Chapter 2 - Liability for Tax

Question 1

Liability of Individuals for Canadian Income Tax

Answer 1

• Individual residents in Canada are subject to tax on worldwide income
• Tax imposed on individuals who aren’t resident in Canada only if they are:
o Employed in Canada,
o Carry on Business in Canada, or
o Dispose of taxable Canadian property

Question 2

Degrees of Canadian Residency

Answer 2

Resident
Part-year Resident
Non-resident

Question 3

Resident

Answer 3

pays tax in Canada on worldwide income

Question 4

Part-year resident

Answer 4

Year in which residency status changes.
For period of residency, pays tax in Canada on worldwide income.
For period of non-residency, pays tax in Canada on income earned in Canada from employment, carrying on business and disposal of taxable Canadian property.

Question 5

Non-Resident

Answer 5

pays tax in Canada on income earned in Canada from employment, carrying on business and disposal of taxable Canadian property

Question 6

sojourner

Answer 6

183 days and more, then he/she is deemed a resident under the “sojourner” rules

Question 7

Liability for Tax - Canadian Resident

Answer 7

3 Residency statuses for individuals are resident, non-resident, and part-year resident.

Question 8

When considering residency status of an individual, note 2 main concepts:

Answer 8

1) Residency must be established somewhere that is, an individual must have residential ties to a country, and
2) When leaving Canada, the facts of the situation are reviewed to determine the taxpayer’s intention to permanently sever ties

Question 9

Common Law Concept of Canadian Resident (3 points)

Answer 9

• It’s possible for a person to be considered a Canadian resident by virtue of principles of common law of case law that have evolved over the years.
• Key statement describing the residence of an individual under common law principles describes residence as “a continuing state of relationship between a person and a place which arises from the durable concurrence of a number of circumstances”
• Facts must be found to establish the continuing state of relationship, that is, ties to the country.

Question 10

CRA factors to be considered in determining an individual’s residency status:

Answer 10

1) maintaining a dwelling
2) Immediate family members remaining in Canada
3) Secondary ties
4) to establish that an individual is not a Canadian resident, the severance of residential ties AND the establishment of residential ties elsewhere is important for determining residency in Canada.

Question 11

Deemed Resident - Sojourning

Answer 11

A deemed resident is treated like a resident and is taxed on worldwide income for a full year.
While the Act doesn’t define resident, it does deem an individual to be a resident if one of the conditions of a deeming rule is met.
A person is deemed to be resident in Canada throughout the taxation year if they “sojourned” in Canada in the year for an aggregate of 183 days or more.

Question 12

Part Year Resident

Answer 12

• The status of a part-year resident can only occur in the year an individual ceases residency or establishes residency in Canada
• “Part-year residence” describes the position of an individual in the year they either became or ceased to be a Canadian resident
• Part-year residence can occur when an individual, having had full residential ties, leaves Canada during a year, or when an individual who didn’t have such ties for a prior period comes to Canada during a year and establishes full residential ties, they would be considered to be a part-year resident for that year
• Part-year resident is taxed in Canada on worldwide income during the part of the year in which they’re considered to be resident in Canada

Question 13

Clean Break or Fresh Start

Answer 13

To break residential ties or establish residency, facts must be found to show that the person made either a “clean break” from Canada or a “fresh start” in Canada during the year.
If a clean break or severing of ties can be established by the facts, then the individual becomes a non-resident after the clean break.
Until residency is established in another country, the individual may remain a resident in Canada and be taxed on their worldwide income.

Question 14

CRA considers a clean break to have been made of the latest of the date on which:

Answer 14

• The individual leaves Canada,
• The individual’s spouse or common-law partner and/or dependants leave Canada, or
• The individual becomes a resident of the country to which he/she is immigrating.

Question 15

On April 1, 2020, Samantha Jones arrived from Germany to commence a two month contract with Technology Development Institute (TDI) located in Toronto, Ontario. Samantha was raised and educated in Germany. On completion of her education, Samantha had joined a family run business inGermany and had worked there until leaving for this contract position. TDI found her knowledge and training invaluable to its product development and convinced her to stay until September 30, 2020. Anxious to return to her home, family and friends, Samantha left Canada October 15, 2020. Her worldwide income for the year totalled $170,000 of which $100,000 related to the TDI contract earned in Canada. She also earned $5,000 interest on funds deposited with a Canadian bank.
What is the total income Samantha must report on her Canadian tax return?

Answer 15

a) $170,000

Question 16

Debra Drake is employed by a consulting firm, with its head office in Hamilton, Ontario, Canada. She rents an apartment near her employer’s office. She is single and has no children. During the current year, Debra’s employer asked her to take on a project for the company in Maine, USA. She moved to Maine on February 1st. She is uncertain when she will be moving back to Hamilton, but it will be some time prior to the end of next year. She is maintaining her apartment and has sublet it to a friend. Debra’s Canadian residence status for tax purposes, under the provisions of the Income Tax Act, for the current year is most accurately described as:

Answer 16

c) resident by virtue of common law.

Question 17

Which of the following individuals are NOT required to file a Canadian tax return in 2020?

Answer 17

a) John Paul, vacationed and visited friends in Quebec City from April 1 to June 30, 2020. Having been born and raised in France, John Paul enjoyed the similarities of the culture. During this time he earned Canadian interest income.

Question 18

Atlas Limited was incorporated in Vancouver, British Columbia five years ago. The corporation has never carried on business in Canada and the Board of Directors all reside outside of Canada and hold Board of Director’s meetings in San Francisco, California, USA. The Canadian residence status of Atlas Limited, under the provisions of the Income Tax Act, is best described as:

Answer 18

a) deemed resident

Question 19

Larry Norman was born in Canada and has lived in Canada all of his life. On November 1st of the current year, he was transferred by his employer to London, England. There is no plan for him to return to Canada in the foreseeable future. He is not married and has no children. For the current year, Larry’s Canadian residence status for tax purposes is most accurately described as:

Answer 19

c) part-time resident