What is the Difference Between Factual and Deemed Residence and How Does It Affect Cross Border Taxes?

October 20, 2021 | Written by: Sohail Afzal

Cross Border Taxes

Residency is a crucial matter for the Canadian tax system. Residents of Canada must declare all their income and pay taxes on it. At the same time, the non-residents are only taxed on their Canadian-sourced income. Therefore, residency status is essential to determine your tax liability in Canada. This is why we will discuss the difference between factual and deemed residence and how it affects cross-border taxes.

Starting With the Basic Rule

Although your residency is determined on a case-by-case basis by the CRA, there are some common factors that you can examine that may give you an indication of your status. It would help if you considered the following question to determine it:

  • Where is your home located?
  • Where do your spouse and children live?
  • Where is your personal property, such as your car, located?
  • Where was your driver’s license issued?
  • Where do your work?

The combination of these and some other factors are thoroughly reviewed. The factors that signify your closest ties determine the country of your residence.

Factual Residence

The term factual residents means that even if you left Canada, you are still considered a resident of Canada for your income tax purpose. You are a factual resident of Canada for tax purposes if you keep your significant ties in Canada while living outside the country.

Here are some ways that tell if you are a factual resident or not:

  • Temporarily outside of Canada.
  • If you work outside the country but come back on and off,
  • If you are a teacher or attend school outside the country.
  • If you commute back and forth
  • Daily or weekly to your place of work, such as crossing the USA border.
  • If you vacation outside the country.

Deemed Residence

If you are deemed resident and not a factual resident, you will be considered liable to pay taxes on all your worldwide income throughout the year. A person is considered to be a deemed resident if they :

  • Lived outside of Canada during the tax year
  • Don’t have significant residential ties and
  • Are employed by the government
  • Member of Canadian forces
  • Are working in global affairs
  • Stayed in Canada for more than 182 days

How Does It Affect Cross Border Taxes

Many individuals residing on either side of the border may be employed and are performing duties in other countries:

A: Us residents working in Canada and living in the United States

B: Canadian residents working in the US and living in Canada.

In both scenarios, if the resident earns less than $10000 or stays less than 183 days in any 12 months starting or ending of the fiscal year are not obliged to pay taxes. But if the previously mentioned restrictions are compromised, then they are considered to pay taxes. These are complicated matters and it would be best if you contact an accounting firm that has experience in cross border taxes so they can take care of it all and leave you free to take care of your business.

If you want to know more about taxes, feel free to contact us, and we would be much happy to assist you.

Sohail Afzal CPA Toronto

Sohail Afzal, CPA, CMA, MBA

Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.

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