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.
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.
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 another country that is party to that treaty (“tie breaker rules”). In the case of individuals (other than trusts) these rules normally provide as follows:
- 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;
- 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”);
- 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;
- If he has a habitual abode in both or neither country, he will be deemed to be resident in the country of which he is a citizen; and
- If he is a citizen of both or neither country, the “competent authorities” of both countries will settle the question by mutual agreement.
Capital Gains- Business Profits
Capital gains taxes on non-residents of Canada are generally applied at the same rate as residents of Canada. Taxes on capital gains typically apply to the sale of the following types of property:
- Real estate property located in Canada
- Interest in corporations, trusts or partnerships
- Business property
- Shares in private entities Capital gains on other types of property may not be taxed.
The CRA will review on a case-by-case basis.
Determination of Residency Status
When determining residency status factual tests relevant to common law rules (largely derived from UK tax cases) as well as statutory rules (found in the Income Tax act) are used. In many cases, “tie breaker” rules that are found in Canada’s tax treaties may also come into play. These rules are discussed in general terms below.
Dividends paid by both resident and non-resident Canadian corporations are usually subject to a 25% tax. However, Canada’s treaties effectively lower this rate to 15%, which can include “deemed dividends” in the following situations:
- Amounts received on wrap-up or liquidation of corporations that are in excess of “paid-up capital”.
- Purchase for cancellation or redemption of a corporation’s own shares that exceeds the “paid-up capital” of the shares.
A non-resident of Canada receiving income from regular employment will be subject to Canadian tax. Canada’s tax treaties with other countries (France, Italy, Japan, the Netherlands, Switzerland, the United Kingdom and the United States) dictate that a non-resident may not be taxed on income from Canadian employment under the following conditions:
- The non-resident sojourns in Canada for less than 183 days; and
- The income paid to the non-resident is not deducted for tax purposes form the income of the resident employer.
A non-resident of Canada who conducts business in Canada is subject to tax on the profits of this business. When a portion of business in conducted in Canada, the profits resulting from that portion alone will be subject to Canadian tax. This includes cases where the non-resident “solicits orders or offers for sale in Canada through an agent or servant”. Non-resident corporations conducting business in Canada are subject to “branch tax” equal to 25% of after-tax profits that have been earned in Canada but not retained in the Canadian branch. This “branch tax” is subject to reductions provided by Canada’s tax treaties.
A non-resident of Canada who is paid interest by a resident is subject to Canadian tax at a rate of 25% under Part XIII. The terms of Canada’s tax treaties will generally lower this rate. Types of interest paid to non-residents that are exempt from Part XIII tax rates include:
Interest paid or guaranteed by government bodies (municipal, provincial, federal)
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 computing the taxed income, 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: 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:
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 set provincially.
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.
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.
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.
Rental Returns/Part XIII Taxation
Canadian Real Estate Rental Income (Section 216)
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 connection with individuals who attempt to cease residency in Canada for tax purposes
- A number of statutory rules may dictate that an individual be deemed a Canadian resident for tax purposes even if that individual was not “ordinarily resident” in that year.
- The most significant statutory rule states that an individual “sojourning” in Canada for 183 days or more will be deemed a resident throughout the taxation year. A “sojourn” is generally interpreted as an intended “visit” or “temporary stay”.
- The Canada Revenue Agency’s main considerations are outlined in Interpretation Bulletin IT-221R3, which should be consulted in planning for potentially contentious situations.
Trusts: There is little Canadian case law dealing with the residency of trusts for tax purposes.
- Generally, a trust will be considered to be resident when a majority of its trustees reside.
The Canadian Revenue Agency’s main considerations are summarized in Interpretation Bulletin IT-447.Corporation: Any corporation incorporated in Canada after April 26, 1965 is considered resident.
- Any corporation incorporated outside of Canada may still be considered resident if its “mind and management” or “central management and control” and located in Canada, usually where the director’s meetings are held.
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.
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
- 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.
- 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 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.