May 17, 2022
By: Rimo Rico
More and more retirees are trading in their Winnebagos for a Carnival Cruise. CNN has recently reported that some cruise-lovers are even choosing to spend their entire retirement on a cruise ship. Before embarking on a retirement at sea, a retiree should consider the income tax implications of tax residence in Canada for income tax purposes.
Under Canadian tax law, residents of Canada are taxed on their worldwide income pursuant to subsection 2(1) of the Income Tax Act[1] (the “ITA”). Residency is neither domicile nor citizenship, and a person may even be a resident of two countries pursuant to the Supreme Court of Canada’s decision in Thomson v MNR.[2] Tax residency is often determined by the nexus of the significant personal, social and economic ties a person has to Canada.
You are deemed a resident in Canada if you sojourn in Canada for 183 days or more in a year, or are a member, school staff or child of a member of the Canadian Forces, diplomatic or quasi-diplomatic service, or otherwise perform services in a foreign country under a prescribed international development assistance program of the Canadian government.[3]
One could also be ordinarily resident of Canada. A person’s factual residency is determined by the person’s “residential ties” to Canada. The most significant of these ties would be the presence of a dwelling place (or places) in Canada, or a spouse, common-law partner or dependants in Canada. Other factors include owning personal property in Canada (such as a car registered in Canada), having memberships in Canadian recreational or religious organizations, having a Canadian passport or driver’s license, or having Canadian insurance policies, bank accounts, retirement savings plans, credit cards, and securities accounts. For more information on these, you may read the CRA’s Income Tax Folio S5-F1-C1, Determining an Individual’s Residence Status.[4]
Applying these factors to our hypothetical retirement at sea, a Canadian who lives on a cruise-ship or a personal yacht year-round for an extended period of time may cease to be resident of Canada for tax purposes. Nonetheless, a cruiser would continue to have certain filing obligations depending on their sources of income. At the same time, a cruiser who wishes to sever their ties with Canada may discover the CRA will nevertheless consider them a resident for tax purposes because of remaining residential ties and/or because Canada is the last best jurisdiction, relative to the jurisdiction of the cruiser’s preference. Pursuant to Thomson, “For the purpose of income tax legislation, it must be assumed that every person has at all times a residence.”[5] A person cannot have no residence.
In Lee v MNR,[6] a British national was employed to work on offshore oilrigs was ruled to be a Canadian resident under the ITA. In its analysis, the Tax Court of Canada drew its conclusion based on the fact that the appellant’s wife was resident in Canada, therefore establishing residential ties with Canada, as well as the fact that the appellant never filed or paid taxes anywhere. The Court rejected the appellant’s argument that he did not wish to be a Canadian resident at the time.
Similarly, in Reed v MNR,[7] the Court found a Canadian citizen seafarer to be Canadian resident under the ITA. While the appellant’s residential ties to Canada were weak, the Court ultimately decided that the appellant was a Canadian resident as the appellant did not have stronger residential ties with another country. In Reed, the Court specifically noted that a ship cannot be the place of residence under the ITA. Given that in Thomson that Court already established one must have a place of residence under the ITA, it led to the inevitable conclusion that the appellant was ruled as a Canadian resident for tax purposes.
Therefore, Canadian retirees should disavow themselves of the belief that a life at sea means they have ceased to be Canadian residents for tax purposes. Before setting off on the open seas, consult with Farber Tax Law to determine your residency status in the coming years or speak to us about a Voluntary Disclosure Program application.
[1] Income Tax Act, RSC 1985, c 1 (5th Supp), at subsection 2(1) [ITA].
[2] Thomson v Minister of National Revenue, 1946 CanLII 1 (SCC), [1946] SCR 209, at page 70 [Thomson].
[3] ITA, supra note 1, at subsection 250(1).
[4] Income Tax Folio S5-F1-C1, Determining an Individual’s Residence Status, CRA, <https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-5-international-residency/folio-1-residency/income-tax-folio-s5-f1-c1-determining-individual-s-residence-status.html>.
[5] Thomson, at pages 63–64.
[6] Lee v MNR, 1989 CarswellNat 429, [1990] 1 CTC 2082, 90 DTC 1014, at paragraph 18 [Lee].
[7] Reed v MNR, 1988 CarswellNat 511, [1989] 1 CTC 2070, 89 DTC 34 [Reed].