Tax Residence in Canada – Are Significant Residential Ties Less Significant for Immigrants to Canada than for Emigrants from Canada? A Canadian Tax Lawyer’s Analysis

Introduction

A person’s status as a tax resident determines the extent to which Canada may tax that person’s income.

The test for whether an individual—i.e., a natural person—is a Canadian tax resident turns on the individual’s particular circumstances. Every detail counts.

But Canadian courts and the Canada Revenue Agency both agree that the presence of certain significant residential ties—specifically, a home, a spouse, or a dependent in Canada—more readily make an individual a factual resident in Canada.

Yet numerous tax cases suggest that these significant residential ties prove far less significant when determining whether a foreigner has become a Canadian tax resident. The presence of a significant residential tie tends to show that a Canadian resident failed to sever residence rather than show that a foreigner became a Canadian resident.

After discussing the basics of Canadian tax residence, this article examines the role of significant residential ties in tax cases deciding upon the residence status of immigrants, on the one hand, and emigrants, on the other.

This article only discusses tax residence of individuals—that is, natural people. For information on the tax residence of a corporation, see our article “Determining the Residence of a Corporation for Tax Purposes.”

The Significance of Tax Residence

Subsection 2(1) and section 3 of Canada’s Income Tax Act require a Canadian resident to pay Canadian tax on worldwide income.

In contrast, subsection 2(3) of Canada’s Income Tax Act obliges a Canadian non-resident to pay tax only on Canadian-sourced income. In particular, Canada taxes a non-resident’s income from:

• employment in Canada;
• carrying on a business in Canada; or
• disposing of a taxable Canadian property

So, your status as a Canadian resident for income-tax purposes determines the extent of Canada’s jurisdiction to tax your income.

When Are You a “Deemed Resident in Canada”?

Canadian residents come in two forms: factual residents and deemed residents. In addition, you may also be deemed to be a non-resident in Canada if a Canadian tax treaty reckons that you’re a tax resident of Canada’s treaty partner.

Factual resident

The Canada’s Income Tax Act uses the terms “resident” and “ordinarily resident” but defines neither. So, the responsibility of defining residence falls upon Canadian courts—namely, the Tax Court of Canada, the Federal Court of Appeal, and the Supreme Court of Canada.

The Supreme Court of Canada has defined a taxpayer’s residence variously as:

• “the place where in the settled routine of his life he regularly, normally or customarily lives”; and
• “the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living.”

(Thomson v Minister of National Revenue, [1946] SCR 209, at paras 50 and 71)

Further, courts are quick to observe that your particular circumstances determine whether you’re a factual resident in Canada. When rendering its decision about an individual’s residence status, a court may examine any of the following factors (and then some):

• Past and present life habits;
• Regularity and length of visits in the jurisdiction asserting residence;
• Ties within that jurisdiction;
• Ties elsewhere; or
• The permanence or purposes of a stay abroad.

Not all jurisdictional ties are given equal weight. As we alluded to in our introduction, courts and the Canada Revenue Agency consider some residential ties more significant. These significant residential ties are discussed further below.

Deemed resident in Canada

Paragraph 250(1)(a) will deem you to have been a Canadian resident throughout the year if you “sojourned” in Canada for 183 days or more in a year. You sojourn if you visit. So, unlike a factual resident, a sojourner need neither have a “settled routine” in Canada nor “customarily live” in Canada. In other words, even if you’re not a factual resident in Canada, your mere physical presence in Canada for just over half a year will brand you a Canadian tax resident.

Deemed non-resident in Canada

Canada has numerous bilateral tax conventions or tax agreements with other countries. These conventions or agreements are commonly known as tax treaties. Tax treaties contain provisions aimed at preventing double taxation and combating tax evasion.

Can Tax Treaties Impact Deemed Residents in Canada?

Notably, Canada’s tax treaties usually contain a tie-breaker clause that settles the issue of a person’s country of tax residence where both countries’ domestic tax laws claim jurisdiction to tax the person’s worldwide income on the basis of domicile, residence, place of management, or any other similar criterion.

To this end, subsection 250(5) of Canada’s Income Tax Act deems a person to be a non-resident of Canada if a tax treaty proclaims that the person is a tax resident of Canada’s treaty partner. Subsection 250(5) assures consistency between Canada’s domestic law and Canada’s tax treaties.

What Residential Ties Prove “Significant” for Determining Tax Residence?

The Canada Revenue Agency views three residential ties as “almost always… significant… for the purpose of determining residence status”:

• a dwelling place in the jurisdiction;
• a spouse or common-law partner in the jurisdiction; and
• a dependant in the jurisdiction

(Income Tax Folio S5-F1-C1, “Determining an Individual’s Residence Status,” at para 1.11)

The CRA also views a Canadian entrant’s acquisition of either landed immigrant status or provincial health coverage as a significant residential tie to Canada (ibid, at para 1.25).

Are These “Significant” Residential Ties Less Significant for Immigrants of Canada?

Despite the CRA’s view, numerous tax cases suggest that these significant residential ties prove far less significant when determining whether a foreigner has become a Canadian tax resident.

On the one hand, the presence of a significant residential tie to Canada tends to show that a Canadian resident failed to sever residence upon leaving Canada. For example, in Thomson v M.N.R. (supra), a Canadian-born taxpayer claimed that he ceased to be a Canadian resident because he left Canada for Bermuda and later moved to the United States. The Supreme Court of Canada held that the taxpayer remained a resident in Canada since he built a home in New Brunswick that he and his immediately family frequented.

But it’s a different story for foreigners entering Canada. In both Shih v. R. (2000 DTC 2072 (TCC)) and Mahmood v The Queen (2009 TCC 89), taxpayers, who originally hailed from foreign countries, were held to be non-residents in Canada despite their owning homes in Canada and their immediate family’s presence in Canada.

Unlike the taxpayer in Thompson, the taxpayers in Shih and Mahmood were not Canadian-born individuals claiming to have cut ties with Canada; they were foreigners who moved their respective spouses and children into Canada for reasons other than settling into the country themselves.

In Shin, the taxpayer immigrated to Canada with his wife and three sons, purchased a home in Canada, and returned to Taiwan that same year to work. He visited Canada annually to see his family, but his stays did not exceed three months in any given year. The primary reason for the moving of his family to Canada was so that his children could obtain a western education. The taxpayer had several ties to Taiwan: other family members; a job; a house; various memberships, a driver’s license, and a bank account. But he had also established the following ties to Canada:

• the taxpayer had investments in Canada;
• the taxpayer owned a home in Canada;
• the taxpayer’s wife and children were in Canada;
• the taxpayer frequently visited his wife and children at their home in Canada;
• the taxpayer obtained a driver’s licence in Canada; and
• the taxpayer filed his income tax returns as a Canadian resident.

Yet the Tax Court of Canada concluded that the taxpayer was not a resident in Canada. In its reasons, the court indicated that the taxpayer was not in Canada “often enough or long enough to establish any personal connections with the various communities [in Canada] whether they be commercial, educational, cultural, recreational, or social.”

And the Shin decision is not unique.

In Song v The Queen (2009 FCA 278), the court held that a Japanese taxpayer failed to be a Canadian resident even though her husband lived in Canada. Although the taxpayer hoped to eventually live in Canada with her husband, her settled, daily routine revolved around her job in Japan.

In Mahmood v The Queen (supra), a Guyanese taxpayer owned a condo in Canada, used Canadian banks to facilitate business transactions, and had a son who lived in Canada. The taxpayer regularly stayed at his Canadian condo and attended a mosque in Canada. Yet the court decided that the taxpayer was not a resident in Canada because his day-to-day activities concerned the business that he ran in Guyana.

In Yoon v The Queen (2005 TCC 366), in 1975, a Korean-born taxpayer moved to Canada, where she later met and married her spouse, had a child, and obtained citizenship. In 2001, she moved back to Korea for work. That year, she spent 135 days in Canada and 224 days in Korea. Her husband remained in Canada. The court applied the Shin decision and concluded that the taxpayer was not a Canadian resident during the 2001 taxation year.

Yoon also illustrates that, despite the CRA’s contrary view, the acquisition of landed-immigrant status seemingly isn’t a significant residential tie. The Yoon taxpayer entered Canada and obtained not only landed-immigrant status but also Canadian citizenship. Yet the Tax Court of Canada held that the taxpayer was not a resident in Canada. Affirming the Tax Court’s decision, the Federal Court of Appeal noted that “residence is not simply a matter of a person’s status under the Immigration Act… .”

In summary, Canada’s tax-law jurisprudence has apparently accepted a principle whereby the CRA’s purportedly significant residential ties prove far less significant when determining whether a foreigner has become a Canadian tax resident.

Tax Tips – Determination of Residency Status

If you misconstrue your tax-residence status, you may erroneously under-report or over-report your Canadian taxable income. Under-reporting your taxable income may lead to monetary penalties, while over-reporting may result in excessive Canadian tax liability.

For additional certainty when preparing your Canadian tax return, you can submit a residence-determination request to the Canada Revenue Agency using Form NR73 (Determination of Residency Status – Leaving Canada) or Form NR74 (Determination of Residency Status – Entering Canada). In response, the CRA will provide you its opinion on your status as a Canadian tax resident.

Still, the CRA’s opinion is only as reliable as the details you provide. And, as demonstrated in this article, the CRA’s administrative view doesn’t always correspond with Canada’s tax law. As a result, your residency-determination application must not only frame the relevant facts but also bring attention to the case law favoring your position. Otherwise, the CRA agent appraising your residence-determination application might render an unfavorable decision based on CRA publications yet contrary to law.

Our experienced Canadian tax lawyers can provide you with advice on your status as a tax resident in Canada or prepare your residence-determination application to ensure that it contains the needed factual and legal analysis.

About the Author

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David J. Rotfleisch

David J. Rotfleisch, a leading Canadian tax lawyer, is not only a certified specialist in taxation but also a chartered professional accountant. Most recently, David is a pioneer in Canadian crypto taxation.

As of April 2020, he was one of 12 Ontario Certified Specialists In Taxation™.

Learn more about David J. Rotfleisch