Tax Residency of Individuals
“Residency” as a Basis for Taxation
Residency is the principal connecting factor used for Canadian tax purposes. It underscores the social and economic connections between a person and the taxing authority, which is why Canada uses residency status to imposes tax liability on the worldwide income of “every person resident in Canada.” A non-resident person, on the other hand, is only liable to pay tax on income earned in Canada.
Definition of “Person” Under the Income Tax Act
The Income Tax Act (“ITA”) defines a “person” to include a corporation and a trust while defining an “individual” as a person other than a corporation. For tax purposes, individuals are treated differently from corporations and trusts in many respects. For instance, while individuals are taxed at progressive rates, corporations are taxed at set fixed rates, with the exact rate dependant on the type of corporation and income they earn. The courts have also set out different tests for determining the residency of individuals, corporations and trusts.
Common Law Test of Residency
In Canada, the leading case on the question of residency is Thomson v. Minister of National Revenue, which sets out the test to determine residence:
To be a resident, there must be “a continuing state of relationship between a person and a place…”
To determine whether there is a continuing state of relationship between an individual and a place, several factors are important and must be examined. Ultimately, this residency test is highly factual, and there is no bright-line test; instead, what is required is a holistic analysis of an individual’s mode of life.
The courts have listed many factors used in their determination of this question, but no one factor is conclusive. Case law following the Thomson case has established several factors. For example, some factors to look at are:
- Whether the individual has a dwelling place in Canada
- Whether the individual has a spouse/common-law partner in Canada
- Whether the individual has dependents in Canada
- Whether the individual is employed in Canada
- Whether the individual has a spouse and/or dependents/child in Canada
- Whether the individual has a Canadian bank account
- Whether the individual is a Canadian citizen
In addition to these factors, the following represent some of the principles that have developed from common law, which go to determining whether an individual is a resident or not:
- The intention of the taxpayer, while relevant in determining their residence, is not determinative.
- A taxpayer can be resident in more than one country at the same time.
- A taxpayer must be a resident of at least one country at any given time.
“Deemed” Full-Time Resident
As mentioned, the ITA also contains specific provisions that will deem a person to be a resident of Canada in certain circumstances. One of these provisions is paragraph 250(1)(a) of the ITA, which deems an individual to be a resident of Canada if they have “sojourned in Canada” in the year for a period of 183 days or more.
A sojourner has been defined by the courts to mean an individual who is physically present in Canada, but whose presence in Canada is unlike that of a resident as his or her presence in Canada is on a more transient basis than that of a resident. For example, an individual who is a resident of another country and comes to Canada on a vacation or business trip is a sojourner. If this sojourner stays in Canada for a period totalling 183 days or more during the year, paragraph 250(1)(a) will deem this individual to have been a resident of Canada for that year, and this individual would be liable to pay tax on his or her worldwide income.
International Tax Treaties
Canada has also entered into a tax treaty with certain countries. If a taxpayer is determined to be a resident of two countries, the relevant tax treaty between the two countries will allocate the jurisdiction to tax the taxpayer to one of the two countries.
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By Kaveh Rezaei – Attorney at KR Law Firm
**Disclaimer
This article contains information of a general nature only and does not constitute legal advice. All legal matters have their own specific and unique facts and will differ from each other. If you have a specific legal question, it may be appropriate to seek the services of a lawyer.
