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3) Individuals


For individuals, residency is  a question of fact.  There is no statutory definition of residency , for individuals, contained in the Income Tax Act.  Case law and jurisprudence have defined the tests used to make that determination.  Each individual taxpayer must then determine his residency status based on his particular "facts and circumstances".  The more ties an individual has to Canada, the stronger the argument that he is a Canadian resident.  Significant ties would include a home available for his use, having immediate family in Canada,  whether children are in school, etc.  The CRA has issued a number of documents which address issues considered significant when determining an individual's residency status.  These would include Interpretation Bulletin IT-221R3, "Determination of an Individual's Residence Status" and forms NR73, "Determination of Residency Status (Leaving Canada)" and form NR 74, "Determination of Residency Status (Entering Canada)".

Canada also has a sojourner rule, whereby if a factual non-resident spends more than 183 days (for any reason) in Canada during the calendar year, the individual will be deemed to be resident throughout the entire year.  For determining the 183 day test, any part of a day counts as a full day.  There are no exceptions for day of arrival or departure. As such it is possible that a U.K. individual, spending significant time in Canada, may inadvertently become a resident of Canada for Canadian tax purposes.

When an individual is considered a resident of both the United Kingdom and Canada, under each country's' respective tax law, the individual needs to consult the Treaty to determine his residence status for tax purposes.  When the facts indicate that the individual is a dual resident, residency is determined under a series of "tie-breaker" rules contained in Article 4(2) of the Treaty. The provision states "...then his status shall be determined as follows:

(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him.  If he has a permanent home available to him in both Contracting States, or neither, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);

(b) if the Contracting State in which he has his centre of vital interested cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has a habitual abode;

(c) if has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting of which he is a national;

(d) if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement."

Thus, under the Treaty an individual will be deemed to be a resident of one Contracting State and, by default, will be taxed as a non-resident in the other Contracting State.  For a U.K. resident who has sojourned in Canada (and become a resident under Canadian domestic tax law) but has maintained his primary ties to the U.K., he would be considered a U.K. resident under the Treaty and a non-resident of Canada for tax purposes.

Employment income

Income from an office or employment includes all amounts received as salary, wages, commissions, director's fees, bonuses, honoria and taxable benefits.  In addition to amounts received while an employee, amounts received in contemplation of or on termination of employment are also taxed as employment income.

Taxable benefits take many forms.  Employer provided housing, schooling, automobiles and membership dues are examples of typical taxable benefits.  Exceptions, however, exist for employer provided board and lodging where the employee is in Canada on a temporary basis and the employee has maintained his principal residence elsewhere for his continued use (i.e., he hasn't let it).

Employer provided stock options exercised, while in Canada, would be subject to Canadian taxation to the employee.  If certain conditions are met, a deduction (generally equal to 1/2 of the employment benefit) may be deducted in computing the employee's taxable income.  If the options were owned prior to the employee moving to Canada, the full employment benefit would be included in income but the employment benefit would need to be sourced between Canada and the United Kingdom on a reasonable basis.  That portion, considered U.K. source, would eligible for a foreign tax credit in Canada for any U.K. tax paid on the income.

All remuneration received by a resident of Canada is taxed by Canada including items relating to a pre-Canadian period of employment.  As such it may be prudent to ensure that all pre-assignment remuneration is received prior to commencing Canadian residence.

Items relating to a period of Canadian employment would be taxable by Canada, even if the amount is paid after the employee has left Canada.

There are no special concessions for the compensation of individuals once they become residents of Canada.

Business income

The rules for individuals carrying in business in Canada are similar to corporations carrying on business in Canada.  It may be easier, however, for an individual to be considered to have a permanent establishment in Canada.  Non-resident individuals carrying on business in Canada will want to ensure that they do not give the impression that the business is resident in Canada.  For example, there should be no Canadian telephone number or Canadian address associated with the business.

Property income

Similar to corporations, interest, dividends, rents, royalties, etc. are taxed when received.  Dividends from taxable Canadian corporations, however,  are taxed at a reduced rate through a gross-up and tax credit mechanism.

Many U.K. individuals, who move to Canada on a temporary basis, maintain ownership of their U.K. principal residence but let it out to offset some of the carrying costs.   As a Canadian resident, the U.K. source rental income must be reported.  Tax depreciation, capital cost allowance, may be claimed to reduce net rental income but losses cannot be created or increased through the use of tax deprecation.  Even though CCA may be claimed, consideration should be given to not claiming it as recapture may arise when the individual ceases Canadian residency and returns to the U.K.

Capital gains

One-half of the net capital gains ('taxable capital gains"), on the disposition of capital property, are included in the calculation of taxable income.  Allowable capital losses (one-half of the net loss) can only be applied against taxable capital gains and cannot be deducted against other sources of income in the current year.  These denied losses, however, may be carried back 3 years and forward indefinitely to be applied against net capital gains arising in those years.

In order to create Canadian jobs and to mitigate investment risk, the government provides incentives for Canadian residents to start Canadian active businesses in Canadian corporations.  When an individual later sells the shares for a gain, the gain may qualify for a capital gains exemption.  Any gain, on the disposition of the share, would be eligible for an exemption of up to $750,000 (lifetime) if the share is a "qualified small business corporation" share at the time of disposition.  In general a share is a QSBC share  where at  least 90% of the fair market value of the company's assets are used in an active business carried on primarily in Canada.

Where a capital loss arises on the disposition of shares or debts of certain "small business corporations", 50% of the loss may be deducted against all types of income not just capital gains.  These types of allowable capital losses are known as allowable business investment losses  ("ABIL)".

Capital gains arising on the disposition of an individual's principal residence are not subject to tax. A principal residence can be located in a foreign jurisdiction.  Families, however, can only designate one property per calendar year as their principal residence.

When a taxpayer becomes a resident of Canada, he is deemed to have acquired all capital assets, unless specifically excluded, at the fair market value on the date he commences residency.  As such, any unrealized but accrued pre-immigration gains would not be subject to Canadian tax when the asset is sold.  Similarly, when a taxpayer ceases Canadian residence, he is deemed to have sold all of his capital assets, unless specifically excluded, at fair market value and the resulting taxable capital gain, if any, would be included in his last Canadian tax return.  If the individual has not been resident in Canada for more than 60 months, any assets he owned at the time he commenced Canadian residency would be excluded from the departure rules.


Other income would include, for example, the receipt of pensions (Canadian or foreign), annuities, employment insurance (EI), Canadian Old Age Security (OAS), government pension plans such as the Canada Pension Plan (CPP) or U.K. National Insurance, withdrawals from Registered Retirement Savings Plans ("RRSP"), etc.

If a particular item of income, other than employment, business, property or capital gains,  is not specifically listed in the Act, it is not subject to taxation.  Perhaps the best example would be lottery winnings.  Lottery winnings are not subject to tax in Canada since the Act does not specifically include them in the definition of other income and the Act specifically states that any capital gains from lottery winnings is nil.

Tax Rates

Individuals must file personal tax rates.  Combined federal/provincial returns (known as a T1, "Income Tax and Benefit Return") are filed for all jurisdictions except Quebec. Quebec residents are required to file form TP1, "Income Tax Return"  in addition to their federal T1.  The Canadian tax year is the calendar year.  In general, personal tax returns are due by the following April 30th.  Self employed individuals have until June 15th to file though taxes should be paid by April 30th.  Penalties and interest will be applied to late filed returns that have a balance due.  Below are the 2012 federal tax rates.

Federal Income Tax Rates - 2012

Taxable Income ($)                         Rate (%)               Cumulative tax($)

0-42,707                                               15                                    6,406

42,708-85,414                                    22                                    15,802

85,415-132,406                                  26                                    28,020

over 132,407                                      29                                        -

Provincial Income Tax

Tax rates vary depending on the province or territory where the individual was resident on December 31st of the taxation year.  If the individual ceased residency during the year he will be taxed on his world wide income from January 1 until the date he ceases to be a resident of Canada.  In these situations, the provincial tax that will be applied will be based on where he was resident on his last date of residence in Canada.

The maximum Ontario tax rate, for 2012, is 17.41% and when added to federal tax results in a maximum combined rate of 46.41%.  Ontario rates are typical of most provinces though Alberta employs a flat tax rate of 10% so that the maximum tax rate is 39%.



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