What Is the Difference Between Factual and Deemed Residency?

To read more chapters, click below:

Chapter 1: The ultimate tax guide for non-residents in Canada

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

You might be thinking that paying taxes in Canada is quite a simple task. But for a lot of people, especially those who have moved to Canada recently or are still getting familiar with the taxation system, it is a cumbersome task to file their tax return. In this chapter we’ll discuss what is the difference between factual and deemed residency, and will also talk about other residency status in Canda in brief.

If you didn’t know, your residency status is of prime importance in Canada especially when it comes to filing your tax return. In Canada, individuals who reside within the country are required to report all of their income and fulfill tax obligations on it. Conversely, non-residents are solely subject to taxation on income originating from Canada. Consequently, determining one's residency status holds significant importance in ascertaining their tax responsibilities in Canada.

While the Canada Revenue Agency (CRA) evaluates residency on an individual basis, there are several shared factors that can provide hints about your status. To gauge your situation, consider the following questions –

• Where is your primary residence situated?
• Where do your spouse and children reside?
• Where are your personal belongings, including your vehicle, located?
• Where was your driver's license issued?
• Where is your place of employment?

What is factual and deemed resident of Canada?

In the context of Canadian taxation and residency, the terms "factual resident" and "deemed resident" refer to different categories of individuals based on their ties to Canada. These terms have specific meanings for tax purposes.

Factual resident of Canada

A factual resident of Canada is an individual who meets specific criteria as defined by the Canada Revenue Agency (CRA) to be recognized as a resident of Canada for income tax purposes. The determination of whether someone qualifies as a factual resident is based on several factors, including –

• Where You Live: The location of your primary residence.
• Residential Ties: Any connections you have to Canada, such as property ownership, bank accounts, and social or economic links.
• Family Connections: Whether your family, such as a spouse or dependents, resides in Canada.
• Employment: Your employment or business activities in Canada.
• Social Affiliations: Your participation in social, recreational, or community activities within Canada, among other considerations.

If you have substantial connections to Canada, spend a significant amount of time in the country, or maintain a permanent home in Canada, you may fall under the classification of a factual resident. Factual residents are generally subject to Canadian income tax on their worldwide income. This means that they are required to report and pay taxes on all of their income, whether it's earned in Canada or from sources outside the country.

Situations in which you will be considered a factual resident of Canada –

• Engaged in temporary employment overseas
• Participating in teaching or educational activities in a foreign nation
• Regularly commuting between Canada and a job location in the United States (U.S.), either on a daily or weekly basis
• Taking vacations outside of Canada
• Residing in the U.S. for a portion of the year, which might be due to health reasons or recreational purposes

As an individual classified as a factual resident, your taxation status remains consistent as if you've remained within the country, irrespective of the time you spend residing or working overseas.

When you prepare your tax returns –

• You are required to declare both your income earned within Canada and any income from other countries
• You are eligible to request all applicable credits and deductions
• You can make use of federal and provincial non-refundable and refundable tax credits
• You have the ability to apply for the GST/HST credit and receive the Canada child benefit (CCB) if you have dependent children residing in Canada

An important consideration revolves around what the CRA designates as "significant residential ties." If any of these circumstances pertain to you, you could potentially be classified as a factual resident. If you –

• Possess a residence in Canada
• Share a domicile with a spouse or common-law partner in Canada
• Have dependents residing in Canada
• Hold property ownership within Canada
• Belong to a Canadian recreational or religious group
• Are employed by a Canadian enterprise
• Maintain Canadian bank accounts
• Possess a Registered Retirement Savings Plan (RRSP)
• Hold a valid Canadian driver’s license

Tax filing due date

In case you are a factual resident of Canada Your income tax and benefit return must be filed on or before –

• April 30 of the year after the tax year
• June 15 of the year after the tax year if you or your spouse or common-law partner carried on a business in Canada (other than a business whose expenditures are mainly in connection with a tax shelter)

Deemed resident of Canada

In Canada, a "deemed resident" is a tax status that applies to individuals who are not actual residents of Canada for most of the tax year but are still considered residents for Canadian tax purposes due to specific provisions in the Income Tax Act. This status can apply to various situations, but it often pertains to individuals who maintain significant residential ties to Canada, even if they spend a significant portion of the year outside the country. Deemed residency can have important tax implications. Here are some common scenarios where an individual might be deemed a resident of Canada –

• Significant Residential Ties: Even if you spend a substantial amount of time outside Canada, you can be deemed a resident if you maintain significant residential ties to the country. These ties can include owning a home in Canada, maintaining a spouse or dependents in Canada, or having economic and social connections to the country.
• Spousal Support: If you are a non-resident of Canada and you are required to make support payments to a resident spouse or common-law partner, you may be deemed a resident for the purposes of determining your tax obligations related to those support payments.
• Canadian Government Employees: Canadian government employees posted abroad may be considered deemed residents of Canada for tax purposes.
• Certain Government Pension Recipients: Some individuals receiving government pensions, such as the Canada Pension Plan (CPP) or Old Age Security (OAS), may be deemed residents based on specific rules.

Deemed residents are subject to Canadian taxation on their worldwide income, similar to factual residents. They are required to report their income to the Canada Revenue Agency (CRA) and file Canadian income tax returns. However, they may also have the opportunity to claim foreign tax credits or deductions to mitigate the potential double taxation that can arise from being considered a resident of Canada while also being taxed in another country.

If you are considered a deemed resident in Canada, your tax filing process follows specific guidelines outlined in the 5013-G Income Tax and Benefit Guide for Non-Residents and Deemed Residents of Canada. Here are some important things to note –

• Federal Surtax Applies: As a deemed resident, you will be subject to a federal surtax instead of provincial or territorial taxes since you are not eligible to receive provincial tax credits.
• Full Reporting of Worldwide Income: You are required to report your entire global income when filing your taxes in Canada. This means you must disclose all income earned both within and outside of Canada.
• Deductions and Tax Credits: While you have to report your global income, you still have the opportunity to claim any applicable deductions or non-refundable tax credits that align with your specific financial situation. These deductions and credits can help reduce your overall tax liability.

If you hold the status of a deemed resident in Canada, your tax filing process involves using a specific guide for non-residents and deemed residents. You will be subject to federal surtax, report your worldwide income, and have the ability to claim deductions and tax credits relevant to your circumstances. It's important to follow these guidelines carefully to ensure compliance with Canadian tax laws and to optimize your tax situation.

What is factual and deemed non-resident of Canada?

If you do not meet the qualifications for complete residency, standard "ordinary" residency, or deemed residency, you may belong to other categorizations. In such situations, you may potentially be designated either as a factual resident or a deemed non-resident. According to the CRA's criteria, you are officially classified as a non-resident of Canada when specific conditions are satisfied.

• You intermittently reside in Canada without possessing any residential ties* within the country, and
• Your stay in Canada during the preceding year is fewer than 183 days, or
• You remain outside Canada for the entirety of the tax year

If the above-mentioned conditions are met, you will be identified as a non-resident in Canada.

Factual non-resident of Canada

A factual non-resident of Canada is an individual who does not meet the criteria set by the Canada Revenue Agency (CRA) to be considered a resident of Canada for income tax purposes.

In the context of Canadian tax regulations, the term "factual non-resident" is not a commonly used or recognized category. Instead, the more common classifications are "factual resident" and "deemed non-resident." However, the term "factual non-resident" may be informally used to describe an individual who does not meet the criteria for being considered a factual resident of Canada, meaning they lack significant residential ties to the country and do not meet the criteria for being deemed a resident. Here are some key points related to a "factual non-resident" based on the informal interpretation –

• Lack of Significant Residential Ties: A factual non-resident is someone who does not maintain significant residential connections to Canada. This typically means they do not have a primary home, spouse or dependents, social affiliations, or economic ties to the country.
• Exemption from Canadian Taxation: Since they are not considered factual residents, factual non-residents are generally not subject to Canadian taxation on their worldwide income. They are only subject to taxation on specific types of Canadian-source income.
• Simplified Tax Obligations: Their tax obligations are typically simplified compared to residents, and they may have fewer reporting requirements.

Deemed non-resident of Canada

In Canada, a "deemed non-resident" is an individual who, for tax purposes, is considered a non-resident even though they might otherwise have residential ties or connections to the country. This classification typically arises when someone maintains residential affiliations with Canada but is recognized as a resident in another country with which Canada has a tax agreement (tax treaty).

Here are some key characteristics of a deemed non-resident in Canada –

• Residential Connections: A deemed non-resident may have significant residential ties or connections to Canada, such as owning property, maintaining bank accounts, or having family members in Canada.
• Tax Treaty Country Residency: Despite these ties, the individual is considered a resident of another country due to the tax treaty between that country and Canada. Tax treaties often define an individual's tax residency to prevent double taxation and ensure tax obligations are clear.
• Continued Canadian Ties: The individual may maintain substantial connections with Canada, but these ties do not override their tax residency status in the other country with which Canada has a tax treaty.
• Tax Obligations: Deemed non-residents are typically subject to specific tax rules in Canada. They are not taxed on their worldwide income but are instead subject to taxation on specific types of Canadian-source income, such as income from employment or business activities in Canada, rental income from Canadian properties, and capital gains on certain Canadian assets.

The designation of deemed non-resident helps determine the tax treatment of individuals who have significant residential ties to Canada but are recognized as residents of another country under the terms of a tax treaty. This ensures that their tax obligations are aligned with their primary tax residency and the specific provisions of the treaty.