Canadian Tax Planning for Non-residents

Planning for the interactions of non-residents with the complex Canadian tax system requires careful consideration of both Canadian tax laws and the tax laws of the country in which the individual or enterprise currently resides. In some cases, we are dealing with former residents of Canada or people who believe they are non-residents in any case. In other cases, we are dealing with individuals and entities with investments in Canada.

The following are some of the issues that commonly need to be addressed in the above circumstances.

1. Determining your residency status: Depending on the foreign jurisdiction at issue, the determination of residency status is a one or two-stage process. If the other country is a non-treaty country or a Tax Information Exchange Treaty country (Caymans, Costa Rica etc.) the only step is determining if someone is a tax resident of Canada or not under the Income Tax Act. An individual can be a de jure/deemed tax resident of Canada if they spend more than 183 days in any given calendar year in Canada. One can also be factual resident of Canada if that person has ‘primary’ residential ties to the country, such as a home, spouse or dependents, a job or business or other personal property. There is also a long list of secondary ties to Canada such as a driver’s license or health care card. If there is a number of such indicia of residency, combined with any of the primary ties to Canada, then that person is likely a resident of Canada under the Act.

If the other country at issue is a country with which Canada has a comprehensive treaty for the avoidance of double taxation (the USA, UK, almost all other wealthy countries as well as a number of other important trade partners) then there is a second set of tests. These tests can vary by treaty, but generally speaking it is much easier to be deemed a non-resident under a tax treaty even if one is a tax resident of Canada under the Act. The treaty overrides the Act where both apply to the same individual.

2. Consider the type of income earned: Non-residents of Canada are generally only taxed on their Canadian-source income. This can include rental income, business income, capital gains, and employment income earned in Canada. Income earned outside of Canada by a non-resident is generally not subject to Canadian taxation.

3. Review foreign tax credits: Non-residents of Canada may be eligible to claim a foreign tax credit for taxes paid in another country. This can help reduce the amount of tax owed to Canada.

4. File your taxes on time: Non-residents of Canada must file a Canadian tax return by April 30th of the following year to report any Canadian-source income earned in the previous year and take advantage of any applicable tax benefits.

5. Beware of special rules applying to real property owned by non-residents: There are special provisions that apply to non-residents owing Canadian real property that is rented or leased out. These provisions create interesting opportunities, but Canada and some provinces have also recently adopted specific rules and taxes involving under-occupied housing. Non-resident non-citizens of Canada are also currently precluded from purchasing residential real property in Canada.

If you are a non-resident of Canada (or think you may be or are considering becoming one) and would like assistance in addressing Canadian income tax issues, please contact us. We would be glad to assist.