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TAXFlash News from IncomeTaxCanada.net
 Jim Maroney
:: Leaving Canada to escape income taxes? CCRA 's updated bulletin on requirements for non-resident taxpayers is worth reading
:: With all the doom and gloom around these days, there’s a chance a person or two may be contemplating packing his or her bags and heading for greener pastures. For those that actually take the plunge and leave the country, they may want to browse through CCRA’s recently updated Interpretation Bulletin (IT-221R3) on the determination of an individual’s residence status.
Under Canada’s income tax system residency matters unlike certain other countries, such as the U.S., where citizenship rules to roost. Indeed, so important is the issue of residency in our income tax system that it shows up in the second section of the Income Tax Act where it states “an income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year.”
The introductory paragraph to CCRA’s revised Interpretation Bulletin on residency provides that “a person who is resident in Canada during a taxation year is subject to Canadian income tax on his or her worldwide income from all sources. Generally, a non-resident person is only subject to Canadian income tax on income from sources inside Canada. A person may be resident in Canada for only part of a year, in which case the person will only be subject to Canadian tax on his or her worldwide income during the part of the year in which he or she is resident; during the other part of the year, the person will be taxed as a non-resident.”
With residency assuming such an important role in Canada’s income tax regime you’d expect to find a definition of the term somewhere in the Act. Well good luck - the term “resident” is not defined anywhere in the Act. Instead, the matter has been left up to the Courts who have held "residence" to be "a matter of the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living with its accessories in social relations, interests and conveniences at or in the place in question."
CCRA’s new Bulletin attempts to encapsulate various Court rulings in this area and distill the above definition into something meaningful. In doing so, the new Bulletin differs from the old Bulletin in a number of key areas.
CCRA previously used the "two-year rule" to establish Canadian residency requirements ... but no longer
CCRA’s former Bulletin used to include what was commonly referred to as the “two-year rule.” This rule basically stated that where a Canadian resident was absent from Canada (for whatever reason) for less than 2 years, he or she was presumed to have retained his Canadian residency while abroad, unless he or she could clearly establish that all residential ties had been severed on leaving Canada.
This old standby rule is conspicuously absent from the new Bulletin having been replaced by CCRA’s new, and I must say logical, position that there is no particular length of stay abroad that necessarily results in an individual becoming a non-resident.
According to the new Bulletin, CCRA considers the most important factor in determining whether or not an individual leaving Canada remains resident in Canada for tax purposes to be whether or not the individual maintains “residential ties” with Canada while he or she is abroad. The Bulletin goes on to state that “generally, unless an individual severs all significant residential ties with Canada upon leaving Canada, the individual will continue to be a factual resident of Canada and subject to Canadian tax on his or her worldwide income.”
So what are these “significant residential ties” that CCRA is referring to? The Bulletin states that the residential ties of an individual that will almost always be significant residential ties for the purpose of determining residence status are the individual's: (a) dwelling place (or places), (b) spouse or common-law partner, and (c) dependants.
Dealing first with the issue of dwelling place, it is not uncommon for a person leaving the country to retain ownership of their former principal residence usually renting the property out in their absence. If such a rental arrangement could be terminated with less than 3 months notice, the former Bulletin stated that generally the taxpayer not be considered to have severed his residential ties within Canada.
While still considering the retained property to be a significant residential tie, the new Bulletin is somewhat more forgiving in that CCRA “will take into account all of the circumstances of the situation (including the relationship between the individual and the third party, the real estate market at the time of the individual's departure from Canada, and the purpose of the stay abroad), and may not consider the dwelling place to be a significant residential tie with Canada”. So under CCRA’s new administrative position holding onto a former principal residence will not necessarily be a proverbial “nail in the coffin” for those looking to sever their residential ties with Canada.
If you depart Canada but leave your spouse, common-law partner or dependants behind, CCRA will consider this to be a significant residential tie. Of course, this will not be the case if you and your spouse or common-law partner are living separate and apart prior to leaving Canada, by reason of a breakdown of your marriage or common-law partnership.
The new Bulletin also includes a hammer absent from its predecessor. If you are purporting to cease your residency in Canada CCRA expects that you will have complied with various tax rules that come into play when departing the country including the deemed disposition rules that apply to certain property. They will also expect you to have disclosed your non-residency status to any Canadian residents making payments to you so that withholding tax can be withheld from certain payments (including interest, dividend, rent and pension payments) as required.
If you’re planning on severing your residential ties with Canada, read through this new Bulletin and make sure you do it right.
Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney
CA Canadian Chartered Accountant with Brown, Andrews & Maroney in Maple Ridge, BC, Canada
Official details about this and other topics on income taxes can be found in English & Francais at www.ccra-adrc.gc.ca
Canada Revenue Agency (CRA) / l'Agence du revenu du Canada (ARC) offers bilingual information on its website for
NetFile, deductions (benefits - credits), interpretation bulletins, income tax forms (returns) and tax tables (brackets).
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