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D Inc. is a Canadian corporation, incorporated in Ontario four years ago. D’s only business is...

D Inc. is a Canadian corporation, incorporated in Ontario four years ago. D’s only business is located in Argentina. D is a resident in Canada throughout the current year. Is this statement true or false?

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"D Inc. is a Canadian corporation, incorporated in Ontario four years ago. D’s only business is located in Argentina. D is a resident in Canada throughout the current year."

This statement is true. D is a resident in Canada.

When Do You Become a "Resident in Canada" for Income-Tax Purposes?

An individual—i.e., a natural person—can become a tax resident in one of two ways. You can be a common-law resident (i.e., a factual resident), or you can be a deemed resident.

Common-Law Tax Resident (i.e., Factual Resident)

Although Canada's Income Tax Act uses the terms "resident" and "ordinarily resident," it doesn't define either one. So, Canadian courts bear the responsibility of defining residence for tax purposes. Since Canada's judiciary subscribes to the common-law system, the court definition of tax residence is often called "common-law residence." (It's also referred to as "factual residence" because the common-law analysis calls for a comprehensive test of the individual's circumstances.)

In its landmark 1946 decision, Thomson v Minister of National Revenue, the Supreme Court of Canada defined a taxpayer's tax residence variously as: "the place where in the settled routine of his life he regularly, normally or customarily lives"; and "the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living."

In other words, your particular circumstances determine whether you're a Canadian tax resident under common law. So, a court may observing any of the following factors (and then some):

  • Past and present life habits;
  • Regularity and length of visits in the jurisdiction asserting residence;
  • Ties within that jurisdiction;
  • Ties elsewhere; or
  • The permanence or purposes of a stay abroad.

Not all jurisdictional ties are given equal weight. Courts and the Canada Revenue Agency both consider some residential ties more significant when discerning whether you're a tax resident—e.g., your having a dwelling place, spouse, or dependent in the jurisdiction.

Deemed Resident: The Sojourner Rule

The sojourner rule—located in paragraph 250(1)(a) of the Income Tax Act—will deem you to have been a Canadian resident for the entire tax year if you "sojourned" in Canada for 183 days or more in that year.

You sojourn if you visit. So, unlike a common-law resident, a sojourner need not either have a "settled routine" in Canada or "customarily live" in Canada.

Your physical presence in Canada for just over half a year will thus brand you a Canadian tax resident for that entire year.

When Do You Cease to be a Canadian Tax Resident?

The rules for losing your status as a Canadian tax resident mirror those for becoming a Canadian tax resident. You can lose tax residence under the common-law test, or you can be a deemed non-resident.

Losing Residence under Common Law

Again, your particular circumstances determine whether you're a Canadian tax resident under common law. And courts will examine the above-mentioned factors (among others) when deciding whether you've sufficiently cut ties with Canada so as sever tax residence.

Interestingly, some tax jurisprudence suggests that a home, spouse, or dependent in Canada proves far less significant when determining whether a foreigner has become a Canadian tax resident than when determining whether a Canadian-born individual has severed residence upon leaving Canada. For more details, see our article "Tax Residence in Canada – Are Significant Residential Ties Less Significant for Immigrants to Canada than for Emigrants from Canada?"

Deemed Non-Residence: Subsection 250(5)

Subsection 250(5) of the Income Tax Act deems a person to be a non-resident in Canada if a Canadian tax treaty renders that person a tax resident of Canada's treaty partner.

But unlike the sojourner rule in paragraph 250(1)(a), which, if it applies, deems you to be a resident throughout the year, subsection 250(5) only deems you to be a non-resident starting from the particular time that you were a resident of another country per a tax treaty.

Canada's tax treaties typically contain an article on residence. The treaty residence article will initially defer to each country's domestic tax law. That is, the tax treaty will consider a person to be a tax resident in the country whose domestic tax laws assert jurisdiction to tax the person's worldwide income on the basis of domicile, residence, place of management, or some similar criterion. If, however, each country's domestic tax laws make this claim, the treaty sets out tie-breaker rules to identify only one country as the person's tax residence.

The deemed non-residence rule in subsection 250(5) overrides the sojourner rule. As a result, subsection 250(5) gives rise to the possibility of part-year residence.


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