Enquiries & Taxpayer Assistance Division
P. McNally Director
Specialty Rulings Directorate D.Y. Dalphy 957-2117
Subject: Ministerial Correspondence Y.S. 8069501 Federal and Provincial Income Tax Liability Residence of Individuals
This is in reply to your memorandum of April 25, 1988 concerning the assessment of the XXXX income tax returns of seven taxpayers employed by XXXX in Canada for a Canadian firm XXXX
It is our understanding that:
1. none of the employees were actually resident in Canada at any time in the taxation year;
2. employees who sojourned in Canada for 183 days or more filed income tax returns as residents in Canada pursuant to the deeming provision ("... deemed to have been resident in Canada throughout a taxation year ...") in paragraph 250(1)(a) of the Income Tax Act (the "Act"); and
3. employees who sojourned in Canada for less than 183 days filed income tax returns in accordance with section 115 of the Act.
Whether an individual is actually resident in Canada or in a province at a particular time is a question of fact to be determined on the basis of all relevant circumstances (in our view, the factors described in Interpretation Bulletin IT-221R2 are useful in determining both federal and provincial residency questions for they simply are an enumeration of a number of various common law criteria and the term "resident" is undefined). With regard to individuals who are not actually resident in Canada at any time in a taxation year but who, pursuant to section 250 of the Act are deemed to be resident in Canada throughout the taxation year, it is our view that the deeming provision would not deem them to be resident in a particular province; section 250 of the Act is limited solely to a determination of residence in Canada.
Section 120 of the Act provides for an addition to tax for income not earned in a province. In particular, subsection 120(1) of the Act provides that individuals who have income for the year, other than "income earned in the year in a province" are required to pay federal tax at a "non- resident rate". In order to determine whether a particular individual had income other than "income earned in the year in a province", and consequently, whether subsection 120(1) of the Act is applicable, reference must be made to paragraph 120(4)(a) of the Act which, in turn, refers one to Part XXVI of the Income Tax Regulations (the "Regulations").
Deemed Residents of Canada
Individuals who are not actually resident in Canada but who are deemed resident in Canada and who did not carry on business would not fall within the ambit of Part XXVI of the Regulations (and, in particular section 2601 therein) for they would not have actually resided in a particular province on the last day of a taxation year. Accordingly, such individuals would not have any "income earned in the year in a province" (as defined in Part XXVI of the Regulations) and they would be required to compute their federal tax payable at the non-resident rate pursuant to subsection 120(1) of the Act.
Non-Residents
In applying subsection 120(1) of the Act to persons who were not resident (actually or deemed) in Canada in a taxation year, reference must be made to subsection 2602(1) of the Regulations which provides:
"Except as provided in subsection (2), where an individual did not reside in Canada at any time in a taxation year, his income earned in the taxation year in a particular province is the aggregate of
a) that part of the amount of his income from an office or employment, that is included in computing his taxable-income earned in Canada for the year by virtue of subparagraph 115(1)(a)(i) of the Act, that is reasonably attributable to the duties performed by him in the province; and
b) his income for the year from carrying on business earned in the province, determined as hereinafter set forth in this Part."
As this subsection of the Regulations would require individuals to fully allocate their employment income to the various provinces wherein they performed their duties, the subsection 120(1) of the Act computation would be nil (unless of course they had other section 115 income not described in subsection 2602(1) of the Regulations) and they would not be subject to federal tax at the non-resident rate. However, these individuals would have income tax liabilities to the provinces in which they performed the duties of their employment. The Ontario Income Tax Act, for example, contains the following relevant provisions:
"2. An income tax shall be paid as hereinafter required for each taxation year by every individual
(b) who, not being resident in Ontario on the last day of the taxation year, had income earned in the taxation year in Ontario as defined in clause 3(6)(b).
3(6)(b) 'income earned in the taxation year in Ontario' means the income earned in the taxation year in Ontario as determined in accordance with regulations made under paragraph 120(4)(a) of the Federal Act."
("Resident" is not defined and the Ontario Income Tax Act contains no deeming provisions in respect of residence). Accordingly, these individuals would pay provincial income tax on their income allocated to each province.
Subsections 2600(2) and 2601(1) of the Regulations
In our view, where an individual resided in a particular province on the last day of a taxation year and he did not carry on business, subsection 2601(1) of the Regulations will apply for the reference in that subsection to "income for the year from a business with a permanent establishment outside the province" relates to the individual resident and not to the employer of that individual. Consequently, subsection 2600(2) of the Act would not apply to individuals who are not themselves carrying on business.
In summary, a deemed resident of Canada will be subject to tax under subsection 120(1) of the Act whereas those individuals who are considered non-residents will be subject to provincial income tax on the basis of income allocated to the provinces. For all purposes where the term "resident" is not defined it is necessary to apply the common law principles regarding residence (and residence in a country or province is not equated with mere presence or sojourning in that country or province).
We hope these comments will assist you in responding to the taxpayers' representatives.
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch