Home is Where Your Social Ties Reside for Tax Purposes
September 15th, 2017
When it comes to taxes, residence can be more complicated than just where you hang your hat on December 31.
In fact, for several years the issue of province of residence has been among the top ten tax issues Canada Revenue Agency (CRA) scrutinizes (see below). Some taxpayers like to claim they reside in low-tax provinces or territories such as Alberta while they actually live elsewhere. The CRA has warned that it will fine or penalize taxpayers who attempt this maneuver to evade taxes.
It all seems fairly straightforward on the face of it. Generally, you have to use the tax package for the province or territory where you reside on December 31 of the tax year. So if you actually resided in Alberta on December 31, you use that province’s tax package.
But it can be more complex: In some cases you could be considered resident in more than one province on December 31, say, for example if you were on a temporary job posting or attending college or university. In other cases, you may own two or more homes that are in different parts of the country, one of which may be a low-tax jurisdiction.
In determining residency, the CRA — and the courts — look to the province or territory where you have the most significant residential ties. That means the jurisdiction where:
- You maintain a dwelling;
- Your spouse or common-law partner lives, and
- Your dependent children live.
If necessary, the CRA may look at other elements to determine the strength of your links to a particular jurisdiction. Among them are where you:
- Were employed or self employed;
- Had healthcare coverage;
- Obtained your driver’s license and registered your vehicle;
- Held bank accounts, Registered Retirement Savings Plans and other financial holdings; and
- Participated as a member in recreational, religious and social organizations.
It is possible to be a resident of a province or territory without actually being there for any significant amount of time during the year. Say, for example, that you are a married taxpayer on an extended assignment in Alberta. But your home, your spouse and your children live in Ontario. Even if you were living in Alberta at the end of the year, you must file the Ontario tax package. The CRA considers that you are resident in your “home” province of Ontario because that’s where your spouse and children live.
Another example: You own a ski cabin in British Columbia and a home in Quebec. You may be skiing on December 31, but you still use the Quebec income tax package because that is the province where you have your most important residential ties.
Your province of residence doesn’t affect your federal taxes directly, but it does affect certain federal tax credits and deductions you may be eligible to claim. For instance, the medical and moving expense rates for mileage are different in different provinces, and the northern residents deduction eligibility requirements include the necessity to be resident in a prescribed zone.
A tip: If you are moving or transferring to a lower-tax jurisdiction, consider arriving before the year-end deadline. Alternatively, if you are relocating to a higher-tax province or territory, try to delay the change until after December 31.
Residency is a complicated matter and can also come into play for snowbirds who spend part of the year in the United States. Your accountant can help you determine which tax package to use as well as help you maintain Canadian residency if you spend extended time outside the country.
Issues on Audit Hit List
There are several issues that send off the alarm bells at the CRA and can prompt an audit of your personal income tax returns. The top nine issues are:
- Allowable business investment losses (ABIL). These carry a near 100 per cent probability of an audit.
- Medical expenses. Claim on the lowest income spouse’s return and be sure you can document and support the payments.
- Carrying charges. Interest, bank charges and fees for accounting and investment and other services must be documented.
- Stock option deductions and deferrals.
- Charitable donations, particularly contributions of more than $25,000 and donations of property in-kind.
- Personal tax instalment payments. Typical errors include payments credited to the wrong year. Be sure you give your accountant the CRA receipts and statements for your payments.
- Disability tax credits. This area is complicated by the fact that the rules are complicated and physicians don’t always understand them when they sign certification forms. Have your accountant verify the claims.
- Transfers from deceased individuals. These usually involve Registered Retirement Savings Plans, investment portfolios and rental properties rolled over to a surviving spouse or common-law partner.
- Business expenses with a personal element. Automobile, home-office, travel and convention expenses typically catch the eye of CRA auditors.