Residency-Rules - 1 DRAFT RESIDENCY FOR TAX PURPOSES F...

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DRAFT RESIDENCY FOR TAX PURPOSES F. BARRY GORMAN, PHD, CA, TEP 1. Charging Provisions 2. Definition of Resident 3. Classifications of Residency 4. Determination of Residence Status (a) Individuals (i) Individuals Ordinarily Resident in Canada (ii) Deemed Residents (iii) Factual Resident (iv) Immigrants (b) Corporations 5. Provincial Residency 6. International Tax Treaties (a) Overview (b) U.S. Residency Status 7. Canada-U.S. Tax Convention (a) Treaty Developments (b) Applicability (c) Relevant Provisions (d) Administration Matters (e) Treaty Shopping (f) U.S. Estate Tax This note discusses the rules related to residency, the fundamental taxation concept that determines the manner in which taxpayers are taxed in Canada. Also discussed is the Canada – U.S. tax treaty. 1. Charging Provisions - ITA 2(1) – (3); IT 420 Unlike American tax law, which taxes on the basis of citizenship , Canadian legislation follows the British tradition of taxing income on the basis of residency . ITA 2(1) provides that “every person resident in Canada at any time in the year” shall pay a tax on taxable income . A person in this context refers to an individual, a corporation and a trust . Non- residents are subject to tax on employment and business income earned in Canada in the taxation year, on income from the disposal of taxable Canadian property 1 in the year, and on certain payments from Canada subject to withholding tax. Furthermore, resident taxpayers compute taxable income pursuant to Division C , while non-residents compute taxable income in accordance with Division D . 1 This term is relevant to taxpayers who leave Canada. Included within the definition of taxable Canadian property is real property situated in Canada, other capital property used in carrying on a business in Canada, shares of Canadian public companies if at any time within the past five years the emigrant owned more than 25 per cent of any class of the shares, and shares of a private company resident in Canada (ITA 248(1)). 1
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2. Definition Of Resident Unfortunately, nowhere in the Act is the term “resident” defined , other than in ITA 250(3), wherein there is a reference to a resident as being an individual “ ordinarily resident in Canada.” Therefore, the determination of residency essentially is a question of fact, based on an annual evaluation of all relevant information. Because residency is not synonymous with such terms as citizenship, nationality, landed immigrant status, or domicile (that is, a physical dwelling), 2 depending upon the facts, a Canadian citizen or a citizen of another country may or may not be a resident of Canada for tax purposes. Furthermore, it is possible for an individual to be a resident although not physically present in Canada , or for a corporation to be a resident even though it does not carry on business in Canada in the taxation year.
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