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Eight Myths Regarding Being Non-Resident For Canadian Tax Purposes

Contributed by Michael Atlas
10 June, 2016


Eight (8) Myths Regarding Being Non-Resident For Canadian Tax Purposes

 

Over the years, I have advised hundreds of people, including many accountants and lawyers, regarding Canadian tax residency issues for individuals.

I am frequently amazed at how little they know about this critically important area, and the misconceptions that many of them have.

Below are what I have found to be the eight (8) most common:

Myth #1 - An Individual Has To Get "Approval" From The Canada Revenue Agency To Be Considered A Non-Resident

There is absolutely no requirement for an individual to get "approval" from the CRA in order to be considered a non-resident.

In this regard, many people wrongly think that they need to submit form NR73, which is a request for determination of their residency status, before being considered a non-resident. This is certainly not the case, although the CRA may encourage that misconception. In fact, virtually all tax pros who are active in this area, including me, strongly discourage anyone from submitting that form to the CRA if they can avoid it.

 

Myth #2 - To Be A Non-Resident Of Canada, One Has To Give Up Their Canadian Passport And Citizenship

Unlike our neighbors to the South, Canadians are not taxed based on citizenship. A Canadian can certainly be considered a non-resident, even if Canadian citizenship is maintained.

Although a passport may be considered a type of "tie", I know of no reported case where it was a deciding factor. If that were a factor, only someone who already had citizenship in another jurisdiction could move out of the country to become a non-resident. Clearly, that is not the case.

Myth #3 - To Be A Non-Resident, One Must Give Up All "Ties" Such As Canadian Bank Accounts

One may maintain some degree of "ties" to Canada and still become a factual non-resident. There is no hard and fast rule.

In addition, if one relocates to a jurisdiction with which Canada has a tax treaty, often they will be able to maintain unlimited "secondary" ties to Canada and still be non-residents.1

Myth #4 - If Your Spouse And Dependents Are Living In Canada As Residents, Then That Automatically Means That You Are Too

It is true that if one is currently a Canadian resident, it will be very difficult to become a non-resident if one's spouse is still leaving here, unless there is a divorce or separation.

However, there is certainly case law that would support the position that the fact that one's spouse and dependent children move to Canada and become residents does not automatically mean that he or she has become a Canadian resident.2

Myth #5 - If You Have Filed A Canadian Tax Return As A Resident, Then That Will Automatically Make You One

There is case law to support the position that the fact that an individual filed a tax return, in which they stated they were resident in Canada, does not preclude that individual from "changing their tune" at a subsequent time. This can be particularly relevant in situations where the CRA discovers that the individual did not include all worldwide income in the return as originally filed.3

Myth #6 - Everyone Has To Be Resident For Tax Purposes And Pay Tax Somewhere

It certainly is true that an individual looking to become a non-resident for tax purposes will always be in a stronger position if he or she has developed significant residential ties to somewhere outside of Canada.4

The "jury is still out" on the issue of whether or not an individual can be a "permanent traveler" and be a non-resident-I think that the answer is "yes", but it is not clear.5

However, there is nothing that says that the "somewhere" has to be a jurisdiction that levies income tax on worldwide income, or even any income tax at all!

 

Myth #7 - As Long As You In The Country For Less Than 183 Days In A Year, You Are Non-Resident

An individual's residency status will rarely be determined by the "183 day rule" in the Act. That merely deems a person to be resident in Canada for a year if they have "sojourned" (visited or stayed temporarily) in Canada for 183 days or more.6 However, the converse is not true-that is, the fact that an individual was in Canada for less than 183 days in the year, does not mean that he or she was not resident here.

In the vast majority of cases, residency is based on "factual residency" or being "ordinarily resident",7 rather than "deemed residency". As such, an individual who has significant ties to Canada can be a resident even if they are not physically present at all in a year.

 

Myth #8 - Canada Has A "Check The Box" System For Residency Status, So There Is No Need To Worry About "Severing Ties" To Become A Non-Resident

No, I did not make this one up! I actually had someone email me a few months ago who was looking to become a non-resident, and read that somewhere online.

Presumably, this was referring to the fact that, on the front page of a T1 Return there is an area where one indicates whether he or she ceased or became a Canadian resident in the year. Apparently, some people wrongly think that this is some form of "election".

The obvious questions one would ask of anyone who believed that would be: "If it is that simple, why would anyone need to hire high-priced experts like me"? "Why then are there so many reported tax cases over this issue, did someone just forget to "check the box"? Why then does the CRA have a Folio, and previous Interpretation Bulletins, dealing with this issue, just to confuse people?

Of course, in reality, all that "checking the box" on the T1 does is to indicate that the taxpayer believes that he or she changed their residency status-it is not conclusive, and like any claim on a tax return the CRA can dispute it

 

1 See my blog posting at http://taxca.com/blog-2016-2/

2 Min Shah Shih, 2000 DTC 2072 (TCC), Kadrie, 2001 DTC 967 (TCC)

3 York, 80 DTC 1749 (TRB), Pearson, 93 DTC 1182 (TCC), and Min Shah Shih, 2000 DTC 2072 (TCC)

4 See for example, Hamel, 2011 DTC 1284 (TCC)

5 See my blog posting at http://taxca.com/blog-2015-6/

6 Paragraph 250(1)(a)

7 Subsection 250(3)





 

 


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