2022-0950421I7 Part-Year Resident - Federal Surtax & Prov Tax

Principal Issues: If an individual who is factually a resident of Canada ceases to be resident during the year, would the taxable capital gain arising from disposition of taxable Canadian property during the part of the year that the individual becomes non-resident be subject to federal surtax under subsection 120(1) of the Act or would it be subject to provincial income taxes?

Position: The taxable capital gain would be subject to provincial tax; federal surtax would be nil.

Reasons: Federal surtax under subsection 120(1) of the Act applies where an individual has income for the year that is not income earned in a province. Regulation 2601(1) provides that the income earned in a province by an individual who resides in a particular province on the last day of the taxation year and has no income from a business with a permanent establishment (“PE”) outside the province is the individual’s “income for the year”. In the case of a part-time resident, the “last day of the taxation year” refers to the last day that the individual resided in Canada in accordance with Regulation 2601(5)(a). As a result of Regulation 2601(1) and 2601(5)(a), the individual’s income earned in a province, comprising of the taxable capital gain determined under paragraph 120(3)(a) would be subject to provincial tax and not subject to federal tax under subsection 120(1).

Author: Ng, Mei
Section: Subsections 2(1), 2(2), 2(3), sections 114, 115, subsections 120(1), 120(3), 120(4), section 250 of the Act, Regulation 2600, 2601(1), 2601(5)(a)

                                                                                September 19, 2023

Contact Centre Services Directorate                      HEADQUARTERS
Assessment, Benefit, and Service Branch             Income Tax Rulings Directorate

                                                                                Mei Ng

Attention: Jeffrey Haynes

                                                                              2022-095042

Federal Surtax and Provincial Tax Implications for a Part-Year Resident

Unless stated otherwise, all statutory references in this document are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.) (the “Act”) or the Income Tax Regulations (“Regulations”), as amended to the date hereof.

We are writing in reply to your email inquiry of September 23, 2022 in relation to the federal surtax and provincial tax implications of taxable capital gains from the disposition of taxable Canadian property by an individual resident in Canada throughout part of the year and non-resident throughout another part of the year. We apologize for the delay in our reply.

In particular, you requested a technical interpretation regarding the following hypothetical situation:

* An individual factually resident in Canada emigrates from Canada during the year.

* The individual ceases to be resident in Canada upon leaving Canada during the year.

* In the year of departure from Canada, the individual is resident in Canada throughout part of the year and non-resident throughout another part of the year (“part-year resident”).

* The individual realizes taxable capital gains from the disposition of taxable Canadian property after emigrating from Canada, in the part of the year that the individual is non-resident.

It is your view that the taxable capital gains from the disposition of taxable Canadian property during the part of the year that the individual is non-resident is subject to federal surtax under subsection 120(1) of the Act as this income cannot be allocated to a province and you are seeking guidance on whether this interpretation is correct.

While not specifically stated in the facts provided, we have assumed that the individual permanently severs all significant residential ties from Canada and becomes a non-resident upon emigrating from Canada during the year of departure. We have also assumed that the individual does not have income earned from a business with a permanent establishment (“PE”) outside the particular province or Canada.

Our comments

A person who is resident in Canada at any time in the year is subject to Part I tax on their worldwide income from all sources pursuant to subsection 2(1). A resident in Canada’s tax is based on “taxable income” as defined in subsection 2(2).

A non-resident individual is taxed on Canadian sourced income. In particular, a non-resident who was employed in Canada, carried on business in Canada or disposed of taxable Canadian property is subject to Part I tax on “taxable income earned in Canada” by virtue of subsection 2(3). The phrase “taxable income earned in Canada” is computed under section 115.

Although an individual resident in Canada is generally subject to Canadian tax on their worldwide income from all sources, section 114 of the Act modifies the rules in subsection 2(2) of the Act in determining the taxable income of an individual who is resident in Canada in part of a taxation year and non-resident in another part of the taxation year (part-year resident).

Paragraph 114(a) computes the part-year resident’s taxable income as their total worldwide income for the year; however, for the non-resident period of the year, only the amounts of income or losses applicable under paragraphs 115(1)(a) to (c) are included.

Paragraphs 115(1)(a) to (c) of the Act generally include income from employment performed by the non-resident in Canada, income and losses from business carried on in Canada and taxable capital gains and losses from dispositions of taxable Canadian property, other than treaty protected property.

In addition to Part I tax, all persons required to file Canadian tax returns are also subject to a federal surtax, to the extent that that the taxpayer does not have “income earned in the province”.

The federal surtax is levied under subsection 120(1) on tax otherwise payable in respect of the portion of the “individual’s income for the year” that is not “income earned in the year in a province”. To the extent that a taxpayer has “income earned in a province”, the federal surtax would not apply to the amount earned in the province.

Pursuant to Regulation 2600(1), in applying the definition “income earned in the year in a province” in subsection 120(4) of the Act, “income earned in the year in a province” means the total of all of the individual’s incomes earned in the taxation year in each province as determined under Part XXVI of the Regulations.

Under Regulation 2601(1), if an individual resides in a particular province on the “last day of a taxation year” and has no income for the taxation year from a business with a PE outside the particular province, the “individual’s income earned in a province” for the taxation year is the individual’s income for the year. The closing words of Regulation 2601(1) refer to the “individual’s income for the taxation year”, which refers to an entire year.

In determining an individual’s income earned in a province under Regulation 2601(1), the reference to “last day of a taxation year” does not necessarily coincide with the end of the year.

Where an individual resided in Canada at any time in the year but ceased to reside in Canada before the end of the year, Regulation 2601(5)(a) deems their “last day of a taxation year” to be the last day in the year on which the individual resided in Canada. In this regard, the application of Regulation 2601(1) extends to part-year residents, where an individual ceased to reside in Canada before the end of the year.

Regulation 2601(5)(a) ensures that individuals who are part-year residents have an “income earned in a province”. Without Regulation 2601(5)(a), part-year residents who have emigrated from Canada will never have an “income earned in a province” amount, despite having resided in a particular province during the year and therefore liable for federal surtax under subsection 120(1) for the entire year.

Application to the hypothetical situation

In the situation provided to us, since the individual is a part-year resident who resided in Canada during the year and ceased to reside in Canada before the end of the year, Regulation 2601(5)(a) deems the individual’s “last day of a taxation year” to be the last day in the year on which the individual resided in Canada.

Based on the assumption that the individual did not earn income from a business with a PE outside the particular province, the individual’s income earned in a particular province would be their “income for the taxation year” pursuant to Regulation 2601(1).

Furthermore, where the individual is a part-year resident, for the purpose of determining the amount of federal surtax under subsection 120(1), “the individual’s income for the year” means the amount determined under paragraph 114(a) in respect of the individual for the year pursuant to paragraph 120(3)(a).

Accordingly, “the individual’s income for the year” of a part-year resident for the purpose of the federal surtax is determined under paragraph 114(a) to be the taxpayer’s worldwide income for the year; but only includes amounts under paragraphs 115(1)(a) to (c) for the non-resident period.

In this regard, despite the fact that the taxable capital gains from the disposition of taxable Canadian property were realized after the individual ceased to be resident in Canada in the situation described, it would be included in the individual’s “income for the year” for the purpose of the federal surtax by virtue of paragraphs 120(3)(a) and 114(a) since the taxable capital gains arose during the non-resident period and are amounts described under paragraph 115(1)(b).

However, the federal surtax provided by subsection 120(1) applies only to the extent that there is income that is not “income earned in a province”. As noted above, Regulation 2601(1) provides that where an individual resides in a particular province on “the last day of a taxation year” and does not earn income from a business with a PE outside the particular province, the income earned in the taxation year in the province is the “income for the year”. This means that, generally, an individual who is resident in Canada (including a part-year resident) will not be subject to federal surtax on any of their income because all of that income will be income earned in a province and the amount calculated under subsection 120(1) of the Act will be nil. At the same time, all of the individual’s income will generally be subject to provincial tax in accordance with the applicable provincial taxing statutes. These comments are consistent with our document XXXXXXXXXX.

In the situation at hand, the income for the whole year of the described individual, a part-year resident, would be their income earned in the province. As such, the taxable capital gain from disposition of taxable Canadian property realized by the described individual would be subject to provincial tax determined under the applicable provincial taxing statutes and not subject to federal surtax under subsection 120(1).

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

We hope our comments are of assistance.

Yours truly,

Gillian Godson
Manager, Administrative Law Section I
for Division Director
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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