The Expatriate Group Inc.

General Rules ...

Under Canada's Income Tax Act, non-residents of Canada may be subject to Canadian tax on certain Canadian-source income.

Generally, such non-residents may be subject to tax under either Part I or Part XIII of the Income Tax Act.

Part I Taxation

Income taxed under Part I is subject to taxation at graduated tax rates similar to those that apply to Canadian residents. In addition, in computing the income that is taxed, certain applicable expenses may be allowed.

Generally, a non-resident will only be subject to tax under Part I on the following sources of income:

·   Income from employment in Canada,

·   Income from carrying on business in Canada, or

.   Taxable capital gains from the disposition
    of "taxable Canadian property"

However, certain types of income that would otherwise be taxable under Part XIII may be subject to tax under Part I if the non-resident so elects.

These types of income are:

·   Canadian real estate rental income (section 216), and

·   Certain pension and similar payments (section 217)

A non-resident liable for tax under Part I must file the applicable Canadian tax return.

In the case of income that would otherwise be subject to tax under both Part I and Part XIII (e.g. interest income earned in connection with a business carried on in Canada), the income will only be subject to tax under Part XIII unless such income pertains to a business carried on through a permanent establishment in Canada, in which case it will only be taxable under Part I.

In certain cases, income taxable under Part I may be offset by losses incurred in other years.

Rates Of Part I Tax-Individuals (Other Than Trusts)

The following basic rates of federal tax will apply to non-resident individuals (other than trusts) who are subject to tax under Part I.

INCOME SUBJECT TO TAX*	RATE OF TAX
35,000 or less	16%
$35,001-$70,000	$5,600 plus 22% on excess over $35,000
$70,001-$113,804	$13,300 plus 26% on excess over $70,001
Over $113,804	$24,689 plus 29% on excess over $113,804

*All amounts to be indexed for inflation in subsequent years

Furthermore, an additional tax equal to 48% of the basic tax computed above will be payable on any income that is not considered to be "earned in a province". This will most commonly arise in situations where Canadian-source rental income is taxed on a net basis under section 216 or where the only source of "taxable income earned in Canada" is taxable capital gains from the disposition of "taxable Canadian property". In most cases, this additional tax is in lieu of any provincial tax on such income. In cases where this tax applies, this will mean that highest marginal tax rate will amount to 42.92%

For income earned in the Province of Quebec, the federal tax may be reduced by a special abatement equal to 16.5% of the basic federal tax.

In very rare cases, non-resident individuals may be eligible for certain tax credits, normally only available to Canadian residents, in computing the amount of taxes payable.

Rates Of Part I Tax-Estates & Trusts

Non-resident testamentary trusts (including estates) are subject to the same graduated rates of federal tax applicable to individuals, as discussed above, on any income taxable under Part I.

Non-resident inter vivos trusts will be subject to a basic rate of 29% on all amounts taxable under Part I.

In addition, non-resident trusts will be subject to the same surtax and additional tax, as discussed above, as other non-resident individuals.

Rates Of Part I Tax-Corporations

Non-resident corporations are subject to a 31% federal tax on all income taxable under Part I. To the extent that the income taxable under Part I is considered to be earned in a province, a reduction in the federal tax payable equal to 10% of such eligible income will be applied, thus resulting in a net tax rate of 21%.

In addition, a surtax of 4% applies, resulting in an effective federal tax rate of 22.12%

However, certain income earned by a non-resident corporation will not be considered to be earned in a province for this purpose, and therefore, will not be eligible for the 10% abatement. This will most commonly apply to Canadian-source rental income with respect to which a section 216 election is filed; and taxable capital gains from the disposition of "taxable capital property" where a business is not carried on through a Canadian permanent establishment.

In certain cases, provincial income taxes will also be applicable, as discussed below.

Part XIII Taxation

Income taxable under Part XIII of the Act is subject to a 25% tax rate unless the rate is reduced under the terms of one of Canada's tax treaties.

The gross amount of such income is taxed at the 25% rate-no deductions are allowed.

Such tax should be withheld at source-there is no return for the non-resident to file. If an agent receives such income on behalf of a non-resident without tax being withheld, that agent is responsible for withholding and remitting the Canadian tax.

Among the most common types of income which are subject to tax under Part XIII are the following:

·    Interest from Canadian sources

·    Dividends paid by corporations resident in
    Canada, and

·    Royalties from Canadian sources

Generally, Part XIII tax will only apply to amounts paid or credited to the non-resident by a Canadian resident. However, in certain cases, a non-resident payer is treated as being a Canadian resident for this purpose, particularly if the payment relates to a business carried on in Canada.

Provincial Taxation

In general, a non-resident will only be subject to provincial taxation on income derived from employment in that province, or from carrying on business through a permanent establishment in that province. However, in certain cases, provincial taxes may apply to taxable capital gains earned by a non-resident .

Rates Combined With Provincial or Territorial Tax-Individuals (Including Estates & Trusts)

In the case of non-resident individuals (including estates and trusts) subject to provincial or territorial taxation, such taxes have now changed from a "percentage of federal tax" to a tax on income basis.

The following are top marginal:

PROVINCE	RATE*
Alberta	39.0%
British Columbia	43.7%
Manitoba	46.4%
New Brunswick	46.84%
Newfoundland	48.64%
Northwest Territories	42.55%
Nova Scotia	48.25%
Nunavet	40.50%
Ontario	46.41%
Prince Edward Island	47.37%
Quebec	48.22%
Saskatchewan	44%
Yukon Territory	42.4%

Rates Of Tax-Corporations

In the case of corporations subject to provincial taxation on income from carrying on business in a province, the rates of tax (which are applied to such income) are as follows:

PROVINCE	RATE
Alberta	11.75%
British Columbia	13.5%
Manitoba	15.5%
New Brunswick	13%
Newfoundland	5%/14%
Northwest Territories	14%
Nova Scotia	16%
Nunavet	12%
Ontario	12%/14%
Prince Edward Island	7.5%/16%
Quebec	8.9%%/16.25%
Saskatchewan	10%/17%
Yukon Territories	2.5%/15%

In cases where two rates are shown, the lower rate will only be available with respect to eligible manufacturing and processing profits.

In addition, non-resident corporations may be subject to Ontario tax if they owned real property timber resource property, or timber limit in Ontario the income from which arose from the sale or rental thereof or is a or is a royalty. This will be the case even if the activities do not constitute a business carried on through a permanent establishment in Ontario.

Determination of Residency Status ....
In general, in determining whether or not a person is resident in Canada one must look to both factual tests relevant to common law rules (largely derived from UK tax cases) as well as statutory rules found in the Income Tax Act. In addition, in many cases "tie breaker" rules found in Canada's tax treaties may also come into play. These rules are all discussed in general terms below.

Individuals

An individual will be resident in Canada in a particular year if that individual is "ordinarily resident" in Canada in that year. Disputes with the Canada Revenue Agency most often arise in this regard in connection with individuals who attempt to cease being in resident in Canada for tax purposes.

The Canada Revenue Agency's views in respect of the main considerations that are relevant in determining whether an individual is resident in Canada are well outlined in Interpretation Bulletin IT-221R3, which should be consulted in planning for all potentially contentious situations.

In addition, under a number of statutory rules an individual may be deemed to be a Canadian resident for tax purposes even if that individual was not "ordinarily resident" in that year.

The most significant of these rules is one that states that where, in any particular year, an individual "sojourns" in Canada for 183 days or more, that individual will be deemed to be resident in Canada throughout that particular taxation year. To "sojourn" is usually interpreted as being the equivalent of "visit" or "stay temporarily".

Trusts

There is little Canadian case law dealing with the residency of trusts for tax purposes.

However, the general rule that most tax practitioners follow is that a trust will be considered to be resident where a majority of its trustees reside.

The Canada Revenue Agency's views on the residency of trusts are summarized in Interpretation Bulletin IT-447.

Corporations

Any corporation incorporated in Canada after April 26, 1965 is deemed to be resident in Canada.

A corporation incorporated outside of Canada may still be considered to be resident in Canada if its "mind and management" or "central management and control" are situated in Canada. Normally, this is found in the place where the director's meetings are held.

Application of Treaties ....

Canada's tax treaties generally have rules that come into play where a person would otherwise be considered to be resident in both Canada and the other country that is party to that treaty ("tie breaker rules").

In the case of individuals (other than trusts) these rules normally provide as follows:

a. If the individual has a permanent home available to him in one (but not both) of those countries, he shall be deemed to be resident in that country;
b. If the individual has a permanent home available to him in both or none of those countries he will be deemed to be resident in the country with which his personal and economic relations are closer ("centre of vital interests");
c. If the country with which he has his centre of vital interests cannot be determined, he will be deemed to be resident in the country in which he has a habitual abode;
d. If he has an habitual abode in both or neither country, he will be deemed to be resident in the country of which he is a citizen; and

e. If he is a citizen of both or neither country, the "competent authorities" of both countries will settle the question by mutual agreement.

COUNTRY	RATE
France	10%
Germany	10%
Italy	15%
Japan	10%
Netherlands	10%
Switzerland	15%
United Kingdom	10%
United States	10%

Real Estate Rents

Rules Under the Income Tax Act

General Rules

The taxation of real estate rental income earned by a non-resident will vary depending on whether or not the rental activities are considered to be a business. Normally, this will not be the case, and the discussion that follows assumes that the rental activities will not be. In the event that they are, see discussion of taxation of Business Profits.

A non-resident in receipt of rental income derived from real property situated in Canada will have the option of paying Canadian tax under two methods:

· The gross rents method, or

· The net income method

This choice must be made from year to year, and there is no prohibition on switching the method used from one year to another.

Gross Rents Method

Under this method, the tax paid (under Part XIII) is equal to 25% of the gross rents. For this purpose, based upon a famous Supreme Court of Canada decision in 1968, it would appear that gross rents must include property taxes paid directly by the tenant to the municipality.

No Canadian tax return need be filed under this method, and tax should be withheld and remitted by the tenant or agent.

It should be understood that, in the absence of a timely filing of a Canadian tax return (as discussed below) the non-resident will be required to pay tax using the gross rents method. This will be the case even if there is no net income after expenses are deducted.

Net Income Method (Section 216)

In lieu of paying Canadian tax on gross rents under Part XIII, a non-resident may elect, instead, to pay tax under Part I, on the net income, at graduated tax rates.

As a general rule, a Canadian tax return must be filed within 2 years from the end of the relevant year to use this method.

However, if a form NR6 (undertaking to file a Canadian tax return) is filed in order to reduce tax withheld at source, the return must be filed within 6 months from the end of the relevant year to use this method.

Rental losses may not be carried over to other years on a section 216 return.

All of Canada's tax treaties allow Canada to tax income derived by a non-resident from the rental of Canadian real estate.

Furthermore, in cases where the gross rents method is used, only Canada's tax treaty with Ireland provides for a rate lower than the statutory 25% (15%).

Royalities and Other Rents

Rules Under the Income Tax Act

General Rules

A non-resident to whom royalties or rents are paid or credited by a Canadian resident is generally subject to Canadian tax thereon under Part XIII at a rate of 25%.

In addition to amounts which are "royalties" and "rents" in the traditional sense, this can apply to "similar payments" (e.g. "licensing fees") as well as certain other amounts (e.g. payments for services) which are calculated based on production, sales, profits, etc.

Rents paid in connection with Canadian real property are discussed separately under Real Estate Rents.

Payments By Other Non-Residents

Rents or royalties paid by a non-resident to another non-resident may be treated as being paid by a Canadian resident for this purpose, in the following circumstances: