Canada: Individual Non-Resident Taxation

It's difficult to obtain non-resident tax status in Canada since the definition of residence is much wider than that existing in many other countries. For example:

• Under Canadian law everyone must be tax resident somewhere. A Canadian who claims to have given up his Canadian residence but cannot prove residence in another country for tax purposes is deemed to have retained his Canadian residence for fiscal purposes.
  
• Whilst in some jurisdictions such as the UK "ordinarily resident" and "resident" are distinct terms which occasionally overlap, in Canada a person who is "ordinarily resident" is automatically resident under section 250 of the Income Tax Act. Thus in Regina V Reeder 1975 it was held that a person who was born and resided in Canada until 1972 but who subsequently went abroad to work for a few years was "ordinarily resident" in Canada in that he "regularly, normally or customarily" lived in Canada and therefore automatically resident. In other words having a habitual home in Canada makes a person ordinarily resident and therefore automatically "resident". This rule has led to a much more aggressive assessment of Canadian nationals transferred abroad.
  
• A foreigner becomes resident in Canada for tax purposes if he stays more than 183 days in the jurisdiction within any tax year.
  
• There must be some permanence to losing your Canadian residence. This permanence is more akin to surrendering your "domicile" under UK tax law. (For fiscal purposes the concept of domicile does not exist in Canada). Loss of Canadian residence almost indicates never intending to return to Canada. A Canadian resident is deemed non-resident from the date of his departure if he can show he "severed all residential ties with his country".

• The maintenance of a physical dwelling (or even a short-term rental lease for year round occupancy) indicates the retention of residency.

• If the applicant's spouse and dependants remain in Canada this would indicate that the applicant intended to return to his country with the consequence that he is not deemed to have given up his Canadian residence.

• If the applicant is not going to be returning to Canada presumably he would sell or transfer abroad all his furniture (as opposed to putting it into cold storage), close all his Canadian bank accounts (other than non resident bank accounts), exchange his Canadian drivers license for a driving license in his new country of residence, sell his Canadian car and boat, resign all his club and professional memberships and cancel his Canadian life and medical insurance since if he is genuinely not going to return he would not need want to retain any of these links. Thus the maintenance of a postal address and telephone listing in Canada may together with other factors be fatal to an application to be deemed non-resident.

• If the return visits are regular and lengthy such that it can be shown that he has not developed strong ties abroad then this may assist a finding that he has retained his links with Canada and is therefore resident.

With a view to deterring tax exiles, the CRA imposes a departure tax on individuals or corporate entities seeking to change residence. Individuals who have been resident in Canada for less than 5 years are exempt from departure tax. Under the departure tax all the individual's capital assets are deemed sold at a fair market value on which capital gains tax is payable.

Non-residents pay tax income tax in respect of certain categories of Canadian source income at the same rates as Canadian citizens. Included in the notion of Canadian source income are:

• Income derived from an employment in Canada;
• Income derived from the carrying out of a business in Canada;
• Gains derived from the sale of capital assets in Canada.

Certain double taxation treaties may reduce the amount of income tax that a non-resident pays on employment activity in Canada.

Canadian source items of income paid to a non-resident individual such as loan interest, rents, royalties and dividends are subject to a withholding tax deducted at source prior to remittance. If however a double taxation treaty is in place with the country in which these individuals reside then the withholding tax rate can drop significantly. This is unlikely to be the case if residence has been established in a low-tax jurisdiction.