In the vast majority of cases where I advise individuals in connection with tax residency issues, it is with the objective of ensuring that they cease to be residents of Canada (or remain nonresidents, if they already are). Rarely is being resident in Canada for tax purposes beneficial.
However, there are certain cases where a Canadian resident does not want to be viewed as a non-resident by the Canada Revenue Agency (“CRA”). Most commonly, this is because of the fact that they do not want to contend with “departure tax” issues, or lose benefits in connection with Canadian corporation that they control ceasing to be a “Canadian controlled private corporation” (often relating to “SRED” credits).
In those cases, I explain to them that the mindset of the CRA is generally to want to classify individuals as residents, rather than non-residents, as long as they are filing tax returns reporting income and paying tax. Hence, aside from any theoretical considerations, the practical reality is that they have nothing to worry about. I often go on to say that it is not that easy to become a non-resident. I explain that the only situations I have ever seen where the CRA is arguing that an individual is a non-resident, is where they have very low income and are claiming eligibility for the “Canada child benefit” (“CCB”)[1].
Well, lately it appears that the CRA has a project where it is zeroing in on just that type of scenario. Judging from the letters that other accountants have sent to me, they are writing to hundreds, if not thousands, of individuals indicating that they have determined that, for the taxation years cited, they did not have sufficient connections to Canada to be considered residents.
I am not totally clear on what process the CRA has used to pinpoint such individuals and make such a determination. Typically, the individuals in question were actually resident in Canada at one time, but left, usually returning to their country of origin.
The letter from the CRA indicates that, unless the taxpayer can provide information to change their conclusion, they want the CCB back and may even invoke penalties under subsection 163(2).
However, the letters I have seen go beyond that and also ask for what is often a huge amount of tax under Part XIII.
It seems that what the CRA is doing is just looking at all the income that was declared on the T1[2] that was filed, and proposing that Part XIII tax should be applied at 25%.
In many cases, the Part XIII tax that has been calculated by the CRA is far beyond what would actually be payable. Hopefully, this is because of incompetence on the part of the CRA employee that wrote the letter. I would not want to think this was an attempt to “pull a fast one” on individuals who will just pay whatever tax would be assessed in the hope of just putting the situation behind them.
For example, in many cases, such individuals earned interest on bank deposits on which the CRA is asking for Part XIII tax for all years. In fact, Part XIII tax generally does not apply to interest paid after 2007.
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Even more outrageous is the fact that the CRA is asking for Part XIII tax on the taxable portion of capital gains reported on the T1. Part XIII tax can never apply to capital gains, and the capital gains in question, generally from ordinary stock market transactions, would not be subject to Part I tax either.
In addition, in cases where Part XIII tax is actually payable, such as in connection with dividends from Canadian corporations, the CRA is just assuming that the 25% rate should apply, without considering the fact that a lower rate (generally 15%) may apply under the terms of a tax treaty.
I also saw situations where individuals had rental income, generally from their former Canadian residence. Although the 25% Part XIII tax would be correct in such circumstances, for taxation years that are still within the two year limit for electing under section 216, filing a T1159 would generally be a better option than paying the Part XIII tax.
The message here is that individuals receiving such letters from the CRA, or their professional advisors, should carefully review the calculation of the proposed liability for Part XIII tax, and not assume that it is necessarily correct.
[1] As provided in section 122.6 of the Income Tax Act (“the Act”). All statutory references are to the Act. Generally, only a Canadian resident can be an “eligible individual” for the purposes of the CCB.
[2] I suspect that the individuals may have had foreign source income as well as Canadian, but only the Canadian income was declared on the T1s.
