Test for Residency
I Introduction
Subsection 2(1) of the Income Tax Act states that “income tax shall be paid… on the taxable income for each taxation year of every person resident in Canada at any time in the year”. Section 248(1) defines a “person” as either an individual or a corporation. The test for residency is not limited to physical presence in Canada and it is not the same test used for immigration purposes. Rather, the test for income tax residency is a complex process with three main influences:
a) Common law;
b) Statutory regulations; and
c) Tax treaty provisions
II Individuals
i Common Law
The common law test for residency analyzes a person’s connection to Canada to determine if that bond is sufficiently strong to warrant the label “resident”. Courts must abide by the ITA requirements of residency, but because the ITA does not explicitly define “residency”, a certain amount of leverage exists for the courts. Courts will look at the following criteria to determine residency (this list is not exhaustive):
  • Frequency of and reasons for visits to Canada;
  • Duration of stay in Canada;
  • Employment in Canada;
  • Business and personal ties with Canada;
  • Business and personal ties elsewhere;
  • Ownership or rental of a dwelling in Canada;
  • Registration and maintenance of automobiles, boats or airplanes in Canada;
  • Residence of family members in Canada;
    Membership with Canadian organizations;
  • Maintenance of a bank account or safety deposit box in Canada;
  • Maintenance of a mailing address or phone number in Canada;
  • Active securities accounts with brokers in Canada;
  • Membership in a Canadian pension plan;
  • Acceptance for landed immigrant status or a work permit.
A person may be resident in more than one country. This may create a problem for the person as different jurisdictions may tax the same income. To alleviate the problem of double taxation, the Government of Canada enters into bilateral tax treaties with other countries. This is discussed below.
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s. 2(1) [ITA].
Ibid., s. 248(1).
ii) Statutory Regulation and Interpretation Bulletin IT-221R3
Section 250(1) of the ITA outlines when an individual is deemed to be a resident of Canada:
  • Individuals who stay in Canada for more than 183 days in a year;
  • Members of the Canadian Forces;
  • Members of the overseas Canadian Forces school staff;
  • Members of the Canadian diplomatic services;
  • Those who perform services in foreign countries under a Canadian government assistance program;
  • Spouses of anyone listed above, who lived with the taxpayer during the taxation year and were residents in Canada in any previous year;
  • Children of anyone listed above, if they are wholly dependent upon that person for support;
Because the ITA does not define “residency”, the Canada Revenue Agency issued an Interpretation Bulletin, IT-221R3 (Consolidated): Determination of an Individual’s Residence Status, to provide certain guidelines which can assist taxpayers. The bulletin states:
The most important factor to be considered in determining whether or not an individual leaving Canada remains resident in Canada for tax purposes is whether or not the individual maintains residential ties with Canada while he or she is abroad.
The residential ties of an individual that will almost always be significant residential ties for the purpose of determining residence status are the individual's
(a) dwelling place (or places),
(b) spouse or common-law partner, and
(c) dependants.
Other residential ties that the Courts have considered in determining the residence status of an individual while outside Canada, and which may be taken into account by the CCRA, include the retention of a Canadian mailing address, post office box, or safety deposit box, personal stationery (including business cards) showing a Canadian address, telephone listings in Canada, and local (Canadian) newspaper and magazine subscriptions
iii Tax Treaties
Canada’s bilateral tax treaties seek to resolve the issue of which of two jurisdictions will have taxable precedence over the taxpayer in the event of dual residency. The treaties achieve this through a set of “tie-breaker” rules. All tax treaties entered into by Canada are modeled after the OECD Model Double Taxation Convention.
III Corporations
Ibid., s. 250(1).
i Common Law
A corporation is considered to be a resident of the country in which its “central management and control” is located. Thus, a corporation is resident where the majority of its central management and control is exercised. The location of shareholders is irrelevant to the residency of a corporation. Instead, the place where the board of directors exercises power and control over the business is the location of residency. To determine this location, several factors are looked at:
  • Location of board meetings;
  • Degree of independent control exercised by the directors;
  • Power relationship between Canadian and foreign directors.
ii Statutory Regulation
Subsection 250(4) of the ITA lists the residency requirements for corporations. Those businesses incorporated in Canada after April 26, 1965, are deemed to be resident by statute, regardless of the location of their “central management”. Corporations who are incorporated in Canada before April 26, 1965 who have their “central management and control” in Canada, are deemed to be resident under common law.
iii Tax Treaties
Corporations may also possess dual-residency. Tax treaties modeled after the OECD Model Convention provide a problem-solving mechanism to avoid double-taxation. This process generally involves equating the location of the corporation’s place of effective management with its residence status.
IV Provincial Residency for Provincial Income Tax Purposes
Individuals are deemed to be residents of a province if they reside in that province on 31 December of the taxable year. Therefore, individuals who immigrate to a certain province on 30 December are liable for the entire taxable year.
Corporations, on the other hand, allocate Canadian source income to the province(s) in which they maintain a permanent establishment.
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