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New Canadian Citizenship Rules (Bill C-24) and Tax

25/03/2014


This article was originally published in CCH's Tax Topics

The rules introduced on February 6, 2014 will have a range of effects, but one of the hidden gems relates to a person’s Canadian tax obligations. As Citizenship and Immigration Canada (“CIC”) says:

According to the current Citizenship Act, applicants must have resided in Canada for three out of four years (1,095 out of 1,460 days), yet “residence” is not defined. As a result, it has been possible for individuals who have spent little time in Canada to acquire citizenship.1

With these rules, it has been possible for individuals to come to Canada and become permanent residents for immigration purposes. However, some of these individuals spent a great deal of time in their original countries, while avoiding Canadian tax residency (the tax rules are different than the immigration ones). Sometimes it seemed as though they ignored Canadian tax rules. Since most of their income was earned (and left) offshore, the Canada Revenue Agency (“CRA”) was not able to catch them. They then acquired citizenship without being subject to Canadian tax.

In the past, there was no tax requirement for citizenship, and CIC and the CRA did not communicate effectively. In the end, some individuals received Canadian citizenship privileges without accepting one of the more significant obligations.

The New Rules
Henceforth, an applicant will have to be physically present for four years (1,460 days) in a six-year period and for at least 183 days per year in four of the six years. He or she would be required to file Canadian income tax returns, if required under the Income Tax Act.

Now each applicant has an incentive to file Canadian tax returns. Without them, CIC will have to determine they were not required. As a practical matter, CIC will likely consult with the CRA to make this determination, so anyone applying for citizenship will need to have their tax affairs in order.

It is possible, but difficult, to spend the newly required amount of time in Canada without becoming a resident of Canada for tax purposes. This is because:
- most people who are in Canada for this amount of time will be “factual residents”, in that Canada is their primary home;
- there is a provision in the Income Tax Act that deems people who “sojourn” in Canada for 183 days or more in a year to be residents;2 not everyone who is physically present for this time is “sojourning”, but the power of this provision has recently been held to be broader than was originally thought;3
- of the people caught under one of the above provisions, some will still be non-residents because of a tax treaty between Canada and their home country, so this rule will not make everyone pay tax.

However, the overwhelming majority of immigrants planning to become Canadian citizens will now be required and inclined to file returns, and most of them as Canadian residents.

What This Means
Canadian residents are subject to Canadian tax on their worldwide incomes. Non-residents are subject to tax only on their Canadian-source incomes. Residents also need to disclose their foreign income-earning assets, including shares, debt, funds, companies, and trusts.4 There are significant penalties for failure to report and pay the appropriate tax.

A larger proportion of immigrants will now be paying tax on their worldwide incomes. For high-income immigrants, proper tax planning will become even more important. We can expect greater scrutiny of these immigrants by the CRA.

And, as always, this means more work for tax lawyers and accountants. Usually, I’m thanking Finance Canada, but today I’m sending the love to Chris Alexander, Minister of Immigration.

Notes:
1
http://www.cic.gc.ca/english/department/media/backgrounders/2014/2014-02-06a.asp.
2
ITA paragraph 250(1)(a).
3
Bruce Elliott et al., 2013 DTC 1070 (TCC).
4
Forms T1134, T1135, T1142, T1143, etc.