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Residential Status for Individuals

SEPARATE ENTITIES FOR TAX PURPOSES

Understanding the legal entities for the purpose of income taxation is very important. Separate legal entities can enter into contracts, buy assets, borrow money, and sue or be sued in court.

Individual

An individual is a separate legal entity because they can do all of these things and must file a return and pay taxes. An individual must file their return and pay taxes before April 30 for the last fiscal year. For example, for the fiscal year-end on Dec 31, 2017, the due date for the return filing will be April 30th, 2018.

Corporation

A corporation is a separate legal entity because it can do all of these things and must file a return and pay taxes. A corporation can choose any fiscal year-end as long as the does not exceed 53 weeks. Corporate can file their tax return within six months from the end of the fiscal year. For example, for the fiscal year-end on Dec 31, 2017, the due date for the return filing will be June 30th, 2018.

Partnership

A partnership can be considered a legal entity because it can enter into a contract, buy assets, borrow money and sue or be sued in court. However, for tax purpose, a partnership is not a person and hence not subject to tax. A partnership firm does not file a tax return, instead, the profit and losses of the partnership are allocated to partners based on their share and partners pay the tax.

General partners (i.e., not limited partners) are personally liable for the losses or liabilities of the partnership firm. Because of this reason partnership is not fully a separate legal entity. General partners unlimited liabilities is the reason to prefer corporations over the partnership to conduct business operations. A partnership must have Dec 31 year-end if any of the partners are individuals.

Trusts

Trusts are not separate legal entity because the trust property is owned by the trustee (i.e., not the trust). But for tax purposes trust is a taxpayer and must file a tax return. Trust must have calendar year-end and are taxed as individuals. Trust must file their return within 90 days after the trust’s year-end.

WHO MUST FILE AN INCOME TAX RETURN?

You must file an income tax return in the following circumstances:

  • You have tax payable for the year
  • You or your spouse or common-law partner either receive or are entitled to receive the Canada Child Benefit
  • You have disposed of capital property
  • You have a taxable capital gains
  • You have to repay all or a part of the Old Age Security (OAS)
  • You have received a demand from CRA to file a tax return
  • You have to repay all or a part of the Employment Insurance (EI) benefits
  • You have withdrawn money from Registered Retirement Savings Plan (RRSP) for home buyers plan or lifelong learning plan and have not fully repaid that money
  • You ceased to be a Canadian resident for tax purposes
  • You or your spouse or common-law partner elected to split pension income

You can always file a tax return, even if you are not required to file an income tax return under the rules above. Filing a tax return will provide you several benefits listed below:

  • You can get the refund for any taxes withheld if your actual tax payable is lower than the taxes withheld
  • You may be entitled to claim federal and provincial credit such as GST/HST credit, Child Tax Benefit, Working Tax Benefit credits, etc.
  • You have non-capital losses in the current year which can be carried back and carried forward to reduce the income of other years
  • You are receiving a Guaranteed Income Supplement (GIS) under the Old Age Security (OAS) Program
  • If you have earned income, filing a tax return will increase your RRSP contribution room

RESIDENCE OF INDIVIDUALS

According to the income tax law, residency is very important. Residence for tax and immigration are different. One person can be a resident of Canada but may not be a resident of Canada for tax purposes. An individual is taxed on worldwide income for the full year if he/she resides in Canada.

An individual can be a resident of Canada for the purpose of income taxes if he meets the following conditions:

Primary indicators

  • Having a residence (i.e, owned or rented) that is available in Canada to live in
  • Having immediate family members living in Canada such as a spouse and/or minor children.

Secondary indicators

  • Maintaining social ties and personal property in Canada such as memberships in a Canadian organization, having a driver license, provincial health card, bank accounts, principal residence, etc.

Secondary indicators are less important when determining residence for tax purposes.

Deemed full-year resident of Canada

A non-resident can be a resident for tax purposes if he/she physically present in Canada for 183 days or more in a taxation year and will be taxed on worldwide income. For the purpose of counting the number of days, even a part of the day is considered as a full day.

A part-year resident of Canada

A person that starts fresh in Canada or makes a clean break from Canada is taxed on the worldwide income for a part of the year. All deductions will be applicable for the part of the year in which he/she was present in Canada. All non-refundable tax credits are pro-rated and only allowed for the period of residence in Canada.

BECOMING A CANADIAN RESIDENT FOR INDIVIDUAL

Once a taxpayer (i.e., individual, corporation or trust) becomes a Canadian resident, then they are subject to tax on their worldwide income.

Individual

Individuals are entitled to a personal tax credit, which is based on his/her presence in Canada. Their basic personal tax credit amount will be prorated for the part of the year for their presence in Canada. Following tax credits are not prorated, such as:

  • Dividend Tax Credits
  • Medical Expenses Tax Credits
  • Foreign Tax Credits
  • Canada Pension Plan (CPP) Tax Credits
  • Employment Insurance (EI) Tax Credits

An individual will become resident of Canada once they purchased or rented house to live in or when their immediate family members moved to Canada.

Federal personal tax credit for 2019 is $12,069 whereas for 2018 it is $11,635. Alberta personal tax credit for 2019 is $19,369 and for 2018 is $18,690.

Deemed Disposition and Reacquisition of Property one day before the acquisition of Canadian residency

When a taxpayer becomes a Canadian Resident it is deemed that the taxpayer has disposed of all property except Canadian taxable property immediately before acquiring Canadian residency and proceeds of disposition is equal to fair market value. The taxpayer reacquires each asset deemed to have been disposed of at fair market value at a cost equal to its proceeds of disposition. These deemed dispositions and reacquisition rules ensure that all the capital gains and losses are triggered on all the property except Canadian taxable property on disposition. After that, if there are any gains, then it will be subject to taxation in Canada.

Example

Mr. A was formerly a resident of India for income tax purposes. Mr. A’s family moved to Canada on March 15, 2017. Mr. A owns a house worth of $500,000 which was acquired by Mr. A for $400,000. So, due to this disposition and reacquisition rules, it is deemed that the house of Mr. A is disposed of for $500,000 and reacquired for $500,000 on March 14, 2017. After that, any gains on the property over $500,000 (ACB, i.e., Adjusted Cost Base) will be subject to Canadian Taxation. Personal Tax Credits will be prorated for 320 days in 2017 tax return.

BECOMING A NON-RESIDENT OF CANADA

Corporation

A corporation ceases to be a resident of Canada:

  • If they are incorporated – when they file articles of continuance to change the jurisdiction of the corporation.
  • If they are not incorporated – then by moving the central management of the corporation to outside Canada.

Impact on Tax

When they cease to become resident of Canada for income tax purposes then there will be deemed year-end immediately prior to ceasing residence and corporation has to complete financial books of accounts and has to file the income tax return for the deemed year-end date.

Trust

Trust ceases to be a resident of Canada:

  • When they change Canadian resident trustee and appoint non-resident trustee
  • By holding all the trust meeting outside Canada

Individual

Individual ceases to be a resident of Canada:

  • When they sold the home or canceled the lease for the house for his/her dwelling in Canada
  • When his/her immediate family moved out of Canada
  • When he/she becomes the resident of another country for tax purposes

Impact on Tax

  • When an individual ceases to become resident of Canada for income tax purposes, then the taxpayer is deemed to have disposed of all properties, immediately prior to ceasing residence for proceeds equal to fair market value. These dispositions will trigger any gains and losses and the taxpayer has to pay taxes on the gains. Any gains or losses after the deemed disposition will not be subject to tax in Canada.
  • Personal Tax Credit will be prorated for the part of the year based on his/her presence in Canada.

MISSING INFORMATION SLIPS

If you have not received information slips such as T4, T4A, T3, T5, RRSP or any other slip by the last date of February next year, you can log in to my CRA Account to download the information slips. Employer’s corporates are required to forward the slips to the last known address by the end of February next year. However, if you still find that the information is not available in my CRA Account, you can use your last payment information to include in your tax return when you are filing a paper tax return. Also, you can amend (T1-ADJ) your return by using my CRA Account when information is available.

The following receipts must be attached with a T1 Return at the time of paper filing to avoid any delays in the processing of your return:

  • Donations
  • Medical Expenses
  • RRSP contributions

INCOME TAX RETURN FILING DEADLINE FOR DECEASED TAXPAYERS

Prior Year Tax Return

If the tax return of the deceased taxpayer is not filed for the prior year, it must be filed by the legal representative of the deceased taxpayer as soon as possible to avoid interest or penalty.

Taxpayer dies between November 1 and April 30

  • If a taxpayer dies between November 1 and April 30 of the following year, the due date for filing his/her last return will be whichever of the two dates occur later:
    • June 15
    • Six months after the date of death.
  • Self-employed individuals – whichever of the two following dates occurring later:
    • June 15
    • Six months after the date of death.

Taxpayer dies prior to November 1

If the taxpayer dies prior to November 1, the filing deadline will be the normal due date for the deceased taxpayer

DUE DATE OF FILING INCOME TAX RETURN FOR INDIVIDUALS

An individual must complete his/her income tax return on a calendar year basis (i.e., January 1 to December 31) and file the tax return by April 30 of the following year. Self-employed individuals or a spouse of self-employed individuals are required to file an income tax return by June 15 of the following year. However, any outstanding taxes must be paid by April 30 of the following year.

Income Tax Return filed date as per CRA

  • Date stamped by Post office, courier, or CRA office
  • If the last date of filing return falls on a Saturday, Sunday, or any holiday then the official due date is moved to the following day that is not a holiday.

BECOMING A NON-RESIDENT OF CANADA

Corporation

A corporation ceases to be a resident of Canada:

  • If they are incorporated – when they file articles of continuance to change the jurisdiction of the corporation.
  • If they are not incorporated – then by moving the central management of the corporation to outside Canada.

Impact on Tax

When they cease to become resident of Canada for income tax purposes then there will be deemed year-end immediately prior to ceasing residence and corporation has to complete financial books of accounts and has to file the income tax return for the deemed year-end date.

Trust

Trust ceases to be a resident of Canada:

  • When they change Canadian resident trustee and appoint non-resident trustee
  • By holding all the trust meeting outside Canada

Individual

Individual ceases to be a resident of Canada:

  • When they sold the home or canceled the lease for the house for his/her dwelling in Canada
  • When his/her immediate family moved out of Canada
  • When he/she becomes the resident of another country for tax purposes

Impact on Tax

  • When an individual ceases to become resident of Canada for income tax purposes, then the taxpayer is deemed to have disposed of all properties, immediately prior to ceasing residence for proceeds equal to fair market value. These dispositions will trigger any gains and losses and the taxpayer has to pay taxes on the gains. Any gains or losses after the deemed disposition will not be subject to tax in Canada.
  • Personal Tax Credit will be prorated for the part of the year based on his/her presence in Canada.