Introduction - Tax vs Immigration Residence
Under the Income Tax Act, Canadian residents must pay tax on their worldview income, while non-Canadian residents must pay tax on their Canadian-sourced income. However, the definition of residence under the Income Tax Act is often a source of confusion for Canadian taxpayers. Under Canadian law, the determination of one's residence for tax purposes is separate from one's immigration status.
The fact a person may be a permanent resident of Canada or a citizen of Canada does not say anything about whether that person is considered a Canadian resident under the Income Tax Act. The determination of residence under the Income Tax Act is complex. It will usually involve interpreting the relevant international tax treaties, various applicable sections under the Income Tax Act, as well as case law. This article will provide tax guidance as to what determines one's tax residence when that person is working outside of Canada, but his or her family is living in Canada.
Tax Residence - Factual vs Deemed
Before getting to the specific issue of a person working abroad while having family members living in Canada, it is important to have an overview of the law on residence under the Income Tax Act. Generally speaking, one can be a resident of Canada for the purpose of the Income Tax Act in two ways. One can either be a deemed resident or a factual resident.
A deemed resident is someone that falls under the "sojourner rule" under paragraph 250(1)(a) of the Income Tax Act, and the operation of paragraph 250(1)(a) is not reversed by subsection 250(5) of the Income Tax Act.
Paragraph 250(1)(a) operates by deeming someone to be a Canadian resident under the Income Tax Act as long as he or she was physically present in Canada for 183 days or more in a year regardless of his or her residential ties or economic connection to Canada. However, this deemed resident status will only stand and be a final determination of one's tax residence if subsection 250(5) does not deem someone to be a non-resident.
A person is deemed to be a non-resident of Canada under subsection 250(5) if an applicable tax treaty proclaims that person to be a non-resident of Canada. The combined effect of paragraph 250(1)(a) and subsection 250(5) is to give legal effect to any "tie-breaker" rule contained in a bilateral tax treaty between Canada and another country.
However, if one's deemed residence status is inconclusive, the court will next look to determine one's factual residence. The determination of factual residence is based on the relevant case law. The scenario of working abroad while having families in Canada was considered in several important tax cases on factual residence. The section below will address them.
Factual Residence - Families Ties to Canada
The CRA has published its guideline in Income Tax Folio S5-F1-C1, Determining an Individual's Residence Status, which lists "Spouse or common-law partner" and "Dependants" as two out of the three significant residential ties factors in determining one's factual residence. Other factors such as the location of one's personal property and the location of employment are listed as secondary residential ties factors. However, CRA's published guidelines do not have the force of law. The case law on factual residence takes a more holistic view of determining one's factual residence.
In Thomson v the Minister of National Revenue, the Supreme Court of Canada has defined factual residence as the place the taxpayer has settled into his own "ordinary mode of living with its accessories in social relations, interests, and conveniences." The holistic approach of the Thomson ruling was succinctly summarized by Justice Rand in the Thomson ruling:
It is quite impossible to give it a precise and inclusive definition. It is highly flexible, and its many shades of meaning vary not only in the contexts of different matters, but also in different aspects of the same matter. In one case it is satisfied by certain elements, in another by others, some common, some new.
Factual Residence - the Shih Case
This holistic approach was applied by the court in Shih v R. The taxpayer in Shih worked a full-time job in Taiwan while his wife and three children moved to Canada as permanent residents. When assessing the factual residence of the taxpayer in Shih, the court first analyzed the taxpayer's time spent in Canada compared to time spent in Taiwan as well as the taxpayer's employment status with his Taiwanese employer. Having found the taxpayer in Shih to have established considerable social ties in Taiwan and did not sever them by visiting his wife and children in Canada, the court found the taxpayer to be a tax resident of Taiwan during the period when his wife and children lived in Canada.
The court paid particular attention to the fact that the taxpayer's employment in Taiwan was the sole source of income for his wife and children in Canada. Particular attention was also given to the fact that the taxpayer would only visit Canada for the purpose of visiting his wife and kids. The court also found the taxpayer's explanation that his wife and children relocated to Canada for the purpose of obtaining a western education for their children, instead of eventually enabling the taxpayer and his wife to permanently reside in Canada, to be a reasonable one.
Factual Residence - the Gaudreau Case
In Gaudreau v. The Queen, the taxpayer moved from Canada to Egypt for the purpose of employment. His wife moved with him to Egypt while his adult children stayed in Canada. While in Egypt, his wife would come back to Canada at least twice in the summertime every year for a period of two to three weeks and stayed in their house in Timmins.
The court found the taxpayer to be a factual resident of Canada during his time in Egypt. The court in Gaudreau paid particular attention to the temporary nature of the taxpayer's work in Egypt and concluded the taxpayer's purpose for accepting the job offer to work in Egypt was to make money and advance in his career and not to sever his ties with Canada. The fact the taxpayer and his wife maintained nearly all of their properties in Canada, as well as the lack of engagement with the taxpayer's surrounding Egyptian community while he was in Egypt, was taken as further support for the taxpayer still having his social ties in Canada.
Tax Guidance - Family Ties to Canada Must be Contextualized
Shih and Gaudreau suggest that when a taxpayer moves from his or her home country to a destination country, it is relatively difficult for the taxpayer to sever his or her ties to the home country in the eyes of a Canadian court. Simply moving abroad for a job, even moving with one's spouse or common-law partner, might not have the effect of severing someone's tie with his or her home country.
The taxpayer's wife and children in Shih moved from Taiwan to Canada while the taxpayer maintained his employment in Taiwan, his annual visits from Taiwan to Canada were not sufficient for the court to consider the taxpayer to have severed all his ties to Taiwan. Similarly, the taxpayer in Gaudreau moved from Canada to Egypt while maintaining his property, including a residential home, in Canada. Even though the taxpayer moved with his wife to Egypt, the court did not consider that fact alone to be sufficient for the taxpayer in Gaudreau to have severed his ties to Canada.
Pro Tax Tips - Retain Professional Tax Lawyers to File Residence-Determination Requests
Determining one's residence for tax purposes can often be a complex and highly nuanced issue that requires the assistance of a skilled Canadian tax lawyer. Some legal certainty can be achieved by filing a residence-determination request to the Canada Revenue Agency using Form NR73 (Determination of Residency Status - Leaving Canada) or Form NR74 (Determination of Residency Status - Entering Canada). The additional information provided by an experienced Canadian tax lawyer with this form will often make the difference in determining whether an individual is a Canadian or non-Canadian resident. In response, the CRA will provide you its opinion on your status as a Canadian tax resident.
However, CRA's opinion is not the law, and CRA's internal guideline for determining residence can diverge from the case law on factual residence. In filing a residence-determination request, it is prudent to not only frame the relevant facts but also bring attention to the case law favoring your position. Our experienced Canadian tax lawyers can provide you with advice on your residence issues or prepare your residence-determination application by applying our expert legal and factual analysis.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.