Understanding Tax Residency in Canada

Introduction: Why Tax Residency Matters

Many Canadians assume that if they live abroad, they no longer owe Canadian taxes. However, this is far from the truth. Even if you leave Canada, the Canada Revenue Agency (CRA) may still consider you a tax resident, requiring you to pay tax on worldwide income.

Imagine these scenarios:

💡 A Canadian consultant moves to Dubai for work but keeps a rental property in Toronto. Will they owe Canadian taxes on their Dubai salary?
💡 A U.S. citizen spends 200 days a year in Canada, working remotely. Will they be considered a Canadian tax resident?
💡 A retiree moves to Portugal but maintains a Canadian bank account and health coverage. Have they truly severed ties with Canada for tax purposes?

📢 Failing to understand tax residency rules can lead to unexpected tax bills, double taxation, and even CRA audits.

In this detailed guide, we’ll cover:
✅ How tax residency is determined by the CRA.
✅ The tax implications of being a resident, non-resident, or deemed resident.
✅ How tax treaties work to prevent double taxation.
✅ Steps to break Canadian tax residency properly (and avoid exit tax).
✅ Common mistakes that trigger CRA audits and how to avoid them.

By the end of this guide, you’ll understand how to optimize your tax status and avoid unnecessary taxes—whether you’re moving abroad, investing in Canada, or working remotely.

1. What is Tax Residency in Canada?

1.1 The Legal Definition of Tax Residency

📢 Tax residency is not the same as citizenship or immigration status.

✔️ A person can be a Canadian tax resident even if they don’t live in Canada full-time.
✔️ A non-resident for tax purposes may still owe Canadian tax on certain income.
✔️ The CRA determines tax residency based on primary and secondary residential ties.

📌 Who Needs to Understand Tax Residency?

• Canadians moving abroad for work or retirement.
• Foreign nationals working remotely in Canada.
• Business owners with international income.
• Investors with Canadian real estate or stocks.

2. How the CRA Determines Tax Residency

2.1 Full Tax Residents of Canada

✔️ Who Qualifies as a Full Resident?

• You have significant residential ties (home, spouse, dependents in Canada).
• You spend more than 183 days in Canada within a tax year.
• You maintain secondary ties (driver’s license, bank accounts, provincial health care).

✔️ Tax Obligations for Full Residents:
✅ Must report ALL worldwide income (foreign wages, rental income, capital gains).
✅ Eligible for Canadian tax credits (RRSP, tuition, medical expenses).
✅ May claim foreign tax credits to avoid double taxation.

💡 Example: A Canadian engineer moves to Germany but keeps their house and family in Canada. Despite working in Germany, the CRA will likely consider them a tax resident.

📢 Tax Tip: If you move abroad but keep significant ties in Canada, you may still be considered a Canadian tax resident and must file a Canadian tax return.

2.2 Deemed Residents of Canada

✔️ Who is a Deemed Resident?

• You spend 183 days or more in Canada in a tax year.
• You do not have strong residential ties, but your physical presence is significant.

✔️ Tax Obligations for Deemed Residents:
✅ Must report worldwide income but pay federal tax only (no provincial tax).
✅ Not eligible for provincial tax credits or deductions.

💡 Example: A digital nomad from the U.K. spends 200 days in Canada while working remotely. They may be deemed a Canadian resident for tax purposes.

📢 Tax Tip: Spending too much time in Canada without establishing tax residency elsewhere can lead to unexpected tax obligations.

2.3 Non-Residents of Canada

✔️ Who is a Non-Resident?

• You spend fewer than 183 days in Canada in a tax year.
• You have severed all residential ties (sold property, canceled health care).

✔️ Tax Obligations for Non-Residents:
✅ Only taxed on Canadian-source income (rental income, business profits).
✅ 25% withholding tax on dividends, pensions, rental income.
✅ Must file a Section 216 return for rental income to avoid higher taxes.

💡 Example: A Canadian retiree moves to Portugal but keeps a condo in Toronto. They must still pay tax on their Canadian rental income.

📢 Tax Tip: If you rent out Canadian property as a non-resident, filing a Section 216 return allows you to be taxed on net income rather than gross rent.

3. How Tax Treaties Prevent Double Taxation

📢 Canada has tax treaties with 90+ countries to prevent double taxation and clarify tax residency rules.

✔️ Who Benefits from Tax Treaties?
✅ Canadians working abroad who pay foreign taxes.
✅ Expats who earn Canadian income while living abroad.
✅ Investors with stocks, rental properties, or pensions in multiple countries.

📌 Example: U.S.-Canada Tax Treaty

• A Canadian moving to the U.S. but earning rental income in Canada can claim a foreign tax credit to avoid double taxation.

📢 Tax Tip: Tax treaties override domestic tax rules. Check the treaty between Canada and your new country of residence before assuming you are tax-free!

4. How to Break Canadian Tax Residency (and Avoid Exit Tax)

📢 If you want to stop paying Canadian tax, you must officially sever residency ties.

✔️ How to Do It Properly:
✅ Sell or rent out your Canadian home.
✅ Close Canadian bank accounts (or convert them to non-resident accounts).
✅ Cancel provincial health care coverage.
✅ File a departure tax return with the CRA.

📌 Exit Tax (Departure Tax) Alert

• The CRA deems you to have sold your stocks, real estate, and business shares at fair market value, triggering capital gains tax.

💡 Example: If you own $500,000 in stocks and move to Mexico, the CRA will tax you on unrealized gains.

📢 Tax Tip: If you plan to leave Canada permanently, consider triggering gains strategically to minimize departure tax.

5. Common Tax Residency Mistakes That Trigger CRA Audits

📢 The CRA aggressively audits taxpayers who claim to be non-residents but maintain Canadian ties.

❌ Mistake #1: Keeping a Home in Canada While Claiming Non-Residency

• If you keep a primary residence in Canada, the CRA will likely consider you a resident.

❌ Mistake #2: Not Reporting Foreign Income

• Canadian tax residents must report ALL global income, including foreign rental properties and stock dividends.

❌ Mistake #3: Failing to File a Departure Tax Return

• If you don’t notify the CRA that you’ve left, you may still be taxed as a resident.

📢 Tax Tip: If you’ve already left Canada and haven’t filed properly, you can use the CRA’s Voluntary Disclosure Program (VDP) to correct mistakes without penalties.

Final Thoughts: Tax Planning for Canadian Expats & Non-Residents

✔️ Your tax residency status determines how much tax you owe.
✔️ Breaking tax residency must be done properly to avoid CRA penalties.
✔️ Tax treaties can prevent double taxation but require expert planning.

📩 Need expert tax residency advice? Contact Shajani CPA today for personalized tax solutions! 🚀

 

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2025 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.

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