| 922261 | |
| 19(1) | K.B. Harding |
| 957-2111 |
November 5, 1992
Dear Sirs:
Re: General Information re Taxation in Canada
This is in reply to your letter of July 22, 1992 wherein you requested our opinion on general questions concerning the taxation of individuals in Canada.
Resident of Canada
The liability for tax under the Canadian tax system is based on residency. The term residency is not defined in the Income Tax Act (the "Act") but is based on common law principles of residency and concerns the residential ties which an individual has in fact established within Canada. We are enclosing a copy of Interpretation Bulletin IT-221R2 which outlines the Department's position regarding the determination of an individual's residence status for taxation purposes.
Any individual entering Canada may request a determination of his residency status for taxation purposes. Form NR74 (copy attached) must be completed and returned to the address provided on the form. The International Tax Office will make a determination of an individual's residence for purposes of the Act.
Taxation of Residents of Canada
We are enclosing a copy of the 1991 Federal and Provincial General Tax Guide and Returns for individuals who are residents of Ontario ("Guide") in order for you to review the reporting requirements in Canada. Individuals resident in Canada are liable to tax on their taxable income for the period of time during which they are resident of Canada. Taxable income generally includes the individual's world income (e.g. U.S. business and investment income and capital gains etc.) adjusted for certain deductions listed on page 2 of the Canadian Income Tax Return titled the T1 General (See the enclosed Guide). Capital gains and other types of income are all taxed at the same rate, however when reporting capital gains only 75% of the gain will be included in the individual's income. It should be noted that the Guide provides an explanation for each item on the T1 General on a Line by Line basis. The 1992 Income Tax Return and Guide for the 1992 filing season will not be available until early 1993.
The rates of federal tax to be applied to the taxable income is set out in Schedule 1 to the 1991 T1 General Return located in the Guide. The rate of tax for 1991 was 17% on the first $28,784 of taxable income, 26% on the next $28,784 of taxable income and 29% on the remainder of the taxable income. In addition, for the 1991 taxation year there is also an individual federal surtax which is also set out in Schedule 1. In the calculation of federal tax there is also a deduction from tax with respect to personal exemptions, charitable donations etc., the calculation of these non-refundable tax credits is set out in page 3 of the T1 General Return. It should be noted that each of the Canadian provinces also levy a provincial income tax, the calculation of the Ontario Income Tax is set out form T1C of the Guide. Since the provincial governments each set their rates, you may request a copy of the Guide for the particular province you are considering to reside in.
It should be noted that where an individual reports income for Canadian tax purposes which is received from a foreign country, he will be granted a foreign tax credit, up to the Canadian tax paid on such income, to ensure the individual will not be double taxed on income received from outside Canada. The calculation of the foreign tax credit is done on a country by country basis and the calculation of such tax is set out in Schedule 1 of the T1 General Return.
Taxation of Non-Residents of Canada
Where a non-resident of Canada invests in Canada, he is subject to 25% withholding tax on any interest, dividends or royalties which are paid or credited by a resident of Canada to a non-resident of Canada, subject to any relief provided by a tax treaty. Where the non-resident is a resident of the United States, the Canada-U.S. Income Tax Convention (the "Convention") reduces the rate of withholding tax to 15% in the case of dividends and interest and 10% in the case of royalties.
Taxable capital gains and income from any business carried on in Canada is subject to tax in Canada in a manner similar to that of a resident of Canada. However, there are some limitations on the deductions from income and federal tax in arriving at taxable income and tax payable. Enclosed is a copy of Interpretation Bulletin IT-171R2 which discusses the deductions permitted in calculating taxable income and tax payable by the non-resident taxpayer.
Dual Residency
Where an individual is considered a resident of both Canada and the United States, Article IV of the Convention provides a tie-breaker rule for interpreting the Convention but does not, for Canadian tax purposes, change the fact that he continues to be a resident of Canada for Canadian taxation purposes. However, where the Convention provides relief to such a taxpayer, the Act will provide that resident with a deduction in computing taxable income for Canadian taxation purposes to reflect such relief, therefore the taxpayer should avoid any problem of double taxation.
U.S. Citizens who are Residents of Canada
It should be noted that subject to paragraph 3, paragraph 2 of Article XXIX of the Convention permits the United States to tax its Citizens living in Canada, however, to avoid any double taxation paragraphs 4,5 and 6 of Article XXIV of the Convention provide special rules for U.S. citizens living in Canada in order to eliminate any double taxation. We are enclosing a copy of the articles of the Convention referred to above and the related Technical Explanation on those articles for your convenience.
As this is a very complex area of taxation, it may be advisable to seek professional advice related to how the taxation of both countries may affect you.
Citizenship
Any question concerning citizenship, including whether an individual can have dual citizenship, and the ownership of property by such individual in both Canada and the United States are not questions concerning taxation and should be addressed to:
Department of Multiculturalism and CitizenshipJules Leger BuildingTerrasses de la Chaudiere15 Eddy StreetHull, QuebecK1A 0M5
We trust the above will be adequate for your purposes.
Yours truly,
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch