Understanding Tax Residency in Canada:
Understanding Tax Residency in Canada: A Guide for Individuals
What is Tax Residency and Why Does it Matter?
Tax residency in Canada determines how much and what type of income tax you need to pay. Unlike citizenship or immigration status, tax residency is based on where you actually live and maintain strong ties.
If you’re a tax resident of Canada, you’re required to report and pay taxes on your worldwide income, even if some of your earnings come from outside the country. On the other hand, non-residents generally only pay taxes on Canadian-source income.
To understand where you fit, let's break down the different tax residency categories in Canada.
1. Factual Residents: Persons with ties to Canada
A factual resident is someone continues to maintain strong residential ties to Canada. Even if you're physically outside Canada, the Canada Revenue Agency (CRA) may still consider you a Canadian resident for tax purposes.
Who is Considered a Factual Resident?
You may be a factual resident if you:
Work temporarily outside Canada
Attend school in another country
Travel frequently but maintain a home in Canada
Spend part of the year in another country (e.g., wintering in Florida)
Commute regularly to the U.S. for work but return to Canada on weekends
Primary and Secondary Residential Ties
The CRA examines both primary and secondary ties to determine if you are a factual resident.
Primary Ties (Almost Always Significant)
Primary ties are the most crucial factor in determining factual residency. If you maintain any of these while abroad, you are likely still a Canadian tax resident:
Dwelling place: Owning or renting a home in Canada is a strong indicator of continued residency. If you still have a property in Canada that is available for your use, it will be considered a significant tie.
Spouse or common-law partner: If your spouse or partner remains in Canada, it is a major factor in maintaining residency.
Dependents: If your children or other dependents live in Canada, this strongly suggests continued residency.
Example of Primary Ties
Mark, a Canadian citizen, moves to Dubai for work but keeps his house in Vancouver and his spouse stays behind. Since he has both a dwelling and a spouse in Canada, the CRA is likely to consider him a factual resident.
Secondary Ties (Evaluated Collectively)
While secondary ties alone may not determine residency, the CRA considers them in conjunction with primary ties. These include:
Personal property in Canada: Owning furniture, a vehicle, or other assets in Canada
Social ties: Memberships in Canadian recreational or religious organizations, professional associations, or unions
Economic ties: Maintaining Canadian bank accounts, investments, credit cards, RRSPs, or pensions
Government documentation: Holding a Canadian driver’s license, passport, or provincial health insurance
Frequent visits to Canada: Regular trips back to Canada may indicate continued residency
Example of Secondary Ties
Julia leaves Canada for an extended teaching position in Germany. She rents out her home, but still has a Canadian driver’s license, maintains Canadian bank accounts, and returns to Canada every summer. Though her primary ties are weak, her multiple secondary ties could result in her being considered a factual resident.
Tax Obligations for Factual Residents
Report all income earned worldwide
Claim applicable deductions and credits
Pay provincial/territorial taxes in your home province
Eligible for benefits like the Canada Child Benefit (CCB) and GST/HST credits
2. Deemed Residents: The 183-Day Rule
A deemed resident is someone who spends 183 days or more in Canada in a given tax year but does not maintain significant residential ties. This also includes certain government employees working abroad.
Who is a Deemed Resident?
You are a deemed resident if:
You stayed in Canada for 183 days or more in the tax year and are not a tax resident of another country
You work abroad for the Canadian government or military
Example:
John, a U.K. citizen, visits Canada for business and vacationing for 200 days in a year but has no home or family ties in Canada. Since he meets the 183-day rule and isn't a tax resident elsewhere, he's deemed a resident and taxed on worldwide income for the year.
Tax Obligations for Deemed Residents
Report all income earned worldwide
Pay federal tax plus a surtax instead of provincial/territorial tax
Not eligible for provincial/territorial tax credits
3. Non-Residents: No Strong Ties to Canada
A non-resident is someone who has no significant residential ties to Canada and spends fewer than 183 days in the country during the tax year.
Who is a Non-Resident?
You may be considered a non-resident if:
You permanently moved to another country
You live outside Canada for most of the year and have no strong residential ties
You’re an international student who left after completing your studies
Example:
David, a Canadian citizen, moved to Australia, sold his home in Canada, and closed his Canadian bank accounts. He is now a non-resident and only pays tax on Canadian-source income, such as rental income from a condo he still owns in Vancouver.
Tax Obligations for Non-Residents
Only pay tax on Canadian-source income (e.g., rental properties, employment in Canada, investments)
Subject to withholding tax (typically 25%) on certain types of income, such as dividends and royalties
4. Deemed Non-Residents: The Tax Treaty Rule
You can be a factual or deemed resident of Canada but still be considered a non-resident if you establish tax residency in another country with a tax treaty agreement.
Who is a Deemed Non-Resident?
You are a deemed non-resident if:
You meet the criteria of a factual or deemed resident of Canada
You are also a tax resident of a country with a tax treaty with Canada
The tax treaty assigns residency to the other country
Example:
Emma is a Canadian citizen who moves to the U.K. and qualifies as a tax resident there under the Canada-U.K. Tax Treaty. Even though she still owns a house in Canada, the treaty classifies her as a U.K. resident, making her a deemed non-resident of Canada.
Tax Obligations for Deemed Non-Residents
Follow the same tax rules as non-residents
Only pay tax on Canadian-source income
How to Determine Your Residency Status
Because tax residency is based on facts and circumstances, CRA reviews each case individually. If you’re unsure, you can:
Use Form NR73 (Leaving Canada) or NR74 (Entering Canada) to request a CRA determination
Consult a tax professional to assess your situation
Final Thoughts: Why Tax Residency Matters
Understanding your tax residency status is crucial because it impacts:
Your tax filing requirements
Whether you pay tax on worldwide income or only Canadian income
Your eligibility for benefits and credits
If you’re planning a move or working abroad, be proactive about severing or maintaining residential ties to avoid unexpected tax bills.
Need help with your tax situation? The team at ModernAxis can guide you through the process, ensuring compliance and minimizing tax liabilities.