Chapter 1: Factual and Deemed Residency

Question 1

What is factual residency, and how is it determined for individuals?

Answer 1

Factual residency for individuals is based on where they live, typically a home in a specific country.

Individuals living in a country for most of the year are considered factual residents of that country for tax purposes.

Question 2

How is factual residency for corporations and trusts determined?

Answer 2

Factual residency for corporations and trusts is based on where decisions are made.

For corporations, it depends on the location of board meetings, and for trusts, it depends on where trustee decisions are made.

Question 3

What is ITA 2(1) in relation to Canadian residents?

Answer 3

ITA 2(1) states that an income tax is imposed on every person resident in Canada at any time in the year, for each taxation year.

Question 4

What is the definition of a “person” under the ITA?

Answer 4

A “person” is defined in ITA 248(1) as including individuals, corporations, or trusts, whether or not exempt from tax.

Question 5

How is a “resident” defined in ITA 2(1)?

Answer 5

A “resident” under ITA 2(1) includes only residents of Canada for the purpose of liability under Part I.

Canada does not tax based on citizenship, only residency.

Question 6

What is the “taxation year” for individuals and trusts?

Answer 6

The taxation year for individuals and trusts is the calendar year from January 1 to December 31.

Question 7

What is the “fiscal period” for corporations?

Answer 7

The fiscal period for corporations is defined as the period for which their accounts are made up and cannot exceed 53 weeks.

Question 8

What is a Graduated Rate Estate (GRE)?

Answer 8

A GRE is an estate that arises at the time of an individual’s death, and it is eligible for certain graduated income tax rates for up to 36 months after death.

Question 9

How is “taxable income” defined in ITA 2(2)?

Answer 9

Taxable income for a taxation year is the taxpayer’s income for the year, plus additions and minus deductions permitted by Division C of the ITA.

Question 10

What is “net income” for tax purposes?

Answer 10

Net income is the amount determined under ITA 3 and is used to calculate taxable income.

It is generally referred to as “net income for tax purposes.”

Question 11

Under ITA 2(3), when are non-residents of Canada liable for income tax under Part I?

Answer 11

Non-residents are liable for income tax under Part I if they:

Were employed in Canada,
Carried on a business in Canada, or
Disposed of taxable Canadian property.

Question 12

What is considered Canadian employment income for non-residents?

Answer 12

Canadian employment income for non-residents refers to income earned while working as an employee in Canada, regardless of the location of the employer.

Question 13

What determines if a non-resident is carrying on a business in Canada?

Answer 13

Determining if a non-resident is carrying on a business in Canada involves identifying what constitutes a business and where it is carried on. In most cases, a business must have a “permanent establishment” in Canada, as defined in tax treaties.

Question 14

What is “taxable Canadian property” under ITA 248(1)?

Answer 14

Taxable Canadian property includes:

Real property situated in Canada,

Certain capital property and inventory used in a business in Canada,

Shares of unlisted corporations if certain conditions are met,

and

Shares of listed corporations if at least 25% of the shares are owned by the non-resident and their non-arm’s-length persons.

Question 15

What are the tax implications for a U.S. resident selling vacation property in Canada?

Answer 15

Under ITA 2(3)(c), a U.S. resident selling vacation property in Canada, such as in Whistler, BC, is subject to Canadian income tax under Part I on any gain from the sale.

Whether the gain qualifies for the principal residence exemption would need to be determined.

Question 16

What is the clearance certificate under ITA 116(5)?

Answer 16

A clearance certificate issued by the CRA is a written acknowledgment that any required income tax on the sale of taxable Canadian property by a non-resident has been provided for, absolving others from personal liability for the tax.

Question 17

Does ITA 2(3) apply to non-residents for investment-type income or property income earned in Canada?

Answer 17

No, ITA 2(3) does not apply to investment-type income (e.g., rents, interest, dividends, royalties) earned by non-residents.

This income is subject to withholding tax under Part XIII of the ITA.

Question 18

What is the standard withholding tax rate under Part XIII for non-residents earning property income in Canada?

Answer 18

The standard withholding tax rate under Part XIII is 25% of the amount paid to the non-resident, although tax treaties frequently reduce this rate.

Question 19

What responsibilities does a Canadian resident have when paying property income to a non-resident?

Answer 19

Under ITA 215 of Part XIII, the Canadian resident paying the property income must withhold 25% of the gross payment and remit it to the CRA, unless a tax treaty provides for a reduced rate.

Question 20

In the case where a tenant rents from a non-resident property owner, who is responsible for withholding and remitting taxes?

Answer 20

The tenant renting property from a non-resident owner is responsible for withholding 25% of the gross rent and remitting it to the CRA, unless a reduced rate applies under a tax treaty.

However, in many cases, a resident Canadian property management company is responsible for withholding instead of the tenant.

Question 21

Is Ms. Laurie Lacombe, a U.S. citizen and resident, subject to Canadian income tax on her Canadian employment income of $70,000?

Answer 21

Yes, under ITA 2(3)(a), Ms. Lacombe is subject to Canadian income tax on her Canadian employment income, despite being a non-resident of Canada and a U.S. citizen.

Question 22

What is the key factor in determining liability for Part I tax in Canada?

Answer 22

The key factor in determining liability for Part I tax is whether a person is or is not a resident of Canada.

Question 23

What are the three types of residency in Canadian tax law?

Answer 23

The three types of residency are:

Factual residency

Deemed residency

Deemed non-residency

Question 24

How is factual residency determined in Canada?

Answer 24

Factual residency is determined by examining where an individual “settles into or maintains” their ordinary mode of living, including social relations, interests, conveniences, and the place they call home.

This was established by the Supreme Court of Canada in the Thomson case.

Question 25

What is deemed residency under ITA 250?

Answer 25

Deemed residency applies to individuals who are not factually resident in Canada but are deemed residents, such as those who spend more than half the year in Canada or are family members of Canadian government employees stationed abroad.

Question 26

What is deemed non-residency, and how is it determined?

Answer 26

Deemed non-residency is a tax treaty concept where a person is a resident of both Canada and another country.

Tax treaties resolve residency status by applying tie-breaker rules to determine which country has tax priority.