Tuesday, May 19, 2015

Canadian Tax Primer 1: Where do you Reside?

Canada imposes income tax on the basis of residence.  A Canadian resident pays Canadian income tax on all income arising anywhere in the world (including interest earned on a bank account in the Cayman Islands).  In contrast, a non-resident of Canada pays Canadian income tax only on specific types of Canadian-source income.

Unlike the United States, Canada does not impose income tax on the basis of citizenship.  So to escape Canadian income tax, you need not turn in your passport.  You merely have to leave Canada, cut off all your ties to Canada and start to reside elsewhere.  However, the termination of Canadian residence may trigger significant Canadian tax liability on deemed capital gains that have accrued up to the date of departure.

In determining your place of residence, you have to look at all the connections that you have in your daily life, from the big ones to the small ones.  Do you have your home in Canada?  Do you use a Canadian driver’s licence?  Do you subscribe to Canadian magazines and periodicals?  Do you rely on Canadian health care funding?

There is considerable confusion about a 183-day test that applies when determining residence status.  This test applies only to individuals who are clearly non-residents.  A non-resident becomes a deemed resident of Canada by being physically present in Canada for more than 182 days in any one calendar year.  The test does not work in reverse, however.  If you are in fact a resident of Canada, you do not escape Canadian tax by spending more than half the year at a vacation resort outside of Canada.  If only life were that simple (and if only one were wealthy enough to spend over half the year on vacation)!

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.