Immigrants – Are You Subject to Canadian Taxes?
Immigrants to Canada are given a permanent resident status so as to have the legal right to live, work or study anywhere in Canada. Immigrants need to meet Canadian residency requirements in order to keep their permanent resident status. There is a misnomer that immigrants in fulfilling their Canadian residency requirements as permanent residents of Canada should also be residents of Canada for tax purposes. As explained below, the permanent resident requirements are different from the tax resident requirements. Thus, in reality, it is possible for permanent residents not to become tax residents of Canada while maintaining their legal status as permanent residents in Canada.
Canadian Residency Requirements for Maintaining Permanent Resident Status
After your landing in Canada as a permanent resident, you are not obligated to remain in Canada. However, in order to maintain your permanent resident status, you must meet your Canadian residency obligations by accumulating two years of “residency day” in each five-year period. Residency days need not be consecutive. Other than the days you stay inside of Canada, you may also count days outside of Canada as days for which you satisfy the residency obligation in the following circumstances:
- You are employed on a full-time basis with a Canadian enterprise or the Public Service of Canada or of a province or territory
- You accompany a Canadian permanent resident as described above in the first circumstance.
- You accompany a Canadian citizen spouse or common-law partner, or
- You are a child under 19 years of age accompanying a parent.
More information is available at the Government of Canada’s website regarding the supporting documents required to prove the residency days outside of Canada. The calculation of residency days for a person who has been a Canadian permanent resident for more than five years will be limited to the five years immediately preceding the examination. Persons who have been Canadian permanent residents for less than five years must demonstrate that they will be able to meet the residency requirement during the five-year period immediately following their becoming a Canadian permanent resident.
Permanent residents can generally be eligible to apply for Canadian citizenship if they have lived in Canada for at least three years out of the four years preceding their application.
Canada’s Tax System for Individuals
In Canada, the taxation of individuals’ income is based on residency, not citizenship. Generally, individuals who are ordinarily resident in Canada are subject to Canadian taxation on their worldwide income as well as certain foreign reporting requirements. Individuals who are not residents in Canada are subject to Canadian taxation only on their Canadian source income. Therefore, the determination of an immigrant’s tax residency in Canada is a prerequisite for determining the immigrant’s Canadian tax liabilities and foreign reporting requirements.
Whether an individual is ordinarily resident in Canada can only be determined based on the specific facts of the individual. Based on the numerous court decisions in this area, the Courts looked at numerous factors that are often referred to as the “residential ties” to Canada, including factors such as location of permanent home, past and present habits of life, regularity of length of visits, economic, social and family ties in Canada versus abroad. No one or any group of two or three residential ties will in themselves establish that an individual is resident in Canada. A number of factors need to be considered together to establish that the individual is a resident of Canada for Canadian income tax purposes. An individual normally resident elsewhere but remains in Canada for 183 days or more in a calendar year may be deemed to be tax-resident in Canada.
If immigrants acquire residence in Canada and retain residence in their home country with which Canada has a tax treaty, the treaty provides tie-breaker rules to determine the dual residents’ residency for treaty purposes. Under the tie-breaker rules, the dual residents’ residency will be determined in the order of their permanent home, centre of vital interest, habitual abode and citizenship. If an individual is treated as a non-resident of Canada and a resident of another country for the purposes of a tax treaty, that individual generally will be deemed to be a non-resident for Canadian domestic tax law purposes.
In recent years, it is not uncommon situations where wealthy individuals from foreign counties wish to settle their spouse and children in Canada, while they remain in their native country because of their ability to earn far more money than they could make by living in Canada. The most fundamental and critical Canadian tax issue for those individuals is whether they can remain non-residents after their spouse and children have moved to Canada. The CRA’s general view is that those individuals have primary residential ties to Canada. As such, the CRA inclines to view those individuals as residents of Canada. However, this may not always be the case. There were a number of Court cases in which the “breadwinning” spouses who remained abroad were determined to be non-residents of Canada.
Immigrants – What Are Your Tax Residency Status in Canada
With proper tax planning, it is possible for permanent residents not to become tax residents of Canada while maintaining their legal status as permanent residents in Canada. Immigrants should seek professional tax advice to determine their ongoing tax residency status in Canada based on their evolving specific circumstances and the consequential Canadian tax implications. Immigrants who would like to take up a non-resident filing position after relocating their families in Canada would need to be very careful about the length of time they spend and the ties they form in Canada.
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The information in this article is general in nature and does not constitute professional advice. We recommend that you obtain the appropriate professional advice before acting on any of the information contained herein.
