Are you a non-resident of Canada for tax purposes?

Determining whether you are a resident or non-resident of Canada for tax purposes is not always straightforward. The Canada Revenue Agency (CRA) uses a detailed set of rules and tax treaty provisions to decide your residency status. If you are working abroad, moving permanently, or splitting time between countries, understanding your residency status is crucial for avoiding double taxation and ensuring compliance.

This article explains the CRA’s residency determination process step by step.

Why Residency Status Matters

Canadian residents pay tax on their worldwide income, while non-residents are only taxed on Canadian-sourced income (i.e. Canadian employment income, Canadian rental income).

Many people may move outside of Canada for personal reasons. As part of their move, they may still have some ties to Canada but don’t want to pay tax on worldwide income. Those people will want to ensure they are non-residents so they are no longer taxed in Canada.

Note: If you become a non-resident, even though you will no longer pay tax on worldwide income, you may have to pay ‘departure tax’ upon your exit from Canada.

Step 1: Severing Residential Ties in Canada

The first question the CRA asks is: Did you sever your residential ties in Canada?

Residential ties come in two forms:

Primary Ties
- Your spouse or common-law partner lives in Canada.
- Your dependents (children) live in Canada.
- You own or have a home available for your use in Canada.
Secondary Ties
- Personal property in Canada (car, furniture).
- Canadian bank accounts, credit cards, investments, or memberships.
- A valid Canadian driver’s license, health insurance, or passport.

If you sever your residential ties, the CRA will still consider you a non-resident.

If you don’t sever your residential ties, you move onto Step 2.

Step 2: Does the Other Country Have a Tax Treaty with Canada?

If you have not severed ties, the next step is to look at tax treaties.

Canada has treaties with many countries to prevent double taxation.
These treaties often include “tie-breaker rules” that determine where you are considered a resident if you are considered of both countries based on their domestic rules.

For example, under the Canada-UAE treaty, residency only applies to UAE nationals, not just residents.

If there is no tax treaty, you will be considered a resident of Canada.

If there is a tax treaty, move onto Step 3.

Step 3: Are You a Tax Resident of the Other Country?

If the treaty applies, the CRA will ask: Are you considered a tax resident in the other country?

The other country in question will have their own tax rules. And you need to find out if you are a resident of that country based on their tax rules.

If yes, then move to Step 4.

If no, then you will be considered a resident of Canada.

Step 4: Treaty Tie-Breaker Rules – Resident or Non-Resident of Canada

Now, you have to look at what the tax treaties use to determine where you will be resident.

The treaty’s residency tie-breaker tests apply in this order:

Permanent Home – Where do you have a home available for personal use (whether rented or owned)? If both, go to 2.
Centre of Vital Interests – Where are your personal and economic relations closer (family, business, employment, social ties)? If both/unsure, go to 3.
Habitual Abode – Which country do you normally live in? If both/unsure, go to 4.
Citizenship – Which country are you a citizen of? If both, go to 5.
If after all these tests residency is still unclear, the governments of both countries may come to a mutual agreement about where you are resident. This is a long process.

Key Takeaways

Severing ties is the most important factor in proving non-residency altogether.
- If you will not sever ties but you are going to a treaty country, you could still become a non-resident.
Tax treaties play a major role in avoiding double taxation.
The CRA applies a step-by-step analysis.
When it’s undeterminable, the governments may settle your residency status through a mutual agreement procedure (MAP).

Frequently Asked Questions About Non-Residency in Canada

1. Do I have to give up my Canadian citizenship to become a non-resident?

No. Tax residency is different from citizenship. You can remain a Canadian citizen while being a non-resident for tax purposes. What matters are your residential ties and whether you are considered a tax resident elsewhere.

2. Do I have to cancel my Canadian health card or driver’s license?

Not always. While the CRA may look at secondary ties such as health insurance, bank accounts, and driver’s licenses, these are not absolute. If you move to a country with a tax treaty, treaty tie-breaker rules often override your residential ties.

3. What is the Canada departure tax?

When you leave Canada and become a non-resident, the CRA may apply a departure tax. This means certain assets are treated as if you sold them on your departure date, triggering capital gains tax. Common assets subject to departure tax include stocks, mutual funds, and other investments. Exemptions apply to Canadian real estate and certain registered accounts (RRSPs, TFSAs, etc.).

4. Can I be a tax resident of two countries at the same time?

No. While both Canada and another country may initially claim you as a resident, tax treaties prevent dual residency. The tie-breaker rules (home, centre of vital interests, habitual abode, citizenship) determine which country has the right to treat you as a resident.

5. How do tax treaties help non-residents?

Tax treaties help prevent double taxation by deciding where you are considered a resident and by reducing or eliminating withholding taxes on income like dividends, pensions, and royalties. If the treaty applies to you, you may not need to cut every tie with Canada to become a non-resident.

6. Do I still pay Canadian taxes as a non-resident?

Yes, but only on Canadian-source income. Examples include:

Canadian employment income
Rental income from Canadian property
Certain pensions and retirement income
This income is usually subject to a withholding tax, often reduced by tax treaties.

7. What happens if the treaty doesn’t apply to me?

If the other country doesn’t have a treaty with Canada, or the treaty doesn’t apply to your situation, you must sever your residential ties completely. Otherwise, the CRA may still consider you a Canadian resident for tax purposes.

8. How can I prove I am a non-resident to the CRA?

You can file Form NR73 (Determination of Residency Status) to request a ruling, though it is optional and generally not recommended. More importantly, keep records showing your ties abroad (rental agreements, employment contracts, foreign tax returns) to support your claim if challenged.

On the other hand, if tax rates go down, an RRSP might look better. But when it comes to financial planning, it’s usually smarter to protect yourself from risks (higher future taxes) than to chase potential benefits (lower taxes).