The “183-Day Rule” in Canadian Tax Residency
We often assist people in determining their tax residency under Canadian law. One question that often comes up is whether they have spent more than 183 days in the Country, as clients have often heard this term come up as a “threshold” for Canadian tax residence. However, in practice, this rule only rarely determines the result.
The 183-day rule refers to people who “sojourn” in Canada for more than 183 days in a year. Where this is the case, they are deemed to be a Canadian resident for tax purposes throughout the whole year. Sojourning refers to time spent in the country while you are not a “factual” resident, which is based on various connections to Canada, particularly spouses, children, and homes. “Typical” Canadian taxpayers, who live, work, and have family in the country, are factual residents, and while they generally spend more than 183 days in the country, this is not what determines their residency status.
Close residency cases where a Canadian leaves the country are also generally based on the departing taxpayer’s factual status and remaining ties to Canada. Taxpayers may believe that they have lost their Canadian tax status because they no longer spend 183 days in the country, but ties such as an unsold Canadian home may mean they are still residents.
Even where an individual leaves the country and returns to sojourn for more than 183 days, this rule still often does not determine residency. Many countries, including, for example, the United States and the United Kingdom, have tax treaties that clarify residence rules. Because the 183-day rule would make the Taxpayer resident in both countries, a tie-breaker rule in the treaty to determine residency. Under Canadian law, the result of this tie-breaker will determine residency. The key question in these cases turns first on where the individual has a “permanent home available to them”, and if they have a home in each country, to “where their personal and economic relations are closest”, with a series of other tie-breakers if that is unclear.
In that instance, the 183-day rule serves to engage the tie-breakers in the tax treaty. However, if the sojourner only has a home in the country they are visiting from, the treaty will rule in favour of that country. If the sojourner has a home and significant personal ties in Canada, there is a very good chance that they were a factual resident of Canada, particularly if they had lived here previously. This means that the 183-day rule is often not necessary to engage the treaties’ tie-breaker rules.
However, residents of countries without tax treaties with Canada (many islands in the Caribbean, for example) should be very cautious about the 183-day rule. Because they cannot fall back on their ownership or leasing of a property in their home country to protect themselves under a treaty, the 183-day rule would require them to pay Canadian tax on their worldwide income.
– James Alvarez, Tax Counsel
© Kalfa Law 2020