It is not uncommon for people to have more than one country that is considered a tax resident (“two residents“or”two residences“). In Canada, people with second homes in warmer climates, people with permanent resident status (“”).land migrants“) but still maintain the relationship of residence in their country of origin, as well as workers who have jobs abroad, can find themselves as dual residents. Residents, as a result of the decision they had to make to extend their stay in Canada or abroad due to travel restrictions or health and safety reasons.CRA“), introduced administrative guidelines for the problem of infectious diseases and housing, these guidelines are very limited and often will not provide relief to these people.

Historically, the CRA has enhanced its oversight of high net worth individuals and certain immigrants with more than one residence. Now it can be expected that the CRA control activities on housing issues will be greater than people unexpectedly, and without proper tax planning, spent more time in Canada, as a result of the disease -move, during the years 2020 to 2022. have serious Canadian tax issues.

It is important that dual residents, regardless of the above categories, understand their Canadian tax compliance requirements before filing their Canadian tax returns, or, if already under They are supervised by the CRA, and respond to the CRA’s questions, requests and tax demands. Although each situation is unique, the purpose of this article is to describe a few important Canadian taxes for dual residents. Often, proactively talking to a tax advisor about some of these issues can be wise.

Canadian Tax System – Based on Residence

Canadian residents are taxed on their worldwide income. In the year of emigration or emigration, they are subject to tax on their worldwide income earned during the year of residence in Canada. There is no definition of “homestead” in Canada Income Tax Act (“ITThe Court defined “dwelling” as “the extent to which a person in his mind and reality establishes or maintains or concentrates his usual way of life with his facilities in “the social relations, interests and privileges of or in the place in question.” When making such a decision, all relevant facts must be considered.

In Tax Folio S5-F1-C1 (“Determining the status of a resident”, March 28, 2013) (“Folio“), the CRA has provided guidance on the criteria to be considered in determining whether a person is a resident of Canada. In the Folio, the CRA lists the most important factors (“first residential relationship“) as well as the second factor in determining whether a person who leaves Canada for tax purposes remains a resident of Canada.

Individuals have the option of filing form NR73, Determination of Residence Status (Leaving Canada) or form NR74, Determination of Residence Status (Entering Canada), as the case may be, where CRA can comment on their housing. Status. However, there is a risk that sending this letter may result in a CRA review or audit or a decision about your position that may not necessarily be clear in your doubts and interests. There is no legal obligation to file form NR73 or NR74 unless requested to do so by the CRA.

Dual Resident (section 250(5) of the ITA)

A person can live in more than one country at the same time. If a person is a tax resident of Canada, as well as a tax resident of another jurisdiction with which Canada has a tax treaty, the determination may depend on the application of subsection 250(5) – a final decision on where a person resides for Canadian tax purposes. the ITA. In short, if subsection 250(5) applies, it treats a taxpayer who is actually a resident of Canada as a non-resident if, under the double-domestic law of the applicable tax treaty, the bond. solutions for other countries. Non-residents of Canada, whether actual or deemed, are only taxed in Canada on certain Canadian income and must pay tax only in limited circumstances. The dual resident requirement (i.e. section 250(5)) is considered important for people who have residential ties to Canada as well as other treaty countries and have significant sources of income. , including business, employment or investment income, earned outside of Canada.

Rules for binding contracts

Most of Canada’s tax treaties use a set of international standard bond-breaking rules, including the permanent home test, the center of interest test, the place of common residence test and the jurisdiction test. – national. But before these treaty rules apply, a person must be a resident of both countries for treaty purposes. To be a resident of a contracting state for treaty purposes, a person must be “tax dependent” in that state, according to the terms of the treaty. The CRA has provided its interpretation of the meaning of “taxable”, in the context of the Canada tax treaty, in paragraphs 1.41 to 1.45 of the Folio. Therefore, taxpayers relying on section 250(5) of the ITA should be expected to provide support to the CRA about their tax status in other areas (eg copies of tax returns foreign and evaluation).

The country where the person has a permanent home, either owned or rented, they can always try first. This is why proper tax planning (for example, ensuring that you do not have a permanent home in both countries at the same time) can often ensure that the rules of cross-border taxation apply. However, as is common with dual residency, a person has a permanent home available to them in both states during the period of dual residency and therefore this test will not resolve the tie. . Thus, the second and third tie tests, center of great interest and habitual residence, are often the tie-breaking rules that determine a person’s residential status for treaty purposes. Since both tests are very reasonable, it may be wise to speak to a tax advisor to get an opinion on the matter. Of course, when relying on the CRA to make the decision for you (eg filing form NR 73 or NR 74 – Determination of Residence Status), the CRA tends to err on the side of caution. and identify the person as a resident of Canada. , in fact a person may have a valid and defensible tax filing status but they are not resident in Canada, due to section 250(5) of the ITA and the treaty bond rules.

Taxpayers are not liable if they file an incorrect tax return as a Canadian resident

Individuals, when filing their first Canadian tax return, are often unaware of the dual resident requirements of section 250(5) of the ITA and report themselves to the CRA as Canadian residents. Regardless of the reason behind the application to be a Canadian resident on the tax return, where there are dual residents and ITA subsection 250(5) should have been applied to treat them as a non-resident, they should be able to correct their the people. the previous tax return, assuming that the tax year is not prohibited by law and the CRA agrees with the analysis of the correlation rule. There is Canadian law that supports the proposition that a taxpayer is not bound by a first misclassification of taxes as a Canadian resident. Depending on the circumstances, this may be beneficial to taxpayers, especially those with significant non-Canadian income whose tax rates in other countries are lower than Canada’s tax rates. . However, on the other hand, amending your tax return to identify yourself as a non-resident may result in negative tax implications, such as departure tax. Before considering a tax return amendment, it would be wise again to discuss with a tax advisor all possible consequences, in both jurisdictions, that may occur.

Conclusion

Dual resident cases are unique and many tax issues can arise in both countries. Ideally, if you are a resident of Canada with a significant residential connection to a country that has a tax treaty with Canada, you should not be in a position of double taxation. . That is, within the agreement, there will be a tax negotiation (Proc├ędure d’Agreement) to resolve double taxation. However, the purpose of this article is to inform the reader of the tax system in Canada and specifically section 250(5) of the ITA. Many people who file their taxes, or are considering filing their taxes, as Canadian residents are actually considered non-residents of Canada. With the increase in the number of cases due to the epidemic, it is hoped that this article will remind taxpayers of the rules in the Canadian tax system that may have a positive effect on them.



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