Noh Review Taxation: Residency

As some accountants are getting ready for the tax season, this post will help clarify some of the Canadian taxation concepts regarding residency.

Residency for Individuals

• The Canadian Income Tax Act imposes taxes based on Residency. This means individual who currently reside in Canada, who may or may not be citizens.
• Individuals who are not residents of Canada but are employed in Canada, carry on business in Canada or dispose of taxable Canadian Property are subject to Canadian taxation.
• Canadian Residents are taxed on their worldwide income, regardless of which country the income was earned in. To avoid double taxation, Canada has negotiated a number of international reciprocal tax agreements.
• Key Principle: The country in which income is earned has priority in taxing that income and the country of which the payer is a resident allows all or some part of the foreign tax paid as a credit against the domestic tax.

1) Full-time resident: taxed on his worldwide income for a full year

• Deemed: Sojourned in Canada for 183 days or more OR Have the characteristics of a non-resident
• Common Law: Continuing State of relationship with Canada

• Maintaining a dwelling
• Immediate family remaining in Canada
• Maintaining personal property and social ties in Canada
• Furniture, clothing, cars, medical insurance, seasonal residence, employment/investment with Canada, retirement savings plans, credit cards and securities accounts, landed immigrant status, passport, license, membership, retention of Canadian mailing address, telephone listing and newspaper subscriptions

2) Part-Year Resident: Taxed on his worldwide income earned during the part of the year he was resident in Canada

• Clean Break: Leaves Canada during a year and severs all ties with Canada (with a spouse and dependants)
• Fresh Start: Comes to Canada during a year after permanently severing all ties with the previous residence

3) Non-Resident: Taxed on his Canadian-source income

• Employed in Canada [Continuous business activity: Carried on business in Canada or Disposal of taxable Canadian Property]
• E.g. A non-resident selling something in Canada through a salesperson = carrying on business in Canada
• Through an independent contractor (Canadian retailer/wholesaler) = not carrying on business in Canada = not taxable in Canada on business income earned in Canada
• “A person who is a non resident for the whole year cannot be a part-time resident. To be a part time resident, there must be a period in which the person was resident, in the sense of a full-time resident, and a period in which the person was non-resident.”

Canada-U.S Tax Convention: Exists to avoid double taxation or tax avoidance. Exempts a CDN resident from U.S taxation on salaries, wages, and other remuneration if:

• Remuneration < $US 10,000
• Present in the U.S. for <183 days

Only Taxed in U.S if he had a permanent establishment in U.S:

• More than 50% of gross active business revenues in U.S
• Or business is for U.S. customers
• Defined as a fixed place of business through which business of a resident of (a country) is wholly or partly carried on.
• Places of management,  a branch, and office, a factory
• Individual who is resident in Canada, would only be taxed in the U.S if the individual has or had a “permanent establishment” regularly available to him or her in the U.S. The tax amount is capped at the income attributable to the permanent establishment in the U.S.

Residency for Corporations: Depends on resident vs. non-resident

Corporate Residence depends on:

• Deemed Resident if incorporated in Canada after April 26, 1965
• Common Law: Central management and control are in Canada; Real business is carried on in Canada; Permanent establishment in Canada
• If incorporated before 1965, still deemed resident if it was resident by the common law principle of control management and control; it carried on business in Canada after 1965