Understanding your Canadian residency for tax purposes

How to determine your residency status for tax purposes in Canada

 

Understanding your residency status is crucial when it comes to managing your taxes when Canadian tax season rolls around.

Whether you’re an international student, scholar, or professional living in Canada, knowing your residency status for tax purposes is essential for fulfilling your tax obligations accurately and efficiently, as well as ensuring you avail of every benefit you’re entitled to claim on your return.

In this blog post, we’ll look at topics like what residency status means for tax purposes, the different types of residency, how to determine your residency status, implications of tax obligations, tax treaties, and filing your income tax return.

 

What does residency status for tax purposes mean?

 

Residency status for tax purposes refers to determining whether an individual is considered a resident or a non-resident of Canada for taxation purposes.

This distinction is important because residents and non-residents are subject to different tax rules and obligations in Canada.

 

Types of Canadian tax residency

 

There are numerous types of residency for tax purposes in Canada, and what you fall under will depend on your personal circumstances.

Here are some examples:

Non-resident of Canada

An individual who does not meet the criteria to be considered a tax resident of Canada. Non-residents are generally taxed only on income earned from Canadian sources.

 

Dual resident

Individuals who may be considered residents for tax purposes in more than one country. Tax treaties between Canada and other countries help resolve double taxation issues for those with dual tax residence.

 

Deemed resident of Canada

A Deemed Resident of Canada is an individual who is not a resident under the usual rules but is considered a resident for tax purposes due to specific criteria, such as significant residential ties to Canada. Non residents and deemed residents of Canada can be hard to distinguish, so it’s important you know which bracket you fall into before filing.

 

Deemed non-resident of Canada

On the other hand, you may be a deemed non-resident of Canada if you have established residential ties with a country that Canada has a tax treaty with, and you are considered a resident of that country, but you have significant ties to Canada.

 

Factual resident of Canada

Individuals who are considered residents of Canada based on the duration and nature of their presence in the country, even if they maintain residential ties elsewhere.

 

How to declare non-resident in Canada for tax purposes

 

You may also be wondering how to declare non residency in Canada. This is where both Form NR73, Determination of Residency Status (Leaving Canada), and Form NR74, Determination of Residency Status (Entering Canada) apply to you.

You will want to complete NR73 if you’ve already left or are planning to leave Canada either temporarily or permanently and need help determining your residency status for income tax purposes.

On the other hand, NR74 is the determination of residency status when entering Canada.

How to determine residency status

 

Determining your residency status involves considering various factors such as the location of your primary residence, ties to Canada, duration of stay, immigration status, and more.

In general, you will be considered a non-resident for tax purposes if:

You normally, customarily, or routinely reside in another country and do not have the required significant residential ties in Canada, and you lived outside Canada throughout the tax year; or you stayed in Canada for 183 days or less during the tax year.

 

On the other hand, you are typically a resident in Canada for tax purposes if:

Canada is where you regularly, normally, or customarily live.

There are a number of ties (primary and secondary) that will be taken into consideration when defining you as a resident or non-resident. These include:

Primary residential ties:

• A spouse or common-law partner
• House or apartment (owned or renting)
• Dependents

Secondary residential ties:

• Personal property (vehicle, furniture, etc).
• Social ties (you are a member of a recreational, religious, or professional organization in Canada)
• Economic ties such as bank accounts, credit cards, or investments
• You’re employed in Canada
• You plan to stay in Canada past your working holiday visa/have applied for permanent residency
• Canada is the place where you customarily live
• You spent more than 183 days in Canada in the tax year

 

Tax implications of residency status

 

Your residency status in Canada for tax purposes has significant implications on how you are taxed, what income is taxable, and what tax credits and deductions you are eligible for.

Here’s a deeper dive into the tax implications:

 

1. Taxable income:

Residents: Canadian residents are taxed on their worldwide income, including income earned in Canada and internationally.

Non-Residents: Non-residents are generally taxed only on their Canadian-source income. This typically includes income earned from employment, business, investments, or property situated in Canada.

 

2. Tax credits and deductions:

Residents: Residents are eligible for various tax credits and deductions available under Canadian tax laws. These may include credits for tuition fees, medical expenses, childcare expenses, and more.

Non-Resident: Non-residents may have limited access to certain tax credits and deductions, depending on the type of income earned in Canada and any tax treaties that apply.

 

3. Filing requirements:

Residents: Residents are required to file an annual tax return with the Canada Revenue Agency (CRA), reporting their worldwide income and claiming applicable deductions and credits.

Non-Residents: Non-residents may also need to file a tax return if they earned income from Canadian sources or if they want to claim a refund of taxes withheld in error.

 

4. Withholding taxes:

Residents: Residents may be subject to withholding taxes on certain types of income, such as employment income, interest, dividends, and rental income.

Non-Residents: Non-residents may also be subject to withholding taxes on Canadian-source income, but the rates and exemptions may vary depending on tax treaties and the type of income.

 

Tax treaties

 

Canada has tax treaties with many countries to prevent double taxation and provide relief for taxpayers subject to tax in both countries.

These treaties often contain provisions for determining residency status and allocating taxing rights between countries.

Essentially, the details of the treaty will decide which country you are taxed in.

 

Filing your income tax return

 

Regardless of your residency status, if you earn income from Canadian sources or have Canadian tax obligations, you may need to file a Canadian income tax return.

Here at Sprintax Canada, we offer assistance and guidance to help residents and non-residents navigate the tax filing process efficiently.

Understanding Canadian residency for tax purposes can be complex, but with the right knowledge and resources, you can fulfill your tax obligations accurately and confidently.

 

Sprintax Canada is here to help you:

• understand your residency status
• comply with Canadian tax laws
• streamline the tax filing process for non-residents.

 

Prepare you nonresident tax return with Sprintax Canada.