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.
- 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 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
- 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 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.
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.
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:
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.
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.