When am I Considered to Have Left Canada for Tax Purposes?

This excerpt from Evelyn Jacks’ Jacks on Tax outlines the different categories of residency and provides an answer.

A taxpayer who leaves Canada may or may not be considered a non-resident for tax purposes. There are a number of categories to consider, depending on circumstances, as Canada will want to retain its taxing authority in particular instances. Likewise, the rules that follow can guide new entrants to Canada, as well.

Factual Residents. Factual residents are those who have sufficient ties here to be considered a resident, even if they have physically left the country. This includes those who are teaching or attending school abroad, commuting to a work or business location in another country (generally the U.S.), those vacationing abroad, or those conducting missionary work abroad.

Factual residents are taxed as residents of Canada for the full year. This means world income is reported in Canadian funds and the taxpayer is eligible to claim all deductions and tax credits normally available to Canadian residents. The taxpayer would pay provincial taxes in the province in which the taxpayer would normally be considered to be resident as of December 31 of the tax year. Federal and provincial refundable tax credits would be claimed as usual.

Some factual residents qualify for the Overseas Employment Tax Credit, for example, if they are working on an oil rig in the middle of the ocean for a Canadian employer. However, this credit is being phased out over the period from 2013 to 2016.

Deemed Residents. Deemed residents are those visitors to Canada who are considered to be residents for tax purposes, because they have “sojourned” here for a period of 183 days or more, or those Canadians who have left Canada for several years because they serve in the armed forces or as a representative of Canada.

Deemed residents must report world income in Canadian funds and are entitled to all federal tax provisions. Rather than pay federal and provincial taxes, they pay a federal non-resident surtax of 48% of federal taxes.

Non-Residents. Non-residents are not required to file a tax return in Canada unless they have income from specific sources in Canada like employment or business income, or if they choose to make an election to be taxed on income in Canada. However, a non-resident can generally only elect to be taxed on rental income and timber royalty income (under Section 216 of the Income Tax Act), certain acting service income, and certain deferred income plan benefits (under Section 217).

To be considered non-resident, a former resident must demonstrate that the departure is permanent. This means that residential and other personal ties have been severed. In the year of departure, the taxpayer is considered to be a non-resident for tax purposes in the period after emigration.

In general, then, taxpayers who leave Canada must continue to file Canadian income tax returns as residents of Canada unless they sever all ties with Canada or become a resident in another country. In the year of departure, income can be reported both as a resident (for the period before departure) and a non-resident (for the period after departure). Where the place of residency is not obvious, certain “tie breaker rules” are used to determine where the closer connection is, based on a number of factors including the location of your permanent home, family, banking and social circles.

Reporting Income in the Non-Residency Period. During the period in which you were a non-resident, that is, before immigration or after emigration, different rules will apply. At issue will be the avoidance of double-taxation between international jurisdictions, when you have been a resident in two countries in the same year.

Non-residents must file an income tax return and pay taxes on the following taxable income sources earned in Canada:

• Income from employment in Canada
• Income from a business in Canada
• Income from the disposition of Taxable Canadian Property. This is the property of any taxpayer—who may be resident in Canada or a non-resident—upon which Canada reserves the right to levy and collect tax on its actual sale in the future. This could present double taxation problems for non-residents, depending on the rules in their new country of residence.

Employment income earned by a non-resident is allocated to the province where the individual’s duties are carried out. Self-employment income is reported in the province where the individual has a permanent establishment—a fixed place of business. Income that cannot be allocated attracts the federal surtax described above.

For investors, reserves for debt forgiveness, recovery of exploration and development expenses, and recaptured depreciation from the sale of a business interest will be reported as well. Professional help is advised in these cases.

Part-Year Residents. When a Canadian resident leaves Canada permanently (emigrates) and becomes a non-resident, or when someone immigrates to Canada and becomes a permanent resident, it will be necessary to file a tax return for the period of residency. In the case of emigration, fair market value of certain assets is required and a departure tax may be necessary. Professional help is advised to assist with the filing of this final return.

Excerpted from Jacks on Tax. © Knowledge Bureau Newsbooks. All rights reserved.