Canadian Tax Haiku of the Week:
Before moving away
Ensure that you are advised
To stop surprise tax
As usual, the CBC is incompetent when it comes to reporting about Canadian tax issues. On the National last week (one of my favourite TV shows… not) and on its website the CBC had a story detailing an large tax bill facing a Canadian couple upon returning to Canada after working abroad for a number of years.[1] Elise and Edwin Britton went to China in 2004, along with their four dependent children, becasue Mr. Britton accepted a two-year contract with an English training school there. In total, they spent nine and a half years in China. The Britton’s filed tax returns every year with the Canada Revenue Agency (CRA). They even included a letter with every tax file, informing the CRA of their circumstances.[2]
After returning to Canada, the Brittons received an $18,000 tax bill from the CRA. The CRA was questioning whether the family should have been receiving the Canada child tax benefit and the GST/HST rebate for those years they were in China.
The CBC article goes on to discuss the CRA’s residency requirements, stating that the Britton’s believed they were “residents for tax purposes” as outlined by the Income Tax Act (the “Act”).[3] The Article states the Britton’s had always intended to return to Canada and lists the many ways the family thought they had maintained its ties to Canada (the family had Canadian drivers’ licences, passports, bank accounts and personal belongings in storage for when they came back, and also returned to Canada several times to see relatives). Despite all of this, the CRA ruled that the Britton’s were not residents under the tax act, and needed to pay back $18,000.
The CBC while making it seem like the CRA was being unfair, did not bother to actually speak to anyone who both understood the law and had been informed of the facts. To us, it is fairly obvious that the Brittons were offside and need to pay back the money they improperly claimed. Usually we are relentlessly pro-taxpayer, and anti-CRA just as a matter of instinct. But in this case, there law is so clear, and the CBC is so clueless that we had to say something.
What the CBC and Mr. & Mrs Britton failed to understand was subdivision a.1 of the Act relates to the Canada Child Tax Benefit. In order to be eligible to receive the benefit, one must be an “eligible individual”. The language in the definition of an “eligible individual” clearly states that an eligible individual must be resident in Canada.[4] Thus, in the context of the child tax benefit, residence is to be determined on a monthly basis and “reside” is understood to have its ordinary meaning, not an expanded meaning from other statutory definitions that are enacted for different purposes.[5] There is another expression in the Act, “ordinarily resident”, which applies in the case of tax residency for the purposes of liability for filing tax returns and paying income tax. Both the CBC and the Brittons seem to be confusing the two, which is understandable, but just plain wrong. The word “resides” and the phrase “is ordinarily resident” are two different concepts, used for different purposes. If Parliament uses different words it is presumed that it intends the two words of phrases to be given different meanings.[6]
Furthermore, the CRA’s Income Tax Folio on determining residence distinguishes between a “factual resident” and a “deemed resident”.[7] In short, because an individual who is deemed to be resident in Canada under subsection 250(1) is not factually resident in Canada, they will not be resident in a particular province for provincial tax purposes. This precludes them from receiving any provincial tax credits or any direct, tax-based, provincial benefits (for example, provincial payments in respect of dependent children).
When it has had to interpret the word “resident” in other cases where taxpayers were denied a claim for the Child Tax Benefit, the Tax Court of Canada (TCC) has ruled that the eligible individual actually has to live in Canada in order to get the tax benefit. Among a number of other issues, the TCC took into account factors such as whether the eligible individual had a mailing address in Canada, or had establishing a sense of permanency while visiting Canada (rather than making infrequent visits[8]). While the TCC also took into account whether the eligible individual had any investments or business activities in Canada[9], none of these factors were determined to be as important and simple presence in the country, based on a day count for every month at issue.
The fact that Mr. Britton filed Canadian returns and pay Canadian taxes does not meant that he meets the definition of “eligible individual” contained in section 122.6 of the Act. Paying tax in Canada does not make one a resident.[10] It is certainly unfortunate for a family to be greeted by such a large tax bill upon their return to Canada. However, despite how confusing the Act is, the CRA is unforgiving; there is simply no fairness in tax.
The reality is that we run into these issues all the time. We had one client who continued to file tax returns in Canada long after he was gone, was no longer liable for Canadian tax, and did not owe any tax in Canada on the facts. But that client only got advice on their situation from a person who made their living filing tax returns. Of course someone who makes their living filing tax returns is going to tell you that you need to keep filing. The net result was that person ended up having to pay hundreds of thousands of dollars in tax completely unnecessarily. Moreover, because most of the years were past the latest possible date to object or appeal, there is nothing we could do about it. We have had clients who left Canada, were no longer liable for Canadian income tax and owed no tax on the facts, but called up the CRA and asked if they had to file tax returns and pay tax. And of course the CRA said they had to pay tax because it’s the CRA and that is what they always say…
So the upshot of all this is that if you are thinking about leaving Canada and moving overseas, get some advice from your friendly neighbourhood tax lawyer before you go so you know so that you can arrange your affairs so as to minimize the tax you will pay while you are gone and also not face a big surprise tax bill when you come back. If you are already a non-resident, then please take the time to get some advice before you come back! This is one area of tax law where an ounce of prevention is worth thousands of pounds of cure.
By Jonathan N. Garbutt, Barrister & Solicitor, and Raminder Pandher, Student-at-law
The above information is provided on an FYI basis and is not intended as, and should not be considered to be, legal advice or tax advice.
[1] http://www.cbc.ca/news/canada/calgary/edwin-and-elise-britton-battle-revenue-canada-over-18k-tax-bill-1.2835478
[2] https://www.documentcloud.org/documents/1361179-sample-cover-letters-submitted-by-my-husband.html
[3] Income Tax Act, RSC 1985, c 1 (5th Supp) [the Act].
[4] Ibid, s. 122.6.
[5] Armstrong v. R., [1999] 4 C.T.C. 2719 (T.C.C.).
[6] Ibid.
[7] Income Tax Folio: S5-F1-C1, Determining an Individual’s Residence Status , http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s5/f1/s5-f1-c1-eng.html
[8] Nedelcu v. The Queen, 2008 TCC 417
[9] Lauren v. Her Majesty the Queen, 2006 TCC 634
[10] Smith v. The Queen, [2000] 4 CTC 2631.