Understanding Canadian Residency Status and Tax Treaties

How residential status affects your tax obligations in Canada

As with most tax-specific topics, the devil is in the details. That’s true for the case of Canadian residency, too. Residential status plays a key role because it determines what income you’ll have to pay Canadian taxes on. If you’re a resident, you pay taxes on your worldwide income. If you’re not a resident, you pay taxes on Canadian income only.

To start, you need to know that Canada has multiple definitions of a resident:

• Factual resident of Canada
• Deemed resident of Canada
• Deemed non-resident of Canada

“Factual,” not surprisingly, refers to the cold, hard facts of your life. If you live and work in the country, your family lives here, you own a home, etc., there is little to no question that you are a Canadian resident.

“Deemed” residents are those who have been in the country for more than half the year—183 days, to be exact—regardless of whether that’s because of an extended hiking vacation or spending extra time with the love of your life. 

It’s important to note that this term also applies to Canadians who live outside the country because they work for the government or serve in the military and have been stationed abroad. The same applies to a service person’s spouse and dependants.

“Deemed” non-residents (and maybe dual citizens) could be “deemed” or “factual” residents of Canada who have established residential ties with another country that Canada has a tax treaty with. For tax purposes, they are considered a resident of the other country. However, this status may still have Canadian tax implications.

Significant residential ties are the most important

Significant residential ties are the primary indicators of whether you’re considered a Canadian resident.

Examples of significant residential ties include:

• Owning or leasing your primary home in Canada
• Having a spouse or common-law partner who lives in Canada
• Having dependants who live in Canada

What if you own a home but do not have a spouse or dependants in Canada? Well, that’s when secondary ties come into play.

Secondary residential ties also play a role

As mentioned earlier, details matter. And secondary residential ties can provide the additional details needed to help you determine residential ties to Canada.

Examples of secondary ties include a variety of everyday factors, such as having:

• Bank accounts and credit cards in Canada
• Property like a car or furniture
• A Canadian driver’s licence
• Canadian health insurance
• A local club or gym membership

Canada’s tax treaties help prevent double taxation

If you’re new to Canada, these details might seem daunting. Maybe you meet the criteria for being a non-resident, for example, then what? That’s when you simply pay Canadian taxes on Canadian income. And to make sure you’re not paying the same taxes twice, Canada has implemented tax treaties with a number of countries.

The Canada Revenue Agency (CRA) has a list of Canada tax treaties by country, which include:

• Australia
• India
• Philippines
• United Kingdom
• United States

When you must file taxes in Canada and the other country you are a resident in, the Canadian government decides which country you should be taxed in through the details of the treaty. To avoid double taxation, you may be eligible for credits for taxes paid to the other country.

But Canada doesn’t have tax treaties with every country

While Canada holds tax treaties with many countries, it does not hold treaties with all of them. If you live, work, own property in, own a business in, or otherwise have tax obligations in a non-tax-treaty country, consult with a tax professional to determine your best course of action.

Stay smart about tax residency status

As you can see, determining residential ties to Canada is straightforward: If you own property in Canada, have a spouse or dependants who live here, maintain a Canadian driver’s license—or if any of the other items listed above applies to you—you may be considered a resident, for tax purposes. 

And as a Canadian resident, you’re required to pay taxes on income you earn everywhere, not just what’s earned in Canada. Staying smart about this residency status—and staying on top of relevant tax treaties when you earn income in other countries—will ensure you’re not overpaying in the end.