Canada is a country that welcomes immigrants. Hence, its tax system follows the rule of taxing the income earned in Canada and taxing the residents of Canada. Identifying the income earned in Canada is the easy part. The tricky part is determining your residency status for tax purposes. You might have just come on a six-month tour to Canada or might have purchased or invested in a local business. These simple acts could make you a Canadian resident and require you to file and pay taxes.
Why Is Canadian Tax Residency Important?
The first step is to establish your residency status for the current tax year, as that will determine your tax obligations in Canada.
- Residents in Canada are subject to Canadian income tax on their worldwide income.
- A non-resident is subject to Canadian income tax on income earned from a Canadian source, such as dividends, returns, interest on investments, rent on property and more.
Understanding Your Canadian Tax Residency
To determine your tax residency, the Canadian Revenue Agency (CRA) has listed a few criteria to help you assess your ties with Canada. The country with which you have the closest residential ties is your resident country. Home is where your family is, and with this principle, if you have your primary residence, spouse/common-law partner or dependents in Canada, you are a factual resident.
The CRA will consider your secondary ties if you own only a house but have no dependents or spouse in Canada. These are your ties with society, like your driving license, bank account, health insurance, gym or club membership.
The CRA determines various types of residency status, each having different tax benefits and obligations:
- Factual resident of Canada
- Deemed resident of Canada
- Deemed non-resident of Canada
- Non-resident of Canada
- Emigrants
Taxes Factual Canadian Residents Pay
Factual residence is the most accessible status to determine. It is for those who live and work in Canada, have dependents here, and have strong ties with the country. The CRA also considers those who have obtained permanent resident status and are covered under a provincial health insurance plan residents for tax purposes.
Tax Obligations
As a factual resident, you are under obligation to file income tax returns and pay taxes on your worldwide income in Canada. Even if you don’t earn income, you should consider filing returns to claim federal and provincial benefits and tax credits like the Canada Child Benefit, goods and service tax (GST) rebate, Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) benefits.
Taxes Deemed Canadian Residents Pay
Remember, we talked about the six-month-long vacation at the beginning of the article. So, if you have been in the country for more than half the year, 183 days to be precise, for whatever reason, you are considered a “Deemed” resident. You are also a “Deemed” resident if you are a Canadian working for the government or military and are stationed abroad.
Tax Obligations
As a deemed resident, you have to report the worldwide income you received during the tax year. You can claim federal tax credits and deductions applicable to you. Depending on your situation, you may pay provincial taxes or a federal surtax. It will defer on a case-to-case basis. A tax consultant can help you determine your tax obligation accurately.
Taxes Non-Residents of Canada Pay
While residents pay taxes, even non-residents must pay tax on income earned from Canadian sources. Your tax filing obligation depends on the type of income received and the applicable tax treaties.
Canada has tax treaties with multiple countries, including the United States, India, Australia, and the United Kingdom. You are eligible for a foreign tax credit if you reside in these countries and pay tax there. This credit helps you avoid double taxation on the same income.
Regarding the type of income, if you are earning rent from your owned property, the tenant must withhold a 25% tax on the rent and pay it to the CRA on your behalf. Banks and financial institutions must withhold 25% tax on interest, dividends, and pension payments and pay that tax to the CRA on your behalf.
You will receive an NR4 slip detailing the gross income and tax withheld from the above parties. As the CRA has already collected the tax, it removes the obligation on non-residents to file income tax returns in Canada. However, if you are a resident of a country with whom Canada has a tax treaty, you can fill out form NR301 and reduce the withholding tax on Canadian income to 15%.
Taxes Emigrants Pay
If you leave Canada to live in another country and sever all ties with Canada, you will be considered an emigrant for income tax purposes. In such a scenario, you must file a final tax return for the year you leave Canada and pay departure tax. This tax considers a deemed disposition of your Canadian assets even if you haven’t sold them.
We have just touched upon how the tax treatment varies depending on your residency status. The deeper you go, the more complex it becomes. There are scenarios where you might be a dual citizen.
Contact Glenn Graydon Wright LLP in Oakville to Help with Your Taxes
A professional tax consultant is well-versed in the intricacies of tax laws and how the CRA determines your residency status for tax purposes. At Glenn Graydon Wright LLP, our accountants and tax consultants can help you accurately determine your residency status and file taxes. To learn more about how Glenn Graydon Wright LLP can provide you with the best tax planning expertise, contact us online or by telephone at 905-845-6633.