Chapter 2: Liability for Tax
Liability of Individuals for Canadian Income Tax
Pg 47-49
● Individuals resident in canada are subject to tax on their worldwide income
● To determine an individual’s liability to the Canadian tax system, determine the residency
status
● Non residents pay tax only on: employment income earned in Canada, business carried
on in Canada or disposal of taxable canadian property
● 3 residency statuses for individuals:
○ Resident (including sojourner)
○ Part year resident
○ Non resident
● Canadian resident is taxed on their worldwide income for the full taxation year
● To be considered residency status: (2 Main Concepts)
○ Residency must be established somewhere; that is an individual must have
residential ties to a country and when leaving canada, the facts of the situation are
reviewed to determine the taxpayer’s intention to permanently sever ties
Common Law Concept of Canadian Resident
Pg 49
● The residence under common law principles described residence as a “continuing state of
relationship between a person and a place which arises from the durable concurrence of a
number of circumstances”
Administrative Practice
Factors considered as ties to Canada
Pg 52
● Primary
○ Dwelling Place
○ Spouse or Common Law Partner
○ Dependents
● Secondary
○ Personal Property
○ Social Ties
○ Economic Ties
● Maintaining a dwelling in Canada, immediate family members remaining in Canada and
secondary ties
Maintaining A Dwelling
Pg 52
● Whether owned or leased, suitable for year round occupancy and available for occupation
would establish an important residential tie to Canada
● May be able to rent or lease the property to an arm’s length individual
● It is not available for the taxpayer’s occupation
Immediate Family
Pg 52
● Spouse or common law partner and other dependent members of the immediate family
remaining in Canada when an individual leaves is regarded by the CRA as an important
residential tie
Secondary Ties
Pg 53
● None of the ties in this third category taken alone would be enough to determine
Canadian residence
● A combination would make a strong package of ties indicating residence
● May include: furniture, clothing, cars, provincial or territorial hospitalization and medical
insurance coverage, seasonal residences (residence that can’t be occupied year round
such as a cottage), active investment in a Canadian business, employment with a
Canadian employer, Canadian bank accounts, retirement savings plans, Canadian landed
immigrant status/work permits, Canadian passport, driver’s license, vehicle registration,
recreational and religious organizations memberships in Canada
● To establish that an individual is not a Canadian resident, the severance of residential ties
with Canada and the establishment of residential ties elsewhere is important
Resident
● Problem 2.2
● Taxed in Canada on worldwide income for the whole year
● Criterion: continuing state of relationship with Canada ie, ties
● Possible Evidence:
● Born, raised and educated in Canada
● Agreed to short term contract abroad
● Contract provided for living expenses, indicating the temporary nature of the stay abroad
● Fees under the contract were paid to the client’s Canadian corporation
● Continued as a shareholder, director and officer of the Canadian corporation,
● Maintained an interest in the activities of the Canadian corporation
● Maintained a Canadian bank account
● Owned a rental property in Canada
● Arranged a rental on a month to month basis to allow them to resume his habitation of the
residence on short notice
● Stored their major furnishings and winter clothing in Canada, indicating an intention to
return,
● Retained credit cards issued in Canada and their RRSP accounts,
● Maintained their health coverage in Canada
● Did not extend their visa in Nigeria, indicating an intention to return,
● Did not pay income tax in Nigeria, indicating a lack of permanence in their stay there
● Girlfriend returned to Canada, spending only a fall term and a summer in Nigeria with
him, indicating a lack of permanence in their stay,
● Returned to Canada, leaving nothing in Nigeria
Deemed Resident-Sojourning
Pg 53
● Treated like a resident and is taxed on their worldwide income for a full year
● A person is deemed to be a resident in Canada throughout the taxation year if they
“sojourned” in Canada in the year for an aggregate of 183 days or more
● Sojourn is a temporary visit rather than a permanent stay
● Spending less than 183 days doesn’t necessarily make an individual a non resident if not
just visiting but as more substantial residential ties
● Problem 2.2
● Deemed resident of Canada: taxed in Canada on worldwide income for the whole year
● Criterion: sojourned in Canada for an aggregate of 183 days or more in the year
● Criterion: paragraph 250(1)(^7) requires that he sojourn in Canada for an aggregate of
183 days or more while a non-resident. Note that CRA practice is to count any part of a
day as a "day" for this purpose.
● Evidence:
● When they were in Canada until July 2020, he was not sojourning despite being in
Canada for more than 183 days in that year,
● Therefore deemed residence is not a possibility in this particular case
Part Year Resident
Pg 54
● Status of a part year resident can only occur in the year an individual ceases residency or
establishes residency in Canada
● The position of an individual in the year they either became or ceased to be a Canadian
resident
● Could have had full residential ties, leaves Canada during a year
● The year of exit or entry is the year of part year residence status
● Part year resident is taxed in Canada on their worldwide income earned during the part of
the year in which they are considered resident in Canada
● An individual who seizes residency later in the year, but who spent more than 183 days in
Canada would still have the status of part year resident
● Problem 2.2
● Taxed in Canada on worldwide income for the part of the year while resident
● Criterion: “clean break,” ie severed ties in July 2020
● Evidence:
● The Canadian bank account was only to avoid foreign exchange difficulties and to
maintain their rental property
● No withholding of income tax on his fees
● Intended to establish an international consulting business abroad and to that end
attempted to promote such a business in Nigeria
● Intended to sell their property in canada when market conditions were right and to this
end they arranged a rental on a month to month basis to facilitate a sale
● Moved his personal effects to Nigeria
● Sold their car
● Cancelled his auto insurance and a gasoline company credit card
● Was accompanied to Nigeria by his girlfriend who stayed with him when not in school
● Rented an apartment in Nigeria because more permanent accommodation was not
available
● Obtained a Nigerian driver’s licence
● Maintained two bank accounts and cars in Nigeria
● Joined clubs in Nigeria
● Had an office in Nigeria
● His business cards identified him as a consultant to the Nigerian government
● The credit cards he kept could be used internationally
● Maintained his health coverage in Canada only because it was a requirement of his
contract
Clean Break or Fresh Start: The Concept
Pg 55-56
● CRA considers a clean break to have been made on the latest of the date on which:
○ Individual leaves Canada
○ Individual’s spouse or common law partner and/or dependent leave Canada
○ The individual becomes a resident of the country to which he or she is
immigrating
Liability of Non Residents
Pg 57
● A non resident individual subject to the provisions of an international tax agreement is
required to pay tax on certain canadian source income
● A non resident individual who was employed in canada, carried on business in canada or
disposed of taxable canadian property at an time in the year or a previous year is liable to
pay income tax
● Tax cannot be avoided by deferring salaries or business income until a year when no
income is earned in Canada
● A person who is a non resident for the entire year cannot be a part year resident
● Problem 2.3
● Non resident: taxed in Canada on Canadian source income
● Criterion: employed in Canada, ie, performed services of employment in Canada
● Evidence:
● After leaving in July 2020, he was not providing services of employment in Canada
● Therefore, non resident taxable in Canada is not a possibility in this case
The Meaning of Carrying on Business in Canada
Pg 58
● Carrying on business is a phase implying a continuous business activity
● A business is not required to involve a continuous business activity which includes an
adventure or concern in the nature of trade
● An adventure in the nature of trade is described as a scheme to make a profit in the same
manner as a person who is in that line of business
● Factors in distinction between employee and independent contractor
○ Whether the parties describe or refer to their relationship as one of an independent
contractor and a supplier
○ Whether the alleged independent contractor carries on business in the name of the
supplier or in their own name and
○ Whether the independent contractor acts for other suppliers
● Greater the independence from the supplier and the greater the degree of responsibility
the greater likelihood that the situation involves a non resident supplier selling to an
independent contractor
○ Supplier isn’t carrying on business in Canada and isn’t taxable in Canada on
business income earned in Canada
International Tax Treaties and Individuals
Pg 59
● Has negotiated many reciprocal tax treaties with other countries with other countries with
the objective of preventing incidence of double taxation and tax avoidance
● Provision deals with the taxation of income from employment and exempts a resident of
Canada from US taxation on salaries, wages and other similar remuneration derived from
certain conditions:
● That the remuneration doesn’t exceed US$10000 or
● The employee is present in the US for a period not exceeding an aggregate of 183 days in
any 12 month period starting or ending in the year and the remuneration is not borne by
an employer who is a resident of the US or by a permanent establishment of a fixed base
which the employer has in the US
● Individual would be taxable in Canada on worldwide income, including that earned in the
US and exempt from taxation in the US
Permanent Establishment
Pg 61
● A fixed place of business through which the business of a resident of a country is wholly
or partly carried on
● A place of management, a branch, an office and a factory, among others; and
● A person, other than an independent contractor who has and habitually exercises an
authority to conclude contracts in say Canada in the name of the resident of the US
Summary of the Residence Issue for an Individual
Pg 61
● Resident of Canada is taxable in Canada on worldwide income
● Non resident is taxable in Canada generally only on Canadian source income
Non Tax Factors Affecting Planning for the Residence of an Individual
Pg 67
● Being a resident of Canada and taxed on worldwide income, is not always worse than
being a non resident who is not taxable in Canada and taxed in full elsewhere
Comprehensive Consideration of the Residence of an Individual
Pg 67
● Planning Stage: the facts of the situation haven’t been completed
● Filing Stage: represent completed transactions but the client has not yet filed the return
that will report the transactions
● Appeal: represent completed transactions that have been reported for income tax
purposes and have been reassessed by the CRA
Liability of Corporations for Income Tax
Charging Provision
Pg 69
● The charging provision for corporations is the same as that for individuals
● One difference between individuals and corporations relates to the concept of a part year
resident
Residence of Corporations
Deemed Residence
Pg 70
● Deeming rule clearly settles the issue of corporate residence for corporations
incorporated in Canada in recent years
Liability of Non Resident Corporations
Pg 72
● Non resident corporation may be taxable in Canada on its Canadian source income
● A corporation cannot be employed it is possible for a corporation that is not incorporated
in Canada to carry on business in Canada and be table on its Canadian source business
income
International Tax Treaties and Corporations
● If it has such a permanent establishment, it is subject to tax in Canada only on the income
attributable to the permanent establishment
● Key determinants of a permanent establishment are a fixed place of business or a person
who habitually exercises authority to contract for their principal
Tax Exemption Under S.87 of the Indian Act
Pg 76
● Meant to avoid the expropriation of reserve lands to non-First Nation government for non
payment of municipal property taxes in the late 19th century