Becoming a non-resident of Canada for tax purposes by taking advantage of the tiebreaker provisions contained in Canada’s tax treaties.
By Todd Trowbridge, CA
Edited By: Wayne Bewick CA CFP CPA (IL) |
We previously discussed the idea of becoming a factual non-resident of Canada for tax purposes based on the elimination or reduction of primary and secondary ties. While these are very important considerations when leaving Canada, especially in situations where an individual is working in non-treaty country, it is also possible in some cases to become non-resident of Canada by using the residency article (i.e. tie-breaker provisions) under one of Canada’s tax treaties, even when significantties are maintained in Canada. In this article, we will review the concept of becoming nonresident of Canada for tax purposes by taking advantage of the tie-breaker provisions contained in Canada’s tax treaties.
In all situations, it is still necessary to do an in-depth analysis to determine Canadian residency status by examining the individual’s primary and secondary ties to Canada. Another important consideration in determining Canadian residency status is based on whether the individual is a deemed resident of Canada under domestic law.
Deemed Residents of Canada
Some readers may have heard of the situation where an individual is a deemed resident of Canada. Deemed resident status under Canadian domestic law would typically occur in the following instances: where an individual has sojourned in Canada for more than 183 days; where the individual is employed under certain situations with the government of Canada or a province and the individual was resident in Canada within the 3 month period prior to their departure from Canada; where the individual is employed with the Canadian Armed Forces; where the individual is providing services under a prescribed international development assistance program and the individual was resident in Canada within the 3 month period prior to their departure from Canada. There are also a few less common situations which should be considered when determining residency status for Canadian tax purposes which are beyond the scope of this article.
Deemed Non-residents of Canada
Assuming an individual is not a deemed resident of Canada and is clearly considered a non-resident of Canada based on having no or limited ties to Canada (as well as resident of the foreign country based on their ties), no further analysis is required.
However, where an individual is considered a deemed resident of Canada or a factual resident of Canada based on their ties, it will be necessary to determine whether they are also resident in the foreign country based on the definition of residence in the relevant tax treaty, where one exists. Where a treaty does not exist with the particular country, the individual will be considered a resident of Canada for tax purposes by default.
If the individual is considered a resident of the foreign country under the particular treaty, in addition to being a resident of Canada, a review of the residency “tie-breaker” rules contained in the relevant treaty will be warranted. It is these tie-breaker rules that will ultimately determine an individual’s residency status since the treaty overrides the domestic law of both countries. In fact, an individual is deemed to be a non-resident of Canada under domestic law where they are considered a resident of another country under one of Canada’s tax treaties based on the tie-breaker rules.
What are the Tie-Breaker Rules?
The tie breaker rules are in place to determine an individual’s country of residence for tax purposes in the case of dual residency status which then determines which country gets the first right to tax certain types of income. The rules will depend on the particular treaty but typically they apply in the following order in cases of dual residency:
- An individual will be considered resident in the country where they have a permanent home available to them.
- Where the individual has a permanent home available in both countries, or neither country, the individual will be considered a resident of the country where their personal and economic relations are closer (referred to as centre of vital interests).
- Where the centre of vital interests cannot be determined, the individual will be considered a resident of the country where they have a habitual abode (generally where the individual spends the majority of their time).
- Where the individual has a habitual abode in both countries, the individual will be considered a resident of the country where the individual is a national.
- Where the individual is a national of both countries, or neither country, the individual’s residence will be determined by the competent authorities for each country.
As can be seen, based on the tie-breaker rules it is possible to become a non-resident of Canada even though the individual may still have significant ties in Canada. For example, consider a situation where a factual resident of Canada has emigrated and become a resident of the United States. If the individual only has a permanent home available in the United States, the individual would be considered resident of the United States and a deemed non-resident of Canada. Or, if the individual has a permanent home available in both countries but works full time and lives with his family in the United States, the individual would be considered a resident of the United States and a deemed non-resident of Canada.
It is worth repeating that in order to take advantage of the tie-breaker rules the individual must be a resident of the foreign country in addition to Canada based on the residency definition in the relevant treaty. It is also worth noting that the date that the individual acquires resident status in the foreign country may not necessarily be the same as their physical arrival date so caution should be exercised. In cases where the individual’s residency status is not clear, the prudent approach will be to ensure that the individual’s ties to Canada have been severed so that it will not be necessary to rely on the treaty.
However, even though Canada may have a tax treaty with the particular country, in some cases it is very difficult to be considered a resident in the foreign country because of the definition of residence in the particular treaty. For example, in the Canada-Kuwait and Canada-UAE tax treaties, an individual would be required to be a Kuwaiti or UAE national in order to be considered a resident of Kuwait or UAE based on the residency definition in these treaties. As becoming a national of these countries is extremely difficult, if not impossible, the residency article of the treaty can unfortunately not be relied upon to be seen as a deemed non-resident of Canada. In these cases, it becomes extremely important to ensure that residential ties to Canada have been severed where non-residency status is desired.
In summary, the tie-breaker rules in Canada’s tax treaties can be a useful tool in cases where an individual may not otherwise be able to become a factual non-resident of Canada. Further, they can also act as a “Plan B” for becoming a non-resident of Canada should the CRA disagree with an individual’s claim of non-resident status. However, the impact of these rules should be considered in all other cases where they may come into play as they can also cause unintended changes to an individual’s residency status where the individual’s circumstances have changed. As always, it is recommended that professional advice be sought from a competent tax advisor in matters pertaining to an individual’s residency status.
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| Todd is a Chartered Accountant and tax advisor with Trowbridge Professional Corporation, Chartered Accountants | Tax Advisors. The firm focuses on international tax services for Canadians around the world. For further information on the firm and the services provided, you can contact Todd.
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