Taxation and Residency in Canada

In Canada, taxation is based on residency status, not citizenship. The Canada Revenue Agency (CRA) determines whether an individual is a resident or non-resident of Canada based on their residential ties and overall circumstances.

Canadian residents are generally required to report and pay tax on their worldwide income. Non-residents are generally taxed only on income earned from Canadian sources.

How Does Canada Determine Residency?

The term "resident" is not specifically defined in the Income Tax Act. Canadian courts have determined that an individual is generally considered a resident if they regularly, normally, or customarily live in Canada as part of their daily life.

The CRA may also consider someone a Canadian resident if they maintain significant residential ties with Canada, even while living outside the country.

Residency decisions are made based on the complete facts of each situation. The leading court decision Thomson v. M.N.R. recognized that residency is flexible and depends on the circumstances of each individual case.

Residential Ties Considered by the CRA

The CRA primarily looks at whether an individual has maintained residential connections with Canada. Important factors include:

1. Immediate Family

A spouse or dependent children living in Canada are considered significant residential ties. If an individual leaves Canada while their family remains in Canada, the CRA may determine that the individual continues to be a Canadian resident.

2. Dwelling

Maintaining a home in Canada that is available for personal use is an important residential tie. A dwelling may continue to be considered a tie even if it is rented in certain situations.

3. Personal Property

Keeping personal belongings in Canada, such as furniture, vehicles, and Canadian bank accounts, may indicate a continuing relationship with Canada.

4. Health Coverage and Memberships

Maintaining provincial health insurance coverage, such as OHIP in Ontario, along with professional or social memberships, may also be considered residential ties.

Other Factors Affecting Residency

Intent and Permanence of Stay

When an individual leaves Canada, the CRA considers whether they intended to permanently sever their residential ties. The length of time outside Canada alone does not determine residency.

If there is evidence that an individual planned to return to Canada, the CRA may give more importance to the residential ties that were maintained.

Residential Ties in Another Country

Canadian courts recognize that:

• Everyone must be a resident somewhere.
• An individual may be considered a resident of more than one country for tax purposes.

Establishing a permanent home outside Canada does not automatically make someone a non-resident. The CRA evaluates all facts and circumstances before making a decision.

Visits to Canada

Occasional visits to Canada generally do not affect non-resident status. However, frequent or regular visits may cause the CRA to review whether significant residential ties with Canada continue to exist.

Example 1: Jeffery's Residency Status

Jeffery, a Canadian resident, takes a two-year leave from the Royal Bank of Canada and accepts a software developer position with Sun Microsystems in California. He works in the United States under an H-1 Visa.

Since Jeffery maintains his employment relationship in Canada and his return is expected after his leave, the CRA would generally consider him a Canadian resident for tax purposes.

However, if Jeffery quits his Canadian job, permanently ends his residential ties, and does not plan to return, he would generally be considered a non-resident.

Example 2: Alex and Sarah

Alex is a doctor from Jordan who works in Jordan while his spouse and four children live in Canada. He frequently visits his family in Canada.

Since Alex's immediate family remains in Canada and he continues to maintain residential ties, he would generally be considered a Canadian resident for tax purposes.

If Alex legally separates from his spouse and permanently severs all residential ties, including cancelling OHIP and memberships, he may be considered a non-resident.

Key Takeaways

Canadian tax residency depends on an individual's residential ties, intentions, and overall circumstances. There is no single factor that determines residency status.

Understanding your residency status is important because it determines whether you must report worldwide income or only Canadian-source income.

Important: Residency determinations are based on individual facts and circumstances. For complex situations, professional tax advice may be required.

For More Information

For additional guidance, visit the Canada Revenue Agency (CRA):

Determining Your Residency Status – Canada Revenue Agency (opens in a new tab)