The ultimate tax guide for non-residents in Canada

To read more chapters, click below:

Chapter 2: What is the influence of residency on your tax return?

Chapter 3:  What Is the Difference Between Factual and Deemed Residency?

In Canada the tax you pay depends on your residency status, which is determined by Canada Revenue Agency. In this chapter we will understand the intricacies of residency status of Canada and you will also get to know the tax guide for non-residents in Canada.

Who are non-residents in Canada?

Non-residents in Canada pertain to individuals, corporations, or other entities that do not satisfy the criteria for being classified as tax residents in Canada. The determination of tax residency hinges on several factors, such as the duration of time spent in Canada, affiliations with the country, and the type of activities undertaken within Canada. Non-residents can encompass foreign individuals temporarily visiting Canada, foreign businesses engaged in Canadian operations, or individuals who have left Canada and severed most connections but might still maintain limited ties to the country.

In matters of taxation, individuals who are not Canadian residents are governed by distinct tax regulations and responsibilities in contrast to Canadian residents. Typically, they are solely liable for taxes on income derived from Canadian sources and are frequently subjected to withholding taxes on specific forms of income, including dividends, interest, and royalties earned within Canada. Non-residents may also be required to fill out distinct tax forms and adhere to particular protocols when navigating the Canadian tax framework.

Residency Status in Canada

Residency status in Canada refers to an individual's tax classification based on their ties and presence in the country. There are five categories -

1. Resident

In the context of taxation, an individual is recognized as a resident of Canada when they have established significant residential ties, which may include owning a permanent residence, having family connections, and possessing personal assets within the country. Even if you spend part of the year outside of Canada, you could still qualify as a resident if your principal affiliations are rooted within the country.

2. Non-Resident

A non-resident in Canada is an individual who lacks substantial residential connections to the country. This can include people who spend the majority of their time outside of Canada and do not maintain significant ties or affiliations within the country. Non-resident status for tax purposes is determined by specific criteria, including the length of time spent in Canada during a tax year and the nature of the individual's connections to the country.

3. Factual resident

A factual resident of Canada is an individual whose residential connections and presence in Canada are substantial enough to qualify them as a resident for tax purposes. This determination considers factors such as the length of time spent in Canada, family ties, personal property, social connections, economic ties, and more. Factual residency status is based on the overall context of an individual's situation, taking into account various aspects that indicate a genuine connection to the country. Instances where you could potentially be categorized as a factual resident encompass –

• Engaging in temporary employment beyond Canada's borders
• Pursuing education or teaching abroad
• Commuting regularly between Canada and your place of employment in the United States (U.S.)
• Taking vacations outside of Canada
• Residing in the U.S. for a portion of the year

If you maintain actual residency status in Canada, your tax situation is similar to if you had never left the country. Thus, you're obliged to submit an income tax return, detailing both your Canadian and global income.

4. Deemed Resident

Certain individuals who invest a considerable duration in Canada, yet lack permanent residential affiliations, might still be categorized as "deemed residents" for tax reasons. This can apply to international students or temporary foreign workers who spend a considerable time in Canada.

Establishing your residency status in Canada is of utmost importance when it comes to taxation. This determination impacts the income you are required to declare, the tax credits you qualify for, and the manner in which your global income is subject to taxation. The rules and guidelines for determining residency status can be complex, so it's recommended to consult with a tax professional or refer to official government resources when determining your specific situation. You are considered a deemed resident if –

• Lack substantial residential connections to Canada
• Stayed within Canada for a period of 183 days or longer during the fiscal year
• And do not satisfy the conditions for being a resident in any other nation as outlined by the tax agreement between Canada and that particular country

If you work for the government, are a member of the Canadian Forces, or participate in a Global Affairs Canada Assistance program, and you lived outside Canada for the entire tax year without significant residential ties to the country, you are also classified as a deemed resident.

5. Deemed non-resident

A person is categorized as a deemed non-resident in Canada when they do not meet the criteria for tax residency but still maintain specific connections to the country that lead to their treatment as a non-resident for certain tax purposes. These connections might encompass substantial residential, social, or economic links to Canada. Deemed non-resident status could be applicable in cases where an individual has departed Canada but maintains ongoing ties that justify their taxation as a non-resident, despite not being formally recognized as a resident.

How does CRA determine residency status?

The CRA assesses residency status on a case-by-case basis. When determining your tax residency status in Canada, the Canada Revenue Agency (CRA) considers various factors that contribute to your ties to Canadian residency, including the following –

• Ownership or rental of a permanent residence in Canada
• Residence of a spouse or common-law partner in Canada
• Presence of dependents residing in Canada
• Duration of time spent in Canada
• Intentions regarding future travel or potential permanent residency
• Possession of Canadian bank accounts, a driver's license, passport, and provincial health insurance

How can I establish my residency status in Canada?

As mentioned earlier, the Canada Revenue Agency (CRA) holds the authority to ascertain your residency status, which can differ according to individual circumstances. Nevertheless, there are certain inquiries you can consider that will assist in clarifying your residency status and the extent of your residential affiliations. These questions help provide a clearer picture of factors such as your ties to Canada, your intentions, and your activities within the country, which collectively contribute to determining your tax residency.

• Where is your home located?
• Where do your spouse and children live?
• Where is your personal property (like car) located?
• Where do you work?
• Where was your driving license issued?

It is best to go through the CRA website to know all the details before you fill your tax return. You can complete the NR74 Determination of Residency Status (Entering Canada) form or the NR73 Determination of Residency Status (leaving Canada) form and send it to the International tax and non-residents enquiries office to get an opinion from the CRA about your CRA status.

Tax returns of non-residents

Individuals who are not residents of Canada and earn income within the country are generally obligated to pay either Part I tax or Part XIII tax.

• Part I tax is typically handled by the entity that distributes your income. This means that the source of your income, such as an employer or a financial institution, is responsible for deducting and remitting the applicable income tax on your behalf.
• On the other hand, Part XIII tax serves as a non-refundable withholding tax, and it applies to specific types of income, including dividends, rental payments, and pensions.

For many non-residents, there may be no need to go through the process of filing a Canadian tax return as long as they fulfill their obligation to remit the withholding tax on income derived from Canada. In essence, the entity making the payment will withhold a portion of the income and send it directly to the Canada Revenue Agency (CRA) as tax on behalf of the non-resident.

However, there are scenarios in which non-residents may want to consider voluntarily filing a Canadian tax return. This is particularly relevant if they receive income from activities such as renting properties, providing services, or receiving pensions. By voluntarily filing a tax return, non-residents can calculate their tax liability on the actual taxable income after accounting for deductions and credits, rather than simply adhering to the withholding tax on the gross income. This option allows non-residents to potentially optimize their tax situation and ensure they are not paying more tax than required on their Canadian-sourced income. It's essentially a way for non-residents to have more control over their tax obligations in Canada. This choice would depend on your specific circumstances and financial preferences.

Documents needed for your tax return as a non-resident

For non-residents, it's vital to report the following categories of income –

• Income earned from employment within Canada.
• Any other types of income originating in Canada, such as scholarships, fellowships, bursaries, and research grants.
• Income generated from a business located in Canada.
• Capital gains resulting from the sale of Canadian property.
• Net partnership income, which is applicable exclusively to limited and non-active partners.

Although there isn't a strict requirement to report these additional income types, you are still obligated to include them on your tax return using Schedule A - Statement of Worldwide Income. This ensures comprehensive and accurate reporting of all relevant income sources, even if they are not subject to immediate taxation in Canada.

How to file your tax return as a non-resident?

For the submission of your Canadian non-resident tax return, having your Social Insurance Number is essential. In case you lack one, you'll need to acquire an Individual Tax Number by utilizing Form T1261 (Application for a CRA ITN for Non-Residents). To access all the required forms and schedules, utilize the Income Tax and Benefit Package for Non-Residents and Deemed Residents of Canada for the year 2020.

If you fall into the category of being a non-resident or a deemed non-resident of Canada, you won't be able to utilize NETFILE for your tax return submission. Instead, you will need to print and either mail or fax your return to the CRA (fax usage is due to ongoing international mail delays).

When submitting tax returns for multiple individuals, make sure that each person's return is sent separately. However, if you're filing tax returns for a single individual for multiple years, you can bundle them together in a single envelope. It's essential to bear in mind that Quebec residents, who are the only group in Canada mandated to file both federal and provincial tax returns, have distinct tax responsibilities that must be fulfilled with the Quebec government.