Before COVID-19, many people were living increasingly global lives. Modern corporations are becoming ever-more international, and traditional nine till five jobs have been going out of fashion in favour of flexible, remote, and nomadic working structures. However, in light of the global pandemic, many people have seen their travel plans disrupted, both business and leisure alike.
Canada is just one of many countries restricting international travel, which is likely to have tax implications for some people. Tax residency is dependent on where you spend your time throughout the tax year, which in turn can have implications on the tax position of not only yourself but your business too.
It is important to understand how your disrupted travel plans may have had downstream effects on the tax residency status of yourself and/or your business. The Canada Revenue Agency (CRA) has issued new guidance on how they will be applying the criteria for Canadian tax residency in light of the pandemic. This article will advise how this is likely to apply to individual taxpayers and corporations.
What is the new CRA guidance on individual tax residency?
If you were visiting Canada when COVID-19 travel restrictions were ordered, you may have found yourself unable to return to your country of tax residence as you had planned. The new CRA guidance covers how they will be interpreting two key areas of legislation in light of such situations:
- Common-law factual determination of Canadian tax residency status of individuals
- Application of rules that usually define Canadian tax residency status as individuals who sojourn in Canada for 183 days of the calendar year The CRA will determine whether you are a tax resident of Canada on the strength of your residential ties, which is an assessment that takes several factors into account. These include the location of your spouse and any children, the location of your home, the location of your employment, the location of your banking society, whether you have a driving license issued in Canada, and your Canadian immigration status.
The CRA’s new guidance advises that if you have stayed in Canada only due to COVID-19 travel restrictions, then this is not enough to warrant Canadian tax residency. However, the decision to stay in Canada long-term is unlikely to be related solely to travel restrictions for many people. The decision will also be related to other residential factors, meaning the new guidance may be of limited applicability to many people.
The second criteria that the CRA may consider when determining tax residncy is your sourjounment period. Sourjourning is defined as ‘unusual, casual or intermittent stays in Canada’, which doesn’t normally lead to ‘factual’ residency as defined by the first set of criteria. The sourjournment threshold is 183 calendar days per year, after which the CRA may deem you to be a tax resident. However, the new guidance states that any days spent in Canada solely due to travel restrictions will not count towards this 183 day threshold. You will be eligible for such an exception if you are:
- Normally residing in another country and;
- You intend to return to that country and/or;
- You actually do return to that country as soon as you are able.
What is the new CRA guidance on corporate tax residency for businesses?
The location where the central management and control of a company is used to establish whether the business has corporate tax residency in Canada. One such factor of this is assessment is the location where the company’s board meetings are normally held. However, travel restrictions may affect whether Canadian directors can travel outside of Canada for board meetings as usual. This in turn could have downstream effects on the corporate tax residency of the business.
In some cases, businesses may have tax residency in two separate countries. Some countries may establish a tax treaty between them, which would mean that businesses will only need to pay tax in one of those countries. Such rules are known as ‘tie-breakers’. Where a treaty determines the tax residency of a business based on the location of it’s ‘effective’ management (akin to central management and control), the CRA has advised that it will not determine Canadian tax residency on the sole basis of a director being unable to travel outside of Canada for board meetings due to COVID-19 travel restrictions.
For businesses with tax residency in two countries that do not have a tax treaty, the CRA will determine tax residency on individual case assessment. If you have a dual-residency corporation in countries without a tax treaty, you should seek advice from an experienced Canadian tax lawyer to help you manage the potential tax implications during the pandemic.
Key takeaways on the new CRA guidance on Canadian tax residency
There are many factors that can affect the tax residency of both individuals and corporations, and your status can have serious tax implications. The downstream effects of COVID-19 travel restrictions may affect the tax residency status of individuals or corporations during the pandemic. The CRA has provided new guidance on how they will interpret the criteria for Canadian tax residency during the pandemic. However, for many individuals and corporations, the multi-faceted nature of tax residency means that decisions to travel—or not travel—can rarely be carried out solely on the basis of travel restrictions and will, therefore, likely have implications for residency factors. If you are an individual or a corporation whose travel plans and/or international business operations have been affected by the pandemic, you should consult with our expert Canadian tax lawyers to find out what the impact may be on your tax residency status. An experienced tax lawyer can help you take steps to minimize the tax implications for yourself and your business during the pandemic, helping you to plan for today and protect your earnings for tomorrow.