Chapter 2

Liability for Tax

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Liability of Individuals for Income Tax

• Main criterion for income tax liability in Canada: Residence [ssec. 2(1)]

• Canadian residents taxed on worldwide income

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An income tax shall be paid as requiredby this Act on the taxable income for eachtaxation year of every person resident in Canada at any time in the year.

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Canadian Resident

• Deemed resident - sojourning– Act may deem an individual to be a resident if one of

the conditions of the deeming rule is met

e.g., If individual “sojourned” in Canada for 183 days or more, he/she deemed to be full-time resident of Canada

• Common law concept of Canadian resident– Residence is determined by application of general

principles that have evolved from common/case law over the years

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Canadian Resident

• Administrative Practice– Interpretation Bulletin “Determination of an Individual’s

Residence Status” [IT-221R3]

– Facts used to establish residential ties:• Maintaining a dwelling, whether owned or leased, suitable for year-

round occupancy and available for occupancy;

• A spouse/common-law partner and other members of immediate family remaining in Canada;

• Maintaining personal property and social ties in Canada (secondary ties).

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Part-Year Resident

• Individual either became or ceased to be a Canadian resident during the year

• Individual taxed in Canada on worldwide income earned during part of the year when he/she was resident in Canada

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Part-Year ResidentFresh Start:

• Non-resident moves to Canada to take up residence but not temporarily

Clean break:

• Considered on the latest date of when:– The individual leaves Canada,

– The individual’s spouse/common-law partner and/or dependants leave Canada, or

– The individual becomes a resident of the country to which he/she is immigrating.

• If existing ties have not been severed, then individual remains a Canadian resident.

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Liability of Non-Residents

• Non-resident is liable to pay income tax if at any time in the year or previous year the individual:1. was employed in Canada,

2. carried on business in Canada, or

3. disposed of taxable Canadian property.

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Carrying on Business in Canada

• “Carrying on business” not defined in Act

• Courts’ interpretation:– Continuous business activity– “Business” is an adventure/concern in the

nature of trade– Offering for sale in Canada through employee

versus independent contractor

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International Tax Treaties and Individuals

• Tax treaties help prevent incidence of double taxation and tax avoidance

• Canada-U.S. Tax convention

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Canada-U.S. Tax Convention

• Dependent personal services– Exempts a resident of Canada from U.S. taxation on

salaries, wages, and other similar remuneration from employment in the United States if:

• the remuneration is < US$10,000; or

• the employee is present in the United States for less than 183 days in any 12-month period starting or ending in the year and the remuneration is not borne by an employer who is a resident of the United States or by a “permanent establishment”/ “fixed base” which the employer has in the United States.

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Canada-U.S. Tax Convention• Independent Personal Services

– Canadian individual earning self-employed income in the United States will be taxed in the United States if he/she has a permanent establishment (PE) in the United States or one of the following conditions is met:

• Services are performed in the U.S. by an individual who is present in the U.S. for a period or periods aggregating 183 days or more in any 12-month period, and more than 50%of the gross active business revenues of the enterprise come from services performed in the U.S.; or

• Services are provided in the U.S. for an aggregate of 183 days or more in any 12-month period with respect to the same or connected project for customers who are either residents of the U.S. or maintain a PE in the U.S. and the services are provided in respect of that PE.

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Canada-U.S. Tax Convention

• Resident and “Tie-breaker” rules– If individual is considered resident in both countries

under the treaty, then deemed resident where:• He/she has permanent establishment available, but if in both

countries or neither, then where

• His/her personal economic interests are closer, but if cannot determine, then where

• He/she has a habitual abode, but if in both countries or neither, then where

• He/she is a citizen, but if in both or neither, then

• The “competent authorities” of the countries will settle the question by mutual agreement.

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Canada-U.S. Tax Convention

Includes:

• Place of management, a branch, an office, and a factory, among others.

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Permanent establishment is “a fixed place of business through which the business of a

resident of a [country] is wholly or partly carried on.”

Canada-U.S. Tax Convention• “Permanent Establishment” does not include:

– Use of facilities for storage, display, or delivery of goods or merchandise;

– Maintenance of a stock of goods or merchandise for the purpose of storage, display, or delivery;

– Maintenance of stock of goods or merchandise belonging to the resident of the country;

– Purchase of goods or merchandise, or the collection of information, for the resident of the other country; or

– Advertising, supply of information, scientific research, or similar activities which have a preparatory or auxiliary character for the resident of the other country.

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Summary of Residence for an Individual

• Individual can be either:– Canadian resident: taxed on worldwide income

– Non-resident: taxed on Canadian-source income

– Part-time resident: taxed on worldwide income only for part of year fully resident in Canada

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Comprehensive Consideration of the Residence of an Individual

• Stages of involvement of tax adviser:– Appeal, filing, or planning

• In any of the stages, tax adviser should:– Consider both sides– Provide varying forms of advice

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Planning for Residence of an Individual

• Non-tax factors to consider:– Differences in cost of health care and how it is

financed– Quality of life– Employment opportunities– Cultural differences– Social and political stability – Economic and financial exchange risks

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Liability for Corporations for Income Tax

• “Person” includes corporation, so the charging provision for corporations is the same for individuals

• Corporations incorporated after April 26, 1965, are deemed to be resident in Canada

• If incorporated before April 26, 1965, deemed resident in Canada by common-law principles or it carried on business in Canada after April 26, 1965

• Common-law principles:– Residency based on central management and control

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Liability of Non-Resident Corporations

• Non-resident if:– Not incorporated in Canada after April 26, 1965

• Non-resident may be taxable on Canadian-source income

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International Tax Treaties and Corporations

• Under Canada-U.S. Tax convention:– U.S. enterprise not subject to taxation by Canada on its

“business profits” unless the enterprise carries on business in Canada through a “permanent establishment” located in Canada.

– Only subject to tax in Canada on income attributable to the permanent establishment.

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Registration Requirements and Liability for GST and HST

• Liability for GST/HST– Legal liability for payment of GST/HST rests

with the purchaser– Responsibility to collect and remit GST/HST

lies with supplier

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Liability for GST/HST

• Charging provision– Each recipient of a taxable supply made in Canada

must pay GST/HST of the value of the consideration of the supply.

• Recipient: person who enters into the agreement to acquire the property or service and is liable under the agreement to pay consideration for supply

• Taxable Supply: a supply made in the course of a commercial activity (includes zero-rated supplies)

• Zero-rated supplies: a supply included in Sch. VI

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Liability for GST/HST

• Supplies in Canada– Subject to GST/HST only if made in Canada

• Supplies in an HST province– Once supply is determined to be made in Canada, it

must be determined whether the supply is made in an HST province to ensure correct rate of GST/HST to charge.

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Liability for GST/HST

• Supplies by non-residents– Deemed made in Canada if:

• The supply is made in course of a business carried on in Canada;

• The non-resident is registered for GST/HST purposes; or

• The supply is in respect of a place of amusement, a seminar, an activity, or an event, and the non-resident supplies admissions directly to consumers.

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Registration Requirements for Residents

• Test for registration:– Person who is engaged in a commercial activity in

Canada is required to register for GST/HST.

– Person is individual, partnership, corporation, trust/estate, or a body that is a society, union, club, association, commission, or other organization of any kind.

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Registration Requirements for Residents

• Commercial Activity:– A business that is carried on;

– An adventure/concern in the nature of trade; and

– The supply of real property

– Excludes:• Making of exempt supplies [e.g., supply of medical services

by physician]

• Activity without a reasonable expectation of profit

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Exceptions From Registration Requirements

• Small Suppliers– Revenues from taxable supplies that are less than

$30,000 in the four preceding calendar quarters

– Not required to collect GST/HST on taxable supplies

• A person whose only commercial activity is making supplies of real property by way of sale other than in the course of business

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Registration and Collection Requirements for Non-Residents

• Non-resident– “Not resident in Canada”

– Deemed resident if incorporated in Canada

– If partnership or unincorporated organization, deemed resident in Canada if a majority of members with management and control are resident in Canada

– If non-resident has permanent establishment in Canada, deemed resident in Canada in respect of activities carried on through that establishment

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Registration and Collection Requirements for Non-Residents

• Mandatory registration– Non-residents who do not carry on any business in

Canada do not have to register

• Voluntary registration available if non-resident:a) Regularly solicits orders for the supply of goods for

delivery in Canada; or

b)Has entered into an agreement for the supply of:• Services to be performed in Canada, or

• Intangibles to be used in Canada or that relate to real property in Canada, goods ordinarily situated in Canada, or services performed in Canada.

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Imports

• GST/HST is imposed on value of imported goods

• GST/HST payable by the person who is liable under the Customs Act to pay duty on import goods

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