Residents vs non-residents: taxation differences
This topic comes up every so often from clients and there’s often much confusion on it. I see questions such as:
- I’m a Canadian citizen so I’m a resident right?
- I have to file my taxes to maintain my permanent resident status right?
- Do I need to apply to CRA to become a non-resident? Or how do I become a non-resident
- What is the NR73 form? Do I have to fill this out?
- Can I keep my driver license if I no longer intend to stay in Canada? How about my bank account? Or my rental property?
And so on…
Under Subsection 2(1), a resident of Canada is taxable on his or her worldwide income in Canada.
However, the concept of tax resident is different from resident for immigration purposes. Thus, one can be a permanent resident for immigration purposes but not a tax resident and vice versa. Whether or not an individual is resident in Canada for taxation purposes via either statutory rules or common law rules.
Staying more than 183 days
Subsection 250(1) deems individuals that falls under certain criteria to be resident of Canada for taxation purposes. The rule of primary concern to us is the 250(1)(a) which deems a person to have “sojourned in Canada in the year for a period of, or periods the total of which is, 183 days or more”
Without getting into the technicality of the word “sojourned”, in simple terms, it means someone that stays in Canada for more than 183 days in a year is deemed to be a resident for tax purposes. A day does not have to mean a full 24 hour day. Arriving in the afternoon on the first day and leaving in the morning of the 183rd day would have the same effect. It’s also important to note the rule applies to individuals with “visitor status” under immigration rules. A common example would be a parent visiting (under a visitor visa) and staying with their children in Canada for more than 183 days.
Under common law
An individual that does not stay 183 days can still be deemed as a resident for tax purposes under common law rules. For those of you that are unfamiliar with the concept of common law, it’s essentially rules that are set out by the Canadian courts throughout various court cases and such. I would recommend reading the Wikipedia entry on common law if you are interested but it’s sufficient for our purposes to know that these are just another set of rules, albeit more complex and less straightforward.
Under common law, an individual can be a resident of Canada for taxation purposes if they have sufficiently strong links to Canada, regardless of how many days that individual stayed in Canada. Some key criteria considered are:
- Does the individual maintain a property or dwelling in Canada
- Does the individual have a spouse or common-law partner in Canada
- Does the individual have any dependants in Canada
- Does the individual have any social or business interest in Canada; and
- Does the individual have other family or life ties in Canada
One also must consider the individual’s physical presence in Canada; their nationality and background, and social connections by reasons of birth or marriage.
An individual that answers yes to all the questions above is far more likely to be considered a resident under common law versus an individual that only answers yes to some of them. However, how many is considered enough? As you can see, it is not so straightforward. Which is why, this is a question of facts. But by the same token, there is no application to “become” a non-resident. Either you are, or you aren’t. And it’s all based on the facts.
It’s important to note that the above list is by no means an exhaustive list of all the factors to consider. In fact, there’s no such a thing as an exhaustive list since it’s based on the individual’s specific facts. However CRA does provide a longer list of factors to consider.
Going back to the original questions on whether or not a person can keep their driver license if they leave the country: the answer is that it depends. An example situation: the individual in question is a new graduate from a computer science program deciding that he or she much rather be in enjoying a living in some tech company somewhere in California than dealing with miserable Canadian winter. Said person moves to California with no intention of coming back but keeps a Canadian bank with whatever miserable amount of cash they have left after gruelling tuitions and keeps their driver license because, well, you just never know. Would you say this person has strong enough ties to Canada to make him or her a resident, just because he or she didn’t get rid of his or her drive license? I would probably say no. However, you can very easily imagine a completely different situation where the answer becomes yes.
Unfortunately to keep this blog post within readable length, I will not be going into details the various potential factors (save that for another post).
On a final note about the role of CRA (and the NR73 form) in all of this. CRA is an administrative body tasked with the collection of taxes (and other things) in accordance to our laws. Therefore, it is their job to make an interpretation on whether or not an individual is a resident of Canada for tax purposes. The NR73 is not a requirement of the Income Tax Act. It is a questionnaire designed to provide all the relevant facts to CRA so that CRA can make an interpretation. Therefore, you do not need to (at least voluntarily) file a NR73. However, CRA may ask you to anyways to gather the facts.
CRA, being an administrative body, can be wrong (and sometimes even biased) in their interpretation. Ultimately, it is the Canadian courts that have the final say on whether or not an individual is a resident for tax purposes.
I hope this helps answering some of the common questions around this topic. If you have any further questions feel free to leave a comment below.
Edit: Forgot to add the disclaimer… don’t want to get in trouble here.
Disclaimer: This post provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.