Paragraph : 2000 2260
Liabilities of Individuals for Income Tax
The Canadian Income Tax Act imposes taxes based on Residency.
This means individual who currently reside in Canada, who may or may not be citizens.
Individuals who are not residents of Canada but are employed in Canada, carry on business in Canada or
dispose of taxable Canadian Property are subject to Canadian taxation.
Canadian Residents are taxed on their worldwide income, regardless of which country the income was
earned in. To avoid double taxation, Canada has negotiated a number f international reciprocal tax
Key Principle: The country in which income is earned has priority in taxing that income and the country
of which the prayer is residents allows all or some part of the foreign tax paid as a credit against the
A deemed resident is regarded as a full time resident and taxed on world wide income.
An individual is deemed to be a resident in Canada if he or she is “sojourned” (visitor) in Canada in the year
for an aggregate of 183 days or more.
An individual who is not visiting Canada and is present within Canada for less than 183 days does not make
him an nonresident.
Consider the following Fact Situation:
Traci resides in California (November 1 to April 30) of each year – 21 days spent marketing new product
line in Canada 05/19/2012
In Total she spent 190 days in Canada traveling in and out.
Verdict : She could be deemed a Canadian Resident (183 days +)
Common Law Concept of fulltime residence
It is also possible for a person to be considered a fulltime resident by virtue of principles of the common
law or case law which have evolved over the years.
A persons ties to a country are not only reflected upon their permanent home. In the British case, an
individual packed up her furniture, and stored it. She traveled the world, and maintained a British bank
account. She was still regarded as a British resident.
An important fact : individual returned to the proximity of relatives and friends in England.
Important note: an individual may be resident in more than one country at once, and must be resident
in at least one country.
“Continuing state of relationship” – facts must be found to establish the continuing state of relationship.
Thompson Case: live in Canada until 1923 – 1925 to 1931 mainly in the United States 1932 to 1941
(inclusive) spent summers in Canada, occupying a large home with staff of servants – CRA asked him to
file Tax –appeal dismissed on the basis that this was not a casual or non – permanent residence in Canada
even though he was in Canada for less than 183 days. He was Ordinarily Resident, and not a mere
Meldrum Case: sea captain living in New York, and sailing the ports in United States and Canada.,
brought property in Nova Scotia. House as furnished and inhabited by his married daughter but the captain
and his wife stayed during two week vacation. Two best rooms were regarded as theirs. Tax Appeal
Board allowed the appeal and stated that a degree of permanence and substance had to be
present to create the status of “Resident”.
Administrative Practice (I.T Bulletin, Determination of an Individual’s Residence
⇒ Maintaining a dwelling, whether owned or leased, suitable for year round residency (important
residential tie). Dwelling need not be vacant at all times. Rented to non arms length, or to arms length
at non arms length. 05/19/2012
⇒ A spouse, or commonlaw partner or other members of the immediate family remaining in Canada
when an individual leaves
⇒ Maintaining personal property or social ties in Canada, including : cars, furniture, clothes, recreational
vehicles, provincial health card, drivers license, active investment in Canada, employment with
Canadian employer, Canadian bank, RRSP, Canadian landed immigrant status, work permits,
Important note : Third category alone is not enough to determine residency, but instead should be
used in addition to first and second
Also important to give each fact a level of weight of importance.
No particular absence results in an individual becoming a nonresident. Occasional, but not regular visits for
personal or business reasons would not likely result in jeopardize the severance of full time residence.
At any point in time, an individual is either a resident of Canada with tax consequences or a nonresident
with possible tax consequences.
Partyear Residence is the position of an individual in the year he or she became or s=ceased to be a
⇒ Leave Canada
⇒ Enter Canada
A part year resident is taxed in Canada on his or her worldwide income earned during the part of the year in
which he or she was resident in Canada.
Proration of deductions and nonrefundable tax credits are allocated accordingly.
Clean break or fresh start: The Concept
A Clean break is when an individual severs its ties as a resident of Canada
A Fresh start is when an individual moves to Canada (starts a continuing state of relationship)
CRA considers the clean break to be made on the latest of the dates stated: 05/19/2012
⇒ Individual leaves Canada
⇒ Individual’s spouse or commonlaw partner and/or dependents leave Canada
⇒ The Individual becomes a resident of the country to which he or she is immigrating (Individual
must be a resident of at least one country)
Jeremy began new career managing a foreign manufacturing business in Thailand – left Canada and
worked on temporary basis for 2 months – maintained his home, car and other personal belongings in
Liability of NonResidents
Subject to the following provisions,
Was employed in Canada
⇒ Carrier on business in Canada
⇒ Disposed of taxable Canadian Property
~at anytime during the year or a previous year~ because it could be income earned in previous year not
collected until now. Income cannot be deferred to a year of non residency.
“A person who is a non resident for the whole year cannot be a parttime resident.
To be a part time resident, there must be a period in which the person was
resident, in the sense of a fulltime resident, and a period in which the person was
The meaning of carrying on business in Canada
⇒ Continuous business activity
⇒ “Carrying on business” – can deem a nonresident to be carrying a business
⇒ Generally determined by the location in which the contract in a transaction is made, not the location of
the offering of an item for sale
⇒ Courts have also looked at the place where the operations occur from which the profits arise in
⇒ Activities listed in the Income Tax Act override any common law 05/19/2012
NonResident offering something for sale in Canada through an employee who is a sales person (Carrying
business in Canada)
NonResident selling to an independent contractor like a Canadianbased retailer or wholesaler who resells
the item in Canada is not carrying business in Canada.
Thus, distinction between Employee and ThirdParty is very important
The courts generally use the following to in distinction
⇒ The parties describe or refer to their relationship as one of an independent contractor or supplier?
Alleged independent contractor carries business in the name of the supplier or in his or her own name?
⇒ Whether the independent contractor acts for other suppliers
“Greater the independence from the supplier and the greater degree of
responsibility, the greater is the likelihood that the situation involves a non
Courts generally assume continuity in the business transaction to be necessary to rule against the
appellant. CRA on the other hand states that even a one time transaction or a short duration can still be
considered as carrying business.
International Tax Treaties and Individuals (To avoid double taxation) Canada and
U.S Tax Convention
Exempts a resident of Canada from U.S Taxation on salaries, wages and etc derived from employment in
the U.S under the following conditions:
⇒ Renumeration does not exceed USD $10,000
⇒ Employee present in U.S for a period not exceeding 183 days in the year AND renumeration is not
paid by a U.S Resident Employer, or an employer with a fixed base in the US. 05/19/2012
⇒ However, being exempt from U.S tax does not mean that that income is not
taxable in Canada (is taxable in Canada).
Self Employed Income
Individual who is resident in Canada, would only be taxed in the U.S if the individual has or had a
“permanent establishment” regularly available to him or her in the U.S. The tax amount is capped at the
income attributable to the permanent establishment in the U.S.
Canadian Resident Individuals will be taxed in the U.S if:
⇒ Permanent establishment in the U.S or
Present in USA for more than 183 days, in any 12 month period, more than 50 percent of the gross
active business revenues of the enterprise consist of income from the US or
⇒ In USA for more than 183 days, in any 12 month period, respect to the same or connected project for
U.S residents, or those who maintain a permanent establishment in the U.S and services are provided
in respect of that permanent establishment.
Resident and “tiebreaker” rules
a. He or she is deemed to be resident of the country which he or she has permanent home available, if
both, resident of country where personal and economic relations are closer
(No? move to B)
b. Habitual abode (if both, move to C)
c. Where one is a citizen
d. If citizen of both, “competent authorities of the countries will settle the question by mutual agreement”
If resident of another country by treaty – then also deemed NON resident of Canada.
• Defined as a fixed place of business through which business of a resident of (a country) is wholly or
partly carried on.
• Places of management, a branch, and office, a factory
• A person other than an independent contractor who has and habitually exercises an authority to
conclude contracts in Canada in the name of the resident of the U.S is deemed to be a permanent
establishment in Canada of U.S Resident. 05/19/2012
Own Example : Walmart selling wholesale goods to a dollarama (not permanent since walmart is selling to
an independent contractor) If walmart had a sales agent in Toronto selling with walmart name then it is a
Permanent Establishment Does not include the fixed place of business in one country used solely
for one or more of the following:
a. the use of facilities for storage, display, or delivery of goods or merchandise belonging to resident of
b. maintenance of a stock of goods or merchandise belonging to the resident of the another country for
the purpose of storage, display or delivery
c. maintenance of stock of goods for processing by another person
d. purchase of goods or merchandise, or the collection of information, for the resident of the other country
e. advertising, the supply of information, scientific research, or similar activities which have preparatory or
auxiliary character for the resident of another country.
Stages of Involvement
Liability of Corporations for Income Tax
• No concept of part year resident since corporations need not coincide with the calendar year.
• Once incorporated, the taxation year starts. When the corporation terminates the taxation year ends.
• Incorporation after April 16, 1965 deemed to be resident
• Corporations not incorporated in Canada, may still be resident under the common law principle that its
central management and control are in Canada. 05/19/2012
1906 British Case
• Company incorporated and had H.Q in South Africa
• Board met in London and the real control was there
• No business was carried in the U.K
• Held as resident of U.K since “a corporation resides where the real business is being carried on and the
real business carried on where the central management and control abide” where directors meet to
make decisions on company policy
Another British Case
• Appellant and 3 other companies were wholly owned subsidiaries in Kenya of an English Company
• Appellant made payments to these companies which would be tax deductible only if the companies
were resident in the U.K for the year in question
• Companies were registered in Kenya, companies carried business outside of U.K strictly
• Control was taken over by the parent company in London
• The FCA concludes, "In other words, the evidence must show that the decisionmaking power of the
corporation in question in fact lies elsewhere than with those whde jure control."
It should be noted that if a corporation is considered to be a resident in Canada at anytime in the year, it is
taxed on worldwide income for the year as if it has been resident throughout the year (no concept of part
Liability of NonResident Corporations
• Incorporated before April 26, 1965
• Possible to be taxed on Canadian source income
• “Carrying on business” – same as individual with one difference
• A corporation may be formed for a single business purpose which, if implemented in a single
transaction would involve no continuity of activity in the carrying on of business
• Case of Placrefid LTD v. M.N.R – single transaction constituted a carrying on of business
• Provisions of a treaty may eliminate tax liability of a non resident corporation 05/19/2012
International Tax Treaties and Corporation
• U.S enterprise is not subject to taxation by Canada on its “business profits” unless the enterprise
carries on business in Canada through a “permanent establishment” located in Canada, and if so the
taxable amount in Canada is capped to the income from the permanent establishment
• Tie Breaker – resident of both countries paragraph 3 – deemed resident of country of incorporation
• Same basic rules as individuals. 05/19/2012
Paragraph 1141, 3000 – 3035
Other Interpretive Sources (Case Law)
Judicial decisions which form Common Law may be appealed to the S.C.C
• Middlelevel court eating tax cases is the Federal Court of Appeal
• Lowest level – Tax Court of Canada
• Case citations… (how they are referenced in CCH and DTC)
• Reasons for Judgment (Ratio Decendi) develop precedent
• Obiter Dicta – extra comments that are not required but may provide insights to the interpretation of the
law in different fact situations that might arise in subsequent cases.
Employed Versus SelfEmployed or Independent Contractor
Important because : deductibility of expenses, remittance of tax, eligibility for EI benefits, liability issues, job
Economic Reality Test
a. Individual is directed by someone is in position to order require not only what is to be done, but
how it is to be done
b. Control is no longer conclusive,
b. Ownership of tools
a. Neither funds or supplies the equipment needed to do the work, takes no financial risk or
managerial responsibility and has no liability.
b. Not conclusive for some jobs that require brain as the main tool
c. Chance of profit/risk of loss 05/19/2012
a. Risks incurring a loss from bad debts, damages to assets or delivery delays, and must cover
Integration or Organization Test
a. Individual doing the work is economically dependent on the organization. The more dependent the
individual is the more they will appear as an employee
b. Proportion of income from organization, benefits and etc from the organization
Specific Results Test
a. Employee putting his or her services at the disposal of his or her employer during a given period of time
without reference to specified results.
b. Specify certain work will be done, maybe with use of assistance (looks contractual)
• Common understanding of legal relationship, even if the evidence cannot be conclusive.
• Visual Artists and Writers – I.T Bulletin Paragraph: 1240 – 1260, 3037 – 3170, 3400 – 3406, 3220 – 3290
Defining the Taxation Year
Employment income is reported on a calendaryear basis; there is no alternative. (Always ends Dec 31).
Self employed individuals may use the same deadline, or choose to report with a much more complicated
business income method.
Salary, Wages, and Other Remuneration Including Gratuities
Bonuses, tips, honoria, and commissions paid to an employee are included as remuneration. These
remunerations must be related to salary and wages and the job.
Gratuities are specifically listed for inclusion. All amounts, received by the individual as an employee from
the employer and from others for the reason of the employment must be included. Generally gifts are not
included (specifics later in these notes)
Bonuses deferred by an individual are taxable immediately, unless the bonus is announced now but to be
paid next year by the employer.
Volunteer Services Exemption
Taxable portion paid to an emergency volunteer is included in income (over 1000). This is done because its
easier than issuing a t4 slip for such a small amount.
Types of payments that are applicable for this rule :
• Volunteer fire fighters – Take 1000 deductible from inclusion or (15 percent tax credit based on an
amount of $3000 for eligible fire fighters)
Volunteer ambulance technicians
• Emergency service volunteers assisting in the search or resume of individuals or emergency
disasters etc. Paragraph: 1240 – 1260, 3037 – 3170, 3400 – 3406, 3220 – 3290
This rule does not apply to individuals:
• Employed by public authority for same or similar duties
• Received salary in addition to allowance
There is a preamble which provides that amounts established to be taxable in the following paragraph’s are
to be included in computing income of a tax payer for at taxation year as income from an office or
Value of Board and Lodging
Taxable Benefit – must be values at fair value less any value charged to employee
• If “Reasonable amount” is one which cover the costs of food prep and service cost. If this is
recovered than not taxable.
• Where a lesser amount is recovered, the difference between the amount and the total cost will be
Act excludes from the income of an employee, in carefully defined circumstances of employment at a
special work site or remote location.
Following conditions must be met to exclude from income:
• Special work site must be a distance away from the employees ordinary residence
• Cannot be reasonably expected to travel daily
• Temporary nature of duties or the remoteness of the work site must be such that it is not
reasonable to establish and maintain selfcontained domestic establishment
• Necessary for not less than 36 hours – if allowance paid – it is not in excess of what is the
• “ My work requires me to be away from my principal place of residence for at
least 36 hours, including the time I spend travelling between my principal place of
residence and the special work site. “ Paragraph: 1240 – 1260, 3037 – 3170, 3400 – 3406, 3220 – 3290
• “include benefits that arise in the course of or by virtue of an office or employment”
• Benefits enjoyed or benefits received (valuation issue)
Increase in net worth (economic benefit)
a. Employers contributions to
i. RPP (approved by CRA)
ii. Group insurance – includes all types of income protection plans
iii. Private health plan premiums, provincial health tax levies, not provincial health plan premiums.
iv. Supplementary unemployment benefit plan, public and private
v. Deferred profit sharing plan
vi. Group term life insurance policy (inclusion for full employer paid premium) – referred to
later in notes
b. Benefits under retirement compensation, employee benefit plan, employee trust, already included in
income other provisions
c. Benefits from use of an automobile (employee provided vehicle discussed later)
d. Counseling services in respect of mental or physical health and reemployment of retirement of the