Canadian taxation is based on the concept of residence. A person who is a resident in Canada will be taxed on his or her worldwide income from all sources. However, a non-resident person only pays Canadian income tax on income from sources inside Canada.
Resident
The term “resident” is not defined in Income Tax Act. For the ordinary Canadian individuals who work and live in Canada, the concept of residence is nothing ambiguous. Such individuals will clearly be Canadian residents and, as a result, they would be taxed on their worldwide income. But problems may arise when establishing residency in situations where an individual leaves Canada for a temporary period of time.
What Matters
The issue here is, under what circumstances should an individual be viewed as having retained their Canadian residency during the period they are not in Canada. This is an important issue. Imagine you just got an offer to work as a CEO in a trading company in Hong Kong. If you are viewed as having retained your Canadian residency during the period you are in Hong Kong, you will be subject to Canadian taxation on your worldwide income. But, if you are assessed as a non-resident and thus avoid paying Canadian income tax on your fat pay cheques earned in Hong Kong, you will achieve a substantial tax saving because the tax rates in Hong Kong are much lower than those in Canada.
What Can You Do
The most important factor to be considered in determining your residency status for tax purpose is whether or not you maintain residential ties with Canada while you are abroad. If you sever all ties with Canada before you head to Hong Kong, you will be able to get the Canadian taxmen’s hands off your income earned in Hong Kong.
Residential Ties
To become a non-resident for tax purposes, your must demonstrate that you have sever most of the ties. The significant ties that will almost be considered are: do you maintain a dwelling place in Canada? Does your spouse or common-law partner remain in Canada? Do your dependants remain in Canada? Even all of the answers to the above are “no”, you may still be consider to be resident of Canada on the basis of secondary residential ties include: bank accounts, a driver’s license, personal property, or membership in Canadian organizations. The residency status is generally determined by looking at the combined facts. There is considerable room for difference of opinion as to whether an individual have remained the residency while he or she is temporarily abroad.
