For Canadians living abroad, or for those who come from abroad but now live in Canada, figuring out your residency status is a burden that must be borne. In short, residents of Canada must pay taxes on income earned worldwide and non-residents of Canada must only pay taxes on income earned in Canada. Additionally, if you were a resident of Canada and you find yourself becoming a non-resident, you may be faced with some interesting tax bills. Therefore, if you are working abroad, or visiting Canada, it is imperative that you understand what your residency status is, otherwise you may end up with a really awkward phone call from the lovely people at the CRA.
However residency status is not a simple matter to determine. It will sometimes require a full investigation into your life, your finances, etc. To understand why it is sometimes unclear whether or not you are a resident, I offer up Canada’s clear and concise definition:
Residence is “a matter of the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living with its accessories in social relations, interests and conveniences at or in the place in question.”
The Official Documents
I’m not a lawyer or accountant, so this entire post is a rough guide at best, therefore please consult the actual documents. The Canadian government offers a rough outline of how to determine your residency status. It discusses the concept of having significant and secondary residential ties. Realistically, this is the tip of the iceberg when it comes to determining your residency status. Instead, you should refer to the full document from the CRA which is named S5-F1-C1. This is a fairly well written document that outlines everything I’ll cover in great detail. Reading through it may cost you an entire night, but the clarity of mind it provides is worth it.
Additionally, it’s important to understand the tax treaties that exist between Canada and the country you are either in, or come from. You can find all of the laws on the Department of Justice’s website. Just type in the country name and you’ll find it. Specifically, these tax treaties have tie-breaker rules. Generally, Canada’s tax treaties include the concept of dual residency, where you can be a resident in both countries, but in some cases a tie-breaker rule will break your residency status. You can find a full list of tax treaties on the Department of Finance’s website. Finally, the Department of Justice lists six acts that talk about tax conventions. I don’t understand the discrepancy but here they are:
- I-3.5 (Latvia, Estonia, Trinidad and Tobago and Hungary)
- I-3.51 (Russia, South Africa, Tanzania, India and Ukraine)
- I-3.52 (Sweden, Lithuania, Kazakhstan, Iceland and Denmark)
- I-3.53 (Vietnam, Croatia, Chile)
- I-3.54 (Kyrgyzstan, Lebanon, Algeria, Bulgaria, Portugal, Uzbekistan, Jordan, Japan and Luxembourg)
- I-3.55 (Slovenia, Ecuador, Venezuela, Peru, Senegal, Czech Republic, Slovak Republic and Germany)
The CRA has broken down the concept of residency into several terms. This is an attempt to simplify the concepts, below, with references back to the S5-F1-C1:
You are a resident if you are either ordinarily resident or if you are deemed resident. [Summary]
You are ordinarily resident if you regularly, normally or customarily live in Canada. [1.7] To determine this, they will review the length of time, intention, etc. of your time in Canada.
You are a factual resident if you are ordinarily resident [1.9]. You are a factual resident if you maintain any significant residential ties (dwelling place, property, spouse/common-law partner, dependants) [1.11]. Secondary residential ties [1.14] (personal property, economic ties, social ties, etc.) and other residential ties[1.15] (maintaining a Canadian mailing address, telephone listings in Canada, etc.) are used to reinforce your factual residency but may not be sufficient alone.
You are deemed a resident if you are not a factual resident, but you [1.34]:
- Sojourned in Canada for a total of 183 days or more in any calendar year
- Were a part of the Canadian Forces
- Were a child/dependant of a member of the Canadian Forces
- etc. (Similar, but they’re all edge cases).
You are a deemed non-resident [1.37] if you are considered to be a resident in another country under an income tax treaty.
You are considered to have dual residence [1.40] status if you are considered a resident of Canada and a resident of the other country. However tie-breaker rules will typically break residency in one country.
It is very important that you understand the tie-breaker rules if you are abroad, or in Canada. As stated in [1.37], you are a deemed non-resident if you become a resident in another country. In Canada, this means that you must do a deemed disposition of property. A deemed disposition is when you “dispose” of all of your property at Fair Market Value, and then re-acquire it immediately. In other words, you will incur either a capital gain or a capital loss, based on whether or not your property (and stock) has accrued. This could potentially trigger a really large tax bill that you may not be prepared to pay.
To determine true residency, the tie-breaker rules are typically made up of the permanent home test and the centre of vital interests test and other, situation-specific tests [1.45].
You have a permanent home if you rent, own or occupy a place on a permanent basis. If you have a permanent home in both countries, you move on to the centre of vital interests test [1.48].
The centre of vital interests test [1.50] is a close examination of your personal and economic ties with each country. If the centre of gravity of your economic ties is in Canada, you’ll be considered Canadian for tax purposes. If the centre of vital interests fails, the tax treaties will specify exactly how your residency status will be determined.
Again, I’m not a lawyer or an accountant. You should really talk to them to figure out what’s going on with your situation, and read up on all of the relevant tax treaties.