If you are international students in Canada, you may need to file tax returns; especially when you are buying or selling houses. First, you have to determine your residency status for tax purposes.
This editor had asked a few international students here the above question. Some might say that as long as they physically are in Canada, they would file tax returns as Canadian residents; but others say that I am no Canadian, but Chinese, so it is not necessary to file a tax return as a non-resident. They both are incorrect and they might make a mistake and lose some money. For example, if you buy or sell a house in Canada, you may be charged a larger amount of tax by the Canada Revenue Agency. You can’t even cry about it!
Based on the regulations of the Canada Revenue Agency, international students will be regarded as one of the following four
residency status in Canada:
1- factual resident;
2- non-resident
3- deemed as a resident;
4- deemed as a non-resident.
The most important thing to consider when determining your residency status in Canada for income tax purposes is whether or not you maintain, or you establish, residential ties with Canada.
Significant residential ties to Canada include:
- a home in Canada
- a spouse or common-law partner live in Canada with you
The above two are primary indicators, and once met, they can be judged as having established a major bond. Other
indicators that may be used by the Canada Revenue Agency to determine whether a significant bond is established are:
- personal property in Canada, such as a car or furniture
- social ties in Canada, such as memberships in Canadian recreational or religious organizations
- Possession of others, such as the Canadian driver’s license, the Canadian government
health insurance, Canadian bank accounts, or credit cards.
Since many of the considerations are very broad, generally speaking, in the eyes of the Canada Revenue Agency, many international students have already established significant residential ties. Then you will be considered as a factual resident of Canada, which means you are a tax resident status.
If you are determined by Canada Revenue Agency that you do not have significant residential ties, and you have lived in Canada for less than 183 days in a year, then you will be considered a non-tax resident.
If you are determined by Canada Revenue Agency that you do not have significant residential ties, but the number of days you stay in Canada reaches or exceeds 183 days in a year, along with the international tax treaty agreement between your home country (such as China) and Canada, plus you are not considered as a resident by your home country, then you will be deemed to be a tax resident.
However, even if you are considered by Canada Revenue Agency as having established significant residential ties, but you are treated as a resident in another country (for example, China or the United States) and this country has the international tax treaty agreement with Canada, then you deemed as a non-tax resident in Canada.
Wow, this is too much information that makes my head spinning. How do these related to the buying and selling real estate properties by international students? We will explain further…
Under the Canadian tax system, your income tax obligations to Canada are based on your residency status.
If you are a tax resident, you have to pay tax to the government of Canada for your income from all over the world, including China. If you are a non-tax resident, you only need to pay tax for the income you earn in Canada. Income from the other countries (for example, China) does not need to be declared in Canada.
Some important information regarding those who go back and forth between two countries, i.e. Canada and China, needs to be noted. This individual might be working full time in China, however, his spouse and children remain in Canada. This individual might already be lost their permanent residency status and only using a visitor visa to enter Canada. He might think that he is not a resident in Canada; therefore, not paying taxes in Canada. This is a misconception. According to the above-mentioned rules, this person has significant ties to Canada since his spouse and children live in Canada, so he has to pay tax in Canada, even he already paid tax in China.
For those international students who do not have to pay tax in China would be a benefit to be a resident in Canada because they can take advantage of the Canadian tax system. Not only they can claim for tuition fee tax credits (which can be used for future years when their incomes are higher to offset the amount of tax they have to pay), they can also enjoy GST refund and other tax incentives from various provinces.
Students need to pay capital gain tax if they sold their investment properties and made a profit. However, if the properties considered their main residency, then there will be no tax implication if your statuses in Canada are factual residents and deemed residents. For those who have either non-tax resident status or deemed non-resident status, then they have to pay the capital gain tax.
A lot of international students might think they must be considered as a resident or deemed resident in Canada; therefore, they don’t have to pay the capital gain tax. However, there is one more important issue we have to explore here: back in 1986, Canada and China had signed the tax treaty agreement. In accordance with this agreement, if you are considered living in China, even if you have significant ties to Canada, you still will be considered a deemed non-resident in Canada.
The principle of the Canada-China Tax Agreement is: if your income from China is already legally taxed from the host country, it will be exempted in Canada, and vice versa. However, according to Article 4 of the agreement, the “tie-breaking rules” can be utilized to prevent double taxing.
There are four levels for determination:
The first level is to determine where the resident has a permanent home. If you have a permanent home in China, you are a
Chinese tax resident, and then you are treated as a Deemed non-resident in Canada. Obviously, most international students have their permanent homes in China, so they will be considered deemed non-resident in Canada even they might be staying in Canada for more than 183 days.
If an international student claims to have a permanent home in Canada after buying a house in Canada, then will this individual be considered a factual resident in Canada?
Then we have to proceed to the second level of determination. If this student has homes both in Canada and in China, then his personal and economic relations will be investigated to determine in where he has more connections. In general, international students are not allowed to work in Canada, economically they dependent on their parents who still reside in China. Therefore, their economic relations are closer to China. In other word, they will be considered as non-residents.
What if an international student owns a lot of assets in Canada given by his parents, or he has investment income and not depending on his parents, or marry to a Canadian resident, and his economic relationship is closer to Canada, then he may be considered as a resident in Canada.
If it is impossible to determine which country the student has a closer economic relationship, then this can be reviewed in the third level. This level is to investigate which country the international student has a habitual and frequent residence. This means in where the student stay longer. If you buy a house in Canada and live in Canada for more than 183 days, according to this level of finding, you may be treated as a Canadian tax resident.
If the foreign student has lived in China and Canada for almost the same length of time, and the residency status cannot be determined by the third level, then proceed to the fourth level. Now, they are going to exam which passport that the student holds, whether the Chinese passport or the Canadian passport. International students holding Chinese passports may be treated as non-residents.
Some cases could be complicated and ambiguous. If you are not sure which category that you belong to, it is best to consult the Canada Revenue Agency. You can go to its website to fill in Form NR74, Determination of Residency Status (Entering Canada) or Form NR73, Determination of Residency Status (Leaving Canada), attach all the relevant materials and send them to the Canada Revenue Agency. They will write back to you to tell you their decision.