RESIDENCY

Residency is the foundation of Canadian income tax. It is not the same as citizenship or immigration status. A person is taxed in Canada on worldwide income for any period in which they are resident in Canada, and only on certain Canadian-source income while they are non-resident. Residency is determined by facts, chiefly the residential ties a person maintains with Canada. Marginal rates dictates a person's tax burden. The marginal rate is the combined federal and provincial rate on the next dollar earned. The average (effective) rate is total tax divided by total income. Decisions about earning, deducting or deferring income should be made using the marginal rate; comparisons of overall tax burden use the average rate.

RESIDENCY CATEGORIES

• Resident: a person who keeps significant residential ties with Canada. Taxed on worldwide income.

• Factual resident: a person who keeps significant residential ties with Canada, even while living or travelling abroad. Taxed on worldwide income.

• Deemed resident: a person who sojourns (stays) in Canada for 183 days or more in a calendar year without establishing residential ties, or certain government employees, armed forces members and their families posted abroad. Taxed on worldwide income, but pays federal tax plus a federal surtax for non-residents instead of provincial tax.

• Non-resident: a person who does not have significant residential ties and does not meet the deemed-residence tests. Taxed only on Canadian-source income such as employment in Canada, business carried on in Canada, and dispositions of taxable Canadian property. Passive income such as dividends, rent and pensions is generally subject to Part XIII withholding tax (25 percent, often reduced by treaty).

• Deemed non-resident: a person who would be resident under Canadian law but is considered resident of another country under a tax treaty tie-breaker rule.

• Part-year resident: a newcomer or emigrant. Worldwide income is taxed only for the part of the year the person was resident.

RESIDENTIAL TIES

Significant residential ties are the most important factors:

• A home in Canada, owned or leased, that remains available.

• A spouse or common-law partner in Canada.

• Dependants in Canada.

Secondary residential ties are considered together and include personal property in Canada (a car, furniture), social ties (memberships), economic ties (Canadian bank accounts, credit cards, employment), a Canadian driver's licence, provincial health insurance coverage, and a Canadian passport. A single secondary tie rarely decides the question, but several together can.

NEWCOMERS AND EMIGRANTS

• Newcomers: become resident on the day significant ties are established. Property owned on arrival is deemed acquired at fair market value on that date, so gains that accrued before arrival are not taxed in Canada. Federal non-refundable credits such as the basic personal amount are prorated for the part of the year the person was resident.

• Emigrants: stop being resident when significant ties are severed. Most property is deemed disposed of at fair market value on departure, which can trigger a capital gain known as departure tax. See Emigration and Departure Tax.

WHO MUST FILE A RETURN

A return is legally required in a year in which any of the following applies:

• Tax is owing for the year.

• The CRA sends a request to file.

• A capital property was disposed of, or a taxable capital gain was realised, including the sale of a principal residence.

• Amounts must be repaid under the Home Buyers' Plan or the Lifelong Learning Plan.

• CPP or QPP contributions are payable on self-employment earnings or on pensionable employment income.

• Employment Insurance premiums are payable on self-employment or other eligible earnings.

• An individual must repay Old Age Security or Employment Insurance benefits.

• The individual and a spouse or partner elected to split pension income.

• An FHSA withdrawal was made or the individual held an FHSA during the year.

WHY FILE EVEN WITH NO INCOME

Many benefits are calculated only from a filed return. Filing, even with zero income, establishes eligibility for the Canada Groceries and Essentials Benefit (formerly the GST/HST credit), the Canada Child Benefit, the Canada Workers Benefit, provincial credits such as the Ontario Trillium Benefit, and Guaranteed Income Supplement payments. Filing also creates RRSP contribution room from earned income and builds a record of carry-forward amounts such as unused tuition. Students under 19 should file to start receiving the Groceries and Essentials Benefit from the quarter after their nineteenth birthday.