary Absences, Part-Year Residence, Sojourners and Other Deemed Residents.
Under what circumstances would you be viewed as having retained your Canadian residency status during a period of absence from Canada? If some residential ties are retained during a temporary absence, other factors will be considered.
Intent – does the individual have the intent to sever their residential ties with Canada? Did the individual initiate a deemed disposition (i.e. disposal of) of his/her property at the time of departure? This would result in a need to pay taxes on any gains.
Frequency of Visits – if visits are made on a regular and continuing basis or if other secondary residential ties are present, this would be a sign of not wanting to permanently depart Canada.
Residential Ties Outside of Canada – if no residential ties are established in the other country, this could be interpreted as the individual not having permanently departed from Canada.
If the individual’s absence is deemed temporary, he/she will be have to pay tax in Canada on his/her worldwide income while absent from Canada. While credits against Canadian income tax payable would usually be available for any income taxes paid in the foreign jurisdiction, the foreign taxes paid may not be sufficient to cover the full Canadian tax liability.
Part-Year Residence aka Sojourners
Most people who move to another country will do so in the midst of a tax year, meaning that they are a Canadian resident for part of that year. This means that they will be assessed in Canada for the portion of the year they were resident in the country. For taxation purposes, the date on which an individual is deemed to become a non-resident is the latest of:
- The date the individual leaves Canada;
- The date the individual’s spouse or common-law partner and/or other dependants leave Canada;
- The date the individual becomes a resident of the country to which they are immigrating.
A deemed resident is someone who is considered to be a Canadian resident even if they have not set foot in Canada during the relevant taxation years. Some examples are:
- Canadian armed forces members who have been stationed outside of Canada.
- Ambassadors, ministers, high commissioners, officers or servants of Canada as well as agents, generals, officers, or servants of a province, provided they were Canadian residents immediately prior to their appointment.
- A child of a deemed resident provided they are also a dependant whose net income for the year was less than the base for the basic personal tax credit.
If you are considering relocating from Canada or have questions about your tax obligations based on Canadian residency, the CPAs at ESS CPAs LLP can provide assistance. Please contact our office by calling us at 905-517-2297 or contacting us online.