Different tax laws for newcomers and possible trap for non-taxpayers? Jonboy?

[toby]

I have had a lot of informative discussions with Jonboy of this forum, about when a person is considered by CRA to be a taxpayer in Canada. I hope he can help with this more subtle question too.

The question is: Does a Canadian living abroad, who is not a Canadian taxpayer, suddenly become a taxpayer again simply because his wife applies for or becomes a permanent resident, where she does not yet live in Canada?

The rules for determining taxpayer status seem clear for all but newcomers to Canada:
A) Have a full-time residence available in Canada;
B) Have a spouse or dependent child living in Canada;
C) Spend more than 183 days per year in Canada.

These are the “residential ties” without which the person is not a taxpayer (unless he/she amasses too many secondary ties, but let that complex topic pass for now).
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However, the rules for newcomers seem different.

The CRA publication on Newcomers to Canada (see http://www.cra-arc.gc.ca/tx/nnrsdnts/ndvdls/nwcmr-eng.html) says:

“Newcomers to Canada who have established residential ties with Canada may be (italics are mine):
• persons in need of protection;
• people who have applied for or received permanent resident status from Citizenship and Immigration Canada; or
• people who have received approval-in-principle from Citizenship and Immigration Canada, to stay in Canada.”

Does the second bullet mean that the mere fact of applying for or receiving permanent residency makes the applicant a Canadian taxpayer, even where he/she does not yet reside in Canada?

And if so, does this make the Canadian spouse a taxpayer too, by virtue of rule (B) above? Or, is the permanent resident a taxpayer, but because he/she does not physically reside yet in Canada, therefore the Canadian spouse is not caught by rule (B)?

 

[steaky]

I too wondered whether CRA would cross examine with CIC/CBSA about the taxpayer status by virtue of rule B and C above

 

[Leon]

We can all say what we think but it is not really us but CRA that decides that so I think you should take your question to them and then post here what they said.

In my opinion, a new permanent resident who had not yet settled in Canada should not be a tax resident but do they become so automatically, I don't know. Surely they can discuss that with CRA if that happens.

As for a person sponsoring a spouse while they themselves are living overseas, they do state to immigration that they are going to move to Canada when their spouse gets PR so does that mean that CRA also makes them a tax resident automatically? I also don't know the answer to that but good questions for you to ask them.

 

[toby]

We can all say what we think but it is not really us but CRA that decides that so I think you should take your question to them and then post here what they said.

In my opinion, a new permanent resident who had not yet settled in Canada should not be a tax resident but do they become so automatically, I don't know. Surely they can discuss that with CRA if that happens.

As for a person sponsoring a spouse while they themselves are living overseas, they do state to immigration that they are going to move to Canada when their spouse gets PR so does that mean that CRA also makes them a tax resident automatically? I also don't know the answer to that but good questions for you to ask them.

Asking CRA is not always prudent. We've seen examples where the CRA person on the phones gives bad advice. And courts have ruled that a taxpayer is not entitled to rely on CRA advice; he/she must get independent tax advice.

That's why I am asking for advice from Jonboy, or anyone else who has actual experience in the matter.

 

[Jonboy]

The question is: Does a Canadian living abroad, who is not a Canadian taxpayer, suddenly become a taxpayer again simply because his wife applies for or becomes a permanent resident, where she does not yet live in Canada?

Short answer - no.

Longer answer - tax-residency is decided on residential ties. In most circumstances your status for immigration purposes is independent of your status for tax purposes. The only time I see the CRA link these is if you are a PR and member of a provincial health plan they will considered you a tax-resident. This makes sense because when you apply for coverage of a provincial health plan you make a declaration that you are resident in the province.

Under most tax-treaties citizenship is only a factor if all the other facts are inconclusive.

I take Leon's point about a citizen applying to sponsor their spouse from outside Canada. As I understand the way this works they must present CIC with a plan to settle in Canada. However, the spouse does not automatically become tax-resident just because of the plan. They first have to establish residential ties with Canada. And, if the sponsoring spouse is tax-resident overseas they will not automatically become tax-resident just because of the application.

I suppose that the one thing to keep in mind is that many factors can be considered when establishing tax-residency. Although applying for, or receiving, PR does not make you a tax-resident, in a rare situation where all other factors are inconclusive it may be taken into consideration.

It is not worth asking the CRA. They will not answer hypothetical questions. They will only give a ruling on the facts that exist at a point in time. Of course, if at that time, they determine you are resident for tax purposes it is too late to do any tax planning.

 

[steaky]

Short answer - no.

Longer answer - tax-residency is decided on residential ties. In most circumstances your status for immigration purposes is independent of your status for tax purposes. The only time I see the CRA link these is if you are a PR and member of a provincial health plan they will considered you a tax-resident. This makes sense because when you apply for coverage of a provincial health plan you make a declaration that you are resident in the province.

What if both husband and wife have already landed? Wife landed first and sponsored husband as PR and only wife is member of provincial health plan and resides in Canada. After landing, husband continue working and living in home country (like astronaunts) and files and claims to be non resident of Canada for tax purposes. How could CRA detects if husband had filed incorrectly or misrepresented? Would CRA cross examined with government departments such as CBSA/CIC?

 

[toby]

What if both husband and wife have already landed? Wife landed first and sponsored husband as PR and only wife is member of provincial health plan and resides in Canada. After landing, husband continue working and living in home country (like astronaunts) and files and claims to be non resident of Canada for tax purposes. How could CRA detects if husband had filed incorrectly or misrepresented? Would CRA cross examined with government departments such as CBSA/CIC?

Steaky, Jonboy is the authority on this, but until he replies here is my reasoning. If physical residency is established, as Jonboy says (in his answer to my question) this establishes one as a taxpayer. If the wife lands and establishes residency, not only is she a taxpayer, but so is the offshore husband. He is a taxpayer because one of the three major ties to Canada is to have a spouse or dependent child living in Canada.

 

[steaky]

Steaky, Jonboy is the authority on this, but until he replies here is my reasoning. If physical residency is established, as Jonboy says (in his answer to my question) this establishes one as a taxpayer. If the wife lands and establishes residency, not only is she a taxpayer, but so is the offshore husband. He is a taxpayer because one of the three major ties to Canada is to have a spouse or dependent child living in Canada.

This is what I thought, but I also heard that had been a court ruling of a similar case where the husband who works in Taiwan was awarded non resident for tax purposes even though his wife lives in Canada and established residency. So what happens when another offshore husband who is in fact a taxpayer but still file his non resident tax returns? How does CRA detects if the husband had filed incorrectly? I wondered how the Taiwanese guy managed to be non resident while he has one of the major ties to Canada.

 

[toby]

That's what I thought, but I also heard that had been a court ruling of a similar case where the husband who works in Taiwan was awarded non resident for tax purposes even though his wife lives in Canada and established residency. So what happens when another offshore husband who is in fact a taxpayer but still file his non resident tax returns? How does CRA detects if the husband had filed incorrectly? I wondered how the Taiwanese guy managed to be non resident while he has one of the major ties to Canada.

I don't know the answer. Maybe the judge took a look at the wife's photo, didn't like her looks, thought that the relationship could not therefore be a good one, and then ruled that the Taiwan guy was a non-resident? I've seen court decisions more weird than my frivolous speculation.

 

[Leon]

I have a feeling that it also depends on how the wife is supporting herself. If the wife has zero income and is supporting herself on money sent to her by her husband, then neither of them is paying tax in Canada. If the wife is working to support herself, then she is paying tax in Canada even if her husband isn't.

 

[Jonboy]

We can all come up with various scenarios and speculate. The thing is that this is all we can do. There are no real rules about what makes a person a factual tax-resident in Canada. All there can be is a conclusion based on examination of the individual's residential ties. If these are closer to Canada than any other country then the individual is likely tax-resident in Canada.

You also have to keep in mind that the factors the CRA look at are more designed for Canadians who conveniently go non-resident when they are expecting a large income, and decide to return as soon as that income has escaped Canadian taxation. Say someone goes to live in temporary accommodation overseas, yet their spouse and kids stay in the family home in Canada, kids go to school in Canada, they keep up their golf club membership in Canada and so on. When that person returns and says, "I've decided to come back after all" the CRA will say that they didn't really go non-resident but just moved temporarily to avoid tax.

I don't think that home and family will always be the test for a newcomer. Here is another scenario. A Canadian resident in Canada arranges to marry someone who is currently living in another country. The Canadian goes to the other country to get married and returns to Canada and starts the process of sponsorship. The other spouse stays living and working in their country waiting for the PR visa. This is in 2011. The PR visa is issued and the spouse moves to Canada in 2012. Was the foreign spouse a tax-resident of Canada in 2011? No, IMO, even though they had a home and family in Canada. How can you be a factual tax-resident in a country you are not allowed to be in? Say the visa is issued in 2012 but the spouse stays living and working in their home country until 2013. Are they tax-resident in Canada in 2012. The answer is much less certain. It now becomes a question of where their residential ties were closest and where their life was centred in 2012. If there is a tax treaty between Canada and their country it will be necessary to evaluate the residency criteria set out in the treaty.

If you get paid cash for a job and "forget" to declare it on your tax return then you have broken the law and, if caught, you will be punished. However, when you file a first Canadian return as a tax-resident you will put the date you became tax-resident. 99% of the time this date will be obvious. If it isn't all you can do is to weigh up the facts about your residential ties. As long as you come to a reasonable conclusion from the facts you are not breaking the law. Of course the CRA may come to a different conclusion and a negotiation follows. Most likely they will accept the date you give. However, if you make an unreasonable conclusion from the facts just to save tax you will be in a spot of bother.

Your actions need to be guided by what is at risk. It may not matter all that much if you end up as a Canadian tax-resident before you planned. Canadian tax rates are not all that different to many other western countries and you get credit for foreign taxes paid. However, if you have a large income in a low tax country it is worth your while to ensure you never put yourself in a position to have residential ties in Canada.

On another board I have been in a long discussion about British military servicemen. When they retire they receive a tax-free gratuity from the British government. Tax-free in the UK, though not in Canada. For people with a lot of service these can be substantial sums. A service person is always tax-resident in the country they are serving. But what happens if they are stationed in Canada and married a Canadian and have their home and family are here? Technically, the day after discharge they could be tax-resident in Canada and as the gratuity is paid after discharge it could be taxable here. Someone suggested a soldier could go back to the UK to take this final leave, be discharged, receive the tax-free gratuity then come back to Canada. They would then file their first Canadian tax return stating the date they became tax-resident as the date they returned after receiving the gratuity. This is not illegal, but it is risky.

The advice I would give (which agrees with the advice given to other service people from much more expensive accountants and lawyers than me) is that if you want to be sure you are not tax-resident when you receive the gratuity then you have to up sticks and sever all residential ties with Canada before it is paid. Costly. For £250,000 maybe it is worth it to be sure. For $20,000 maybe not.

For anyone else in a kind of hybrid position we have been speculating on I think you have to look honestly at the facts of your circumstances and make the best judgement that you can. And, if there is a lot of potential tax at stake make your case as watertight as possible.

 

[Jonboy]

This is what I thought, but I also heard that had been a court ruling of a similar case where the husband who works in Taiwan was awarded non resident for tax purposes even though his wife lives in Canada and established residency. So what happens when another offshore husband who is in fact a taxpayer but still file his non resident tax returns? How does CRA detects if the husband had filed incorrectly? I wondered how the Taiwanese guy managed to be non resident while he has one of the major ties to Canada.

In the UK Canada tax treaty the first criteria for establishing tax residency is:

(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);

So according to this if a family has a permanent home in both the UK and Canada then a person is tax-resident in the country where his personal and economic relations are closer. Assuming a similar clause in the Taiwan Canada treaty then I suppose that if you can demonstrate that your economic ties to your business in one country are stronger than your personal ties to your family in the another this might be the outcome.

 

[toby]

In the UK Canada tax treaty the first criteria for establishing tax residency is:

(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);

So according to this if a family has a permanent home in both the UK and Canada then a person is tax-resident in the country where his personal and economic relations are closer. Assuming a similar clause in the Taiwan Canada treaty then I suppose that if you can demonstrate that your economic ties to your business in one country are stronger than your personal ties to your family in the another this might be the outcome.

Excellent answers, Jonboy.

A general concern, though, is that there is an element of judgment in determining whether someone is a taxpayer or not, and this leaves room for overzealous auditors to come to self-serving conclusions. I am less comfortable than you leaving discretion in the hands of bureaucrats, especially as Canada gets more and more desperate to find the money to find its expensive social programs, and as the taxpayer base dwindles.

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[Brooklands]

We can all come up with various scenarios and speculate. The thing is that this is all we can do. There are no real rules about what makes a person a factual tax-resident in Canada. All there can be is a conclusion based on examination of the individual's residential ties. If these are closer to Canada than any other country then the individual is likely tax-resident in Canada.

You also have to keep in mind that the factors the CRA look at are more designed for Canadians who conveniently go non-resident when they are expecting a large income, and decide to return as soon as that income has escaped Canadian taxation. Say someone goes to live in temporary accommodation overseas, yet their spouse and kids stay in the family home in Canada, kids go to school in Canada, they keep up their golf club membership in Canada and so on. When that person returns and says, "I've decided to come back after all" the CRA will say that they didn't really go non-resident but just moved temporarily to avoid tax.

In the British Isles, many of the ultra-rich do just that when they come into a pile of loot, are non-resident for tax purposes and 'live' in places like Monaco, Gibraltar, Malta and the Channel Islands despite having substantial ongoing ties to their original countries such as homes, businesses and kids in school etc. When one looks at lists of the Richest 100 Canadians, a surprisingly large number seem to be resident in Canada. I know Canada's tax residency rules seem onerous but have they helped to discourage massive tax avoidance at the top? These rules must have had political and academic champions outside Revenue Canada originally although such voices seem to be very quiet now?