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Unformatted text preview: Chapter 2 Tax Principles and Concepts Questions 2-1 An individual is a deemed resident for tax purposes when he/she sojourns in Canada for 183 days or more (subsection 250(1)) during the taxation year. A deemed resident is subject to tax on his/her worldwide income for the full year. An individual is considered a part-year resident if he/she permanently leaves Canada during the year or permanently enters Canada during the year. When leaving Canada, it must be established that all ties have been fully severed with Canada and a clean break has occurred. Part-year residents receive special tax treatment, as they are only taxed on their worldwide income during the period they were a resident of Canada. 2-2 The Department of Finance avoided drafting a specific definition of residency for individuals because residency is difficult to define and is dependent on numerous factors that differ for every individual taxpayer. Instead, the Department has left the delineation up to the courts. Over time, case law has defined residency as a question of fact, rather than meaning. Therefore, the individual facts of each case are examined to ascertain whether an individual has a continuing state of relationship with the country, and in turn, this determines an individuals residency status. However, numerous court cases have resulted from the lack of a concrete definition in 9 10 TAXATION IN CANADA the Income Tax Act. Taking each residency case to the courts results in excessive costs that are ultimately borne by the taxpayers. For example, if an individual challenges the CRAs assessment and wins, the CRA must pay its own court costs and legal fees, and very often, the taxpayers. If the individual loses, then the court costs are paid by that individual taxpayer. 2-3 Any corporation that was incorporated in Canada after April 27, 1965 is considered a resident of Canada and must pay taxes on its worldwide income (paragraph 250(4)( a )). This would include the income earned in the United States, provided that the corporation has not established an independent subsidiary there. If the corporation carries on operations in the United States, it may also be subject to tax in the United States. To avoid double taxation, a foreign tax credit may be claimed on the Canadian tax return for U.S. foreign tax paid. There are other options available, such as operating out of a branch or incorporating a foreign subsidiary. However, professional advice is recommended....
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- Winter '09