Matriculating Abroad: Understanding Canadian Tax Residency

Author's Note:

After a lot of excitement, I finally received my PFA designation this month. For many students in Toronto and around the country, January and the coming months will be for deciding where to study! While some will stay close to home, many others may study in another province — even abroad! On that note, it is fitting that the next series, Matriculating Abroad, focuses on exactly that! I look forward to providing a basic overview of our tax system's treatment of cross-border situations. While I write this series with students in mind, many concepts apply equally to anyone with ties abroad.

On behalf of KLee Tax, happy reading! We hope you get into your dream schools! - Ken Lee, PFA

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Good morning Toronto! When studying or residing abroad, it is possible for an individual to be considered a tax resident in both the foreign country and in Canada. How does Canada treat one of its tax residents abroad? What is a tax resident? In today's article, we will explore the Act's provisions pertaining to international taxation, deeming rules, and implications of these rules for Canadians studying abroad.

To begin, there are multiple definitions of what constitutes a ‘resident’ in Canadian law. For example, Canadian immigration law broadly recognizes 4 categories of immigration status: Canadian Citizens, Canadian Permanent Residents, Refugee/Asylum claimants, and Temporary Residents (those with visit/study/work permits). Your status under the immigration laws is fairly explicit. If you are a Canadian citizen, you can be assured that your immigration status is cemented — barring renunciation or revocation of your citizenship.

However, under the Income Tax Act, the concept of a Canadian tax resident is more nuanced. For reasons which will become clear, a Temporary Resident with a study permit can be considered a factual resident for tax purposes, while a Canadian citizen could also be considered a non-resident.

While the Act has other residency statutes, for relevance’s sake, this article will consider the implications of the following three:

• Factual Residents
• Factual Non-Residents
• Deemed Non-Residents

Non-Residents (NRs) — Factual or Deemed — are taxed in the same manner. The following table distinguishes the differences in taxation between Factual Residents and NRs.

*Former Factual Residents that are now NRs may retain their RRSPs and TFSAs after becoming a NR without immediate penalty, although they are not allowed to make new contributions. To be discussed in a future article.

As can be seen, while Factual Residents are taxed on their worldwide income and are subject to both Canadian federal and provincial taxes, they also enjoy access to tax-privileged accounts, benefits, and tax credits. This is contrasted to NRs that, while only subject to federal taxes on their Canadian-source income, do NOT enjoy the aforementioned privileges that residents receive.

While the Income Tax Act does not define the term “resident,” the courts — most notably in Thomson v. Minister of National Revenue — have held that the question of residence, and thus liability for Canadian taxes, is reliant on the degree to which an individual has established and maintains their ordinary life in a given place.

Thus, the question of whether an individual is a Factual Resident, even after leaving Canada to live/study/work abroad, depends on the nature of their residential ties to Canada while abroad. Revenue Canada considers both significant and secondary ties in considering residency. No single combination of ties is, by itself, determinative.

Significant residential ties include:

• Dwelling place maintained for use in Canada;
• Spouse/common-law partner in Canada; and/or
• Dependents in Canada

Secondary residential ties MAY include:

• Personal property in Canada (i.e. furniture, cars, and clothing);
• Social ties with Canada;
• Economic ties with Canada (i.e. Canadian bank accounts, retirement savings plans, credit cards, and investments);
• Keeping provincial medical insurance coverage (i.e. OHIP);
• Retaining a Canadian Driver's Licence;
• Having a registered vehicle in Canada;
• Retaining a valid Canadian passport;
• Retaining a valid Canadian phone number;
• Retaining membership in Canadian unions or professional organizations;
• AND MUCH MORE

Other factors that assist the CRA in determining an individual's residency status MAY include:

• Intention to return to Canada;
• Frequently and the length of visits to Canada; and/or
• Residential ties in the foreign country

The CRA tends to scrutinize the residential ties of single individuals due to their lack of family ties, which are an extremely significant tie. Due to their life stage, high school students naturally tend to have less established ties, in spite of potentially having lived in Canada their whole lives. In addition, extended absences abroad (2+ years) tend to increase the likelihood of being treated as a non-resident, barring meaningful and substantive ties. Where an individual has failed to maintain sufficient residential ties to Canada, they are considered to be a Factual Non-Resident.

Particularly, most students tend not to be in a committed relationship, have dependents, or own/rent their own house. These lack of factors would, in theory, suggest a lack of significant ties to Canada. To that end, the CRA has also recognized (See ¶19 of GST/HST Memorandum 3.4) that a room in a parent's house may potentially count as a residential tie, provided that the room is maintained and always available for the individual's exclusive use upon any return to Canada.

Depending on an individual's intentions to return to Canada after their absence, while most may strive to maintain being a Factual Resident, those who intend to permanently leave Canada should take steps to sever their ties. This can include closing all Canadian bank accounts and phone numbers, moving all personal effects abroad, establishing strong ties to the foreign country, and even informing Canadian institutions (such as banks) of Non-Resident status. There are several tax consequences of becoming a Non-Resident — to be explored in an upcoming article.

To assist in determining residency status, individuals should submit Form NR73 to the CRA for a NON-BINDING OPINION of their residency status. Processing time takes 2-3 months.

While most of this article has focused on determining if an individual remains a factual resident, it is also possible for an individual to be considered a resident under both Canada AND a foreign country's tax laws. For example, it is common for individuals to be considered a tax resident of the other country if they spend a substantial portion of the year or have established residential ties in that country.

Canada has entered into tax treaties with many countries. These treaties generally contain 'tie-breaking' rules that 'deem' a dual-resident individual to be a resident of only one country for tax purposes, applied in the following order:

• Permanent Home Test: In which country does an individual have a permanent home always available to them, in any hour of need?
• Center of vital interests Test: To which country is an individual's social and economic ties closer?
• Habitual Abode Test: In which country does the individual regularly live?
• Citizenship Test: In which country does the individual hold citizenship of?

Should the first three tests tie AND the 4th test (Citizenship) fails (due to the individual holding none OR both of the Countries' citizenships), the individual's tax residence shall be mutually decided between the tax authorities of the two countries.

Per §250(5) of the Act, if an individual is a dual resident of both Canada and a foreign country, if the tax treaty breaks the tie in favour of the other country, the individual will be considered a Deemed Non-Resident for tax purposes in Canada.

In all, the rules surrounding residency status and international taxation can be extremely convoluted. Generally, where multiple jurisdictions are concerned, taxation can become extremely tricky, extremely quickly. In these cases, having professional advice can be crucial in fully understanding your rights and responsibilities in each country. In the next article, join us as we discuss the implications of Canada-US taxation.

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