What is the influence of residency on your tax return?

To read more chapters, click below: 

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

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

One of the most important things to know in terms of tax return in Canada is that your tax return is directly impacted by your residency status. The Canada Revenue Agency (CRA) as it is popularly known as, considers numerous factors when evaluating your residency status and the corresponding tax responsibilities.

Understanding the basics of residency status in Canada

Establishing your residency status in Canada can be intricate, as it involves considering multiple factors related to your physical presence in the country, your affiliations with Canada, and your intentions. The Canada Revenue Agency (CRA) and Immigration, Refugees and Citizenship Canada (IRCC) each maintain separate criteria for determining residency, with the CRA primarily concerned with tax-related aspects and the IRCC focusing on immigration concerns. Let's delve into this matter further.

1. Residency for Tax Purposes (CRA)

The Canada Revenue Agency (CRA) ascertains your tax residency by evaluating your connections with Canada and the duration of your presence within the country during a given tax year. The following factors are considered in the process of establishing your residency status –

1. Residential Ties

• Do you own a residence in Canada?
• Does your spouse or common-law partner reside in Canada?
• Do you have dependents who are living in Canada?

2. Economic Ties

• Do you possess personal property, such as a car or furniture, located in Canada?
• Do you maintain bank accounts or credit cards in Canada?
• Do you have ownership in a business located in Canada?

3. Social Ties

• Do you belong to social or recreational organizations in Canada?
• Are you registered with provincial health insurance?

4. Length of Time Spent in Canada:

In the majority of instances, if you spend 183 days or more physically present in Canada within a single calendar year, you are categorized as a resident.

If you possess substantial connections to Canada, you might be regarded as a resident even if your time spent within the country amounts to less than 183 days.

2. Residency for Immigration Purposes (IRCC)

For immigration purposes, IRCC determines your residency status based on your intention to settle in Canada. Some key points include –

• Permanent Residency: If you hold permanent residency status in Canada, you are generally allowed to live, work, or study anywhere in Canada.
• Temporary Residency: If you are in Canada on a temporary visa (e.g., study permit, work permit, visitor visa), your residency status depends on the type of visa you hold and its conditions. Temporary residents are expected to leave Canada once their authorized stay is over.
• Intention to Settle: If you are applying for permanent residency or citizenship, your intention to settle in Canada becomes important. You need to demonstrate your commitment to living in Canada permanently.
• Time Spent in Canada: Excessive time spent outside of Canada during your permanent residency could affect your eligibility for citizenship and other benefits.

It's essential to consult the official websites of the CRA and IRCC for the most up-to-date information and guidance on residency status. If you're uncertain about your situation, consider seeking advice from a tax professional or immigration consultant with expertise in Canadian laws and regulations.

Determining your residency status

When you are determining your tax residency status in Canada, the fundamental element to consider is the presence of significant residential connections to the country. This hinges on evaluating whether you maintain existing ties to Canada or establish new ones that establish a substantial connection to Canadian residency for tax purposes.

The assessment revolves around the strength and nature of your ties to Canada, as they play a crucial role in determining your tax residency status and obligations in the country.

Significant residential ties to Canada include –

• A home in Canada
• A spouse or common law partner in Canada
• Dependents in Canada

Secondary residential ties in Canada include –

• Personal property in Canada, such as a car or furniture
• Social ties in Canada, such as memberships in Canadian recreational or religious organizations
• Economic ties in Canada, such as Canadian bank accounts or credit cards
• Canadian driver's licence
• Canadian passport
• Health insurance with a Canadian province or territory

Your residency status if you have left Canada

A factual resident of Canada is an individual who meets the criteria set by the Canada Revenue Agency (CRA) to be considered a resident of Canada for income tax purposes. To put it differently, it pertains to an individual whose residential connections and time spent in Canada are substantial to the extent that they meet the criteria for being classified as a resident as per tax regulations.

When establishing actual residency, the Canada Revenue Agency (CRA) takes into account several factors, including –

• Residential ties: This involves an individual possessing a residence, familial relationships, personal belongings, social connections, and economic interests within Canada.
• Length of Stay: The individual spends a significant amount of time in Canada during the tax year. Generally, if you are physically present in Canada for 183 days or more in a calendar year, you are considered a resident.
• Economic and Social Ties: The individual has bank accounts, credit cards, investments, employment, or other economic interests in Canada. They are also registered with provincial health insurance and might be a member of Canadian social or recreational organizations.

You might qualify for acknowledgment as a factual resident of Canada if you maintain residential connections with the country and are –

• Temporarily working abroad
• Vacationing abroad
• Commuting regularly between Canada and your job location in the United States
• Enrolled in school in a different country

Emigrants in Canada

In Canada, an individual is considered an emigrant if they have left Canada and established a permanent residence in another country while simultaneously severing their residential ties with Canada. Being classified as an emigrant has significant implications for an individual's tax status in Canada –

• Severing Residential Ties: To be categorized as an emigrant, it's essential to sever your residential ties with Canada. This typically involves actions such as selling your Canadian home, cancelling health insurance coverage in Canada, and terminating memberships and affiliations that link you to the country.
• Permanent Residence in Another Country: You must establish a permanent residence in another country. This means that you intend to live in the new country on a long-term or permanent basis, with the expectation of being a resident there for the foreseeable future.
• Ending Canadian Residency for Tax Purposes: By becoming an emigrant, you effectively end your Canadian residency for tax purposes for the particular tax year in which you make this change. This means that you are no longer subject to Canadian taxation on your worldwide income for that specific tax year.

The process of becoming an emigrant involves more than just physical relocation. It also requires a formal change in your residential status and the intention to establish a permanent residence in another country. Additionally, tax implications and rules may vary depending on your individual circumstances and the specific tax year in question. Therefore, individuals considering emigrating from Canada should consult with a tax professional or the Canada Revenue Agency (CRA) for guidance on their specific situation and tax obligations.

Deemed non-resident in Canada

In Canada, a person is deemed a non-resident if they have established residential ties in a country with which Canada has a tax treaty (also known as a tax agreement), and they are considered a resident of that specific country for tax purposes. However, they may still maintain significant residential affiliations with Canada. Being classified as a deemed non-resident in Canada affects an individual's tax residency status and has the following implications –

• Tax Obligations: Deemed non-residents are typically subject to specific tax rules in Canada. They are not taxed on their worldwide income in the same way as Canadian residents. Instead, they are subject to taxation only on certain types of Canadian-source income.
• Reporting Requirements: Deemed non-residents are still required to report their Canadian income to the Canada Revenue Agency (CRA) and may need to file a Canadian tax return. However, they can often claim deductions and credits available to non-residents.
• Tax Treaties: The tax treaty between Canada and the country where the individual is deemed a resident can impact the taxation of specific types of income and may provide relief from double taxation.

Factual resident in Canada

a factual resident is an individual who maintains significant residential ties to Canada and is considered a resident for tax purposes. The concept of a factual resident is crucial for determining an individual's tax obligations in Canada. Here's a closer look at who is considered a factual resident and how it impacts residency status. A factual resident in Canada is an individual who meets one or more of the following criteria –

• Primary Residential Ties: They have a primary home in Canada. This means they have a dwelling place (e.g., house, apartment) where they reside or could reasonably be expected to reside.
• Secondary Residential Ties: Even if they don't have a primary home in Canada, they may still be considered a factual resident if they maintain significant secondary residential ties. These can include things like:
• Spouse or Dependents: If their spouse or dependents (e.g., children) reside in Canada, this can be a significant tie.
• - Personal Property: Ownership of personal property in Canada, such as a car or furniture.
• Social Ties: Maintaining memberships, social, or recreational activities in Canada.
• Economic Ties: Having bank accounts, credit cards, or investments in Canada.
• Health Coverage: Being covered by the provincial health insurance plan.
• Duration of Stay: Generally, if an individual spends 183 days or more in Canada during a tax year (which usually coincides with the calendar year), they are considered a factual resident. However, the specific number of days can vary depending on individual circumstances and tax treaty provisions.

Impact on Residency Status

Being considered a factual resident in Canada has significant implications for an individual's residency status –

• Tax Obligations: Factual residents are subject to Canadian taxation on their worldwide income. This means they must report and pay taxes on income earned both inside and outside of Canada.
• Tax Credits and Deductions: Factual residents can claim tax credits and deductions available to Canadian residents. They may also be eligible for certain provincial or territorial tax benefits.
• Reporting Requirements: Factual residents must file a Canadian income tax return and report their worldwide income to the Canada Revenue Agency (CRA). This includes income from employment, investments, business activities, and more.
• Tax Treaties: Canada has tax treaties with many countries, which can affect how specific types of income are taxed for factual residents who are also tax residents of another country. Tax treaties may provide relief from double taxation and influence the tax treatment of certain types of income.

Your residency status if you have entered Canada

You could be recognized as an immigrant if you have relocated from another country to establish your permanent residence in Canada, establishing significant residential ties and becoming a Canadian resident within the tax year.

Immigrants are individuals who have gone through the immigration process and have become permanent residents of Canada. Their immigration status has a significant impact on their residency status for tax and legal purposes.

An immigrant in Canada is typically someone who has been approved for permanent residency through various immigration programs, such as family sponsorships, economic immigration streams, refugee resettlement, or humanitarian and compassionate grounds. Immigrants often receive a Permanent Resident (PR) Card as proof of their status.

Impact on Residency Status

• Tax Residency: Immigrants who have been granted permanent residency status in Canada are generally considered tax residents of Canada. This means they are subject to Canadian taxation on their worldwide income, similar to factual residents.
• Reporting and Filing Taxes: Immigrants are required to report their worldwide income to the Canada Revenue Agency (CRA) and file Canadian income tax returns. They must follow the same tax rules and guidelines as Canadian citizens and other tax residents.
• Access to Benefits: Immigrants who become permanent residents may have access to various Canadian benefits and programs, such as healthcare coverage through provincial or territorial health plans, social services, and education.
• Path to Citizenship: Immigrants with permanent resident status have the opportunity to apply for Canadian citizenship after meeting certain residency and other requirements. Canadian citizenship grants them full legal rights and responsibilities as Canadian citizens.

While immigrants have the legal status to live and work in Canada permanently, their specific tax obligations, rights, and responsibilities may vary depending on their individual circumstances, such as their income, family situation, and the province or territory where they reside.

Immigrants to Canada should seek advice from tax professionals and legal experts to ensure they understand their rights and responsibilities, meet their tax obligations, and make the most of the benefits and opportunities available to them as permanent residents. Additionally, changes in immigration or tax laws can impact an immigrant's status and obligations, so staying informed is crucial.

Your residency status if you live in another country

You may fall into the category of a non-resident in Canada if you lacked significant residential connections to the country and meet one of the following conditions –

• You resided outside Canada for the entire tax year, except in situations where you were considered a resident of Canada.
• The total duration of your stay in Canada during the tax year was less than 183 days.

To definitively determine your residency status, you have the choice of completing either of two forms: the NR74 form titled "Assessment of Residency Status (Entering Canada)" or the NR73 form titled "Assessment of Residency Status (Leaving Canada)." These forms can be submitted to the Canada Revenue Agency (CRA) to request an official assessment and clarification of your residency status based on their evaluation.

In essence, if you lack substantial residential ties to Canada and meet either of these conditions, you can seek official confirmation of your non-resident status through the completion and submission of these forms to the CRA. This process makes things convenient and helps ensure that you are taxed appropriately according to your residency status.