ch2so - Chapter 2 Tax Principles and Concepts Questions 2-1...

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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  individual’s  residency  status.   However,  numerous court cases have resulted from the lack of a concrete definition in  9
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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 CRA’s assessment and wins, the CRA must pay its  own   court   costs   and   legal   fees,   and   very   often,   the   taxpayer’s.   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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