CPA Tax Package: Residency

Question 1

What are the taxable entities under the Income Tax Act

Answer 1

- Individual
- Corporation
- Trust

(Note: A partnership does not file an income tax return; it files an information return and its partners report the income.)

Question 2

What is the difference between a “person” and a “sole proprietorship” or “partnership” under the ITA?

Answer 2

A “person” under the ITA includes an individual, corporation, or trust.

A sole proprietorship or partnership does not file an income tax return but files an **information return **and the partners report the income.

Question 3

What is the taxation rule for a resident in Canada?

Answer 3

A resident is subject to tax on their worldwide income for each taxation year (subsections 2(1) and 2(2) ITA).

Question 4

What is the taxation rule for a non-resident in Canada under Part I tax?

Answer 4

A non-resident person is subject to Part I tax if:

Employed in Canada;

Carried on a business in Canada;

Disposed of taxable Canadian property (subsection 2(3) ITA).

Question 5

What is the tax treatment for passive or property income for non-residents under Part XIII ITA?

Answer 5

Part XIII applies, requiring a withholding of 25%, which may be reduced by a treaty.

This applies to rents, royalties, or interest.

Question 6

What is considered taxable Canadian property under the ITA?

Answer 6

Real estate situated in Canada;

Capital property used to carry on a business in Canada;

Certain shares of a Canadian-controlled private company.

Question 7

How is tax liability determined for residents versus non-residents?

Answer 7

Factual Resident: Taxed on worldwide income.

Deemed Resident: Taxed on worldwide income.

Part-Year Resident: Taxed as non-resident and resident for the relevant portion.

Non-Resident: Taxed on Canadian source income.

Question 8

What is the significance of residency versus citizenship in determining tax liability in Canada?

Answer 8

Canada’s taxation system is based on residency rather than citizenship.

A person can be a Canadian citizen without being a resident for income tax purposes.

Question 9

What are the primary residential ties for determining an individual’s residence status in Canada?

Answer 9

Dwelling place (or places)

Spouse or common-law partner

Dependants

Question 10

What are some examples of secondary residential ties for determining residence status in Canada?

Answer 10

Personal property in Canada (e.g., furniture, vehicles)

Social ties with Canada (e.g., memberships in recreational or religious organizations)

Economic ties (e.g., employment with a Canadian employer, Canadian bank accounts)

Landed immigrant status or appropriate work permits

Canadian driver’s license

Vehicle registered in Canada

Seasonal dwelling place in Canada

Canadian passport and memberships in unions or professional organizations

Question 11

What other residential ties might be considered when determining residence status in Canada?

Answer 11

Mailing address

Post office box

Safety deposit box

Personal stationery showing a Canadian address, telephone listings

Local Canadian newspaper and magazine subscriptions

Question 12

What factors are considered when assessing a temporary absence from Canada?

Answer 12

Factors include:

Evidence of intention to permanently sever residential ties with Canada

Regularity and length of visits to Canada

Residential ties outside Canada

Question 13

Who qualifies as a deemed resident of Canada under the 183-day rule?

Answer 13

An individual is deemed a resident if they sojourned in Canada for 183 days or more during a tax year.

Question 14

What is the definition of a “sojourner” in Canadian tax law?

Answer 14

A sojourner is an individual who is resident in another country but lives or vacations temporarily in Canada.

This includes days spent on vacation in Canada but does not include daily commuters for employment purposes.

Question 15

Which individuals are considered deemed residents due to their employment with the Canadian government?

Answer 15

Deemed residents include:

Members of the Canadian Forces
Ambassadors,
ministers,
high commissioners, officers, or servants of Canada
Agents-general,
officers,
or servants of a province who were residents of Canada prior to their appointment

Question 16

How does employment in an international development program affect an individual’s residency status in Canada?

Answer 16

An individual is deemed a resident if they performed services under a prescribed international development assistance program of the Canadian government and were resident in Canada during the 3 months before these services began.

Question 17

Who else can qualify as a deemed resident under Canadian tax law?

Answer 17

Other individuals considered deemed residents include:

Members of the overseas Canadian Forces school staff

A child or dependent of a deemed resident, provided they do not exceed the income threshold for the year

Question 18

What is the tax status of deemed residents in relation to provincial taxes?

Answer 18

Deemed residents are not subject to provincial taxes but must pay an additional federal tax equal to 48% of the federal tax otherwise payable.

Question 19

How is an individual’s residency determined when they are a resident of both Canada and another country under a tax treaty?

Answer 19

Residency is determined in the following order:

The individual is deemed a resident of the country where they have a permanent home.

If they have permanent homes in both or neither country, they are a resident of the country where their personal and economic relations are closer (centre of vital interests).

If the centre of vital interests cannot be determined, they are a resident of the country where they have a habitual abode.

If they have habitual abodes in both or neither country, they are a resident of the country of which they are a citizen.

If they are a citizen of both or neither, residency is determined by mutual agreement between the countries.

Question 20

What is the tax status of part-year residents in Canada under section 114?

Answer 20

Part-year residents are taxed on their worldwide income for the part of the year during which they were residents of Canada. For the period they are non-residents, they are only subject to tax on Canadian source income.

Question 21

What personal tax credits apply to part-year residents?

Answer 21

Personal tax credits for part-year residents will be pro-rated based on the portion of the year they were residents of Canada.

Question 22

How is the establishment of residency for immigration purposes determined in Canada?

Answer 22

Residency is established on the date of entry under immigration rules.

Question 23

How is the termination of residency for emigration determined under IT-221R3?

Answer 23

Termination of residency occurs at the latest of:

The date the individual leaves Canada

The date the individual’s spouse/common-law partner and dependants leave Canada

The date the individual becomes a resident of another country

Question 24

What is the difference between a sojourner and a part-year resident in Canada?

Answer 24

A sojourner is still a resident of another country and is living in Canada temporarily. They are subject to tax on their worldwide income for the entire year if they sojourn in Canada for 183 days or more.

A part-year resident has broken ties with another country and established residency with Canada, or vice versa. They are taxed on their worldwide income for the part of the year they were residents of Canada.

Question 25

What factors should an individual consider when severing residential ties with Canada?

Answer 25

Selling or leasing out their home

Moving or selling personal effects

Closing Canadian bank accounts and safety deposit boxes

Canceling Canadian credit cards and applying for new ones in their new country of residence

Canceling Canadian newspaper subscriptions

Having mail forwarded to their new address

Moving immediate family members
Canceling Canadian registration of cars, boats

Obtaining a driver’s license from their new jurisdiction

Minimizing visits to Canada

Filing a tax return with a non-Canadian address

Question 26

How is a corporation deemed a resident of Canada under subsection 250(4) ITA?
Question

Answer 26

A corporation is deemed a resident if:

It was incorporated in Canada after April 26, 1965, or

It was incorporated in Canada prior to April 27, 1965, and at any time in a taxation year after April 26, 1965, it was either:

Resident in Canada (based on mind and management criteria), or

Carried on business in Canada.

Question 27

What is the significance of April 27, 1965, in determining a corporation’s residency in Canada?

Answer 27

If a corporation was incorporated in Canada prior to April 27, 1965, and met the residency or business criteria at any time after April 26, 1965, it is deemed a Canadian resident for all subsequent years.

Question 28

What are the key factors for determining the “mind and management” of a corporation in Canada?

Answer 28

The primary factors include:

Location of board of director meetings (note: not where the directors reside)

Where day-to-day decision making is made

Location of books and records

Where major business contracts are signed

Question 29

How is double taxation avoided for corporations resident in both Canada and another country?

Answer 29

Article IV of most treaties provides relief by determining that the corporation is considered a resident of the country where it was originally created.

Question 30

Where is a trust generally considered resident for tax purposes in Canada?

Answer 30

A trust is generally resident where the trustees reside, according to IT-447R.

Additionally, the central mind and control of the trust should be considered.

Question 31

What are the steps for determining how a taxpayer is taxed in Canada?

Answer 31

Determine if the taxpayer is a factual resident, deemed resident, or part-year resident.

Based on the residency status, state how the taxpayer is taxed.
If the taxpayer is a resident of another country, seek relief under a treaty or convention.