Michael Kane
Sun
Q: My 23-year-old daughter is attending university in England for three years and is receiving #11,000 in scholarship money to cover her tuition, #480 in training support fees, and #6,500 in an annual maintenance payment. She is also being paid #19 an hour for two to three hours work per week as a teaching assistant. Her professor has suggested she become a non-resident of Canada to avoid paying Canadian income tax on this scholarship money. We would welcome any advice.
For 2005, she will also have about $200 interest income on savings in Canada, about $6,000 income from employment in Canada and $2,000 US employment income from the States. She started school in England on Oct.3.
— Diana Wladichuk, Delta
Robert Kopstein, an international tax specialist with the Vancouver office of lawyers Borden Ladner Gervais, answers:
Non-residents are only subject to Canadian taxation on their Canadian source income, whereas Canadian residents are subject to Canadian taxation on their worldwide income.
Unfortunately, a person’s status as a resident or non-resident of Canada for tax purposes is a “question of fact,” which means that each person’s circumstances must be considered on a case-by-case basis. In general, to become a non-resident for tax purposes, a person must take active steps to sever all significant ties with Canada.
In your daughter’s situation, one important factor would be whether she has a place to stay (such as a room in her parents’ residence) when she is in Canada. Other relevant factors would include whether she maintains Canadian health benefits or club memberships, keeps a Canadian bank account, driver’s licence, or credit card, how often she visits Canada, whether she works in Canada for part of the year, and whether she intends to return to Canada upon graduation. When a person ceases to be a resident of Canada for tax purposes, she is deemed to dispose of all of her property before leaving Canada, which means that capital gains or losses may be triggered.
Your daughter will be a U.K. resident for tax purposes for any taxation year that she is physically present in the U.K. for more than 183 days, or for any other year when she is ordinarily resident in the U.K. If she moved to the U.K. on Oct. 3, she will not be a U.K. resident for the 2005 tax year. If she is a Canadian resident for the 2006 tax year (because she has not severed her ties to Canada), but is also a resident of the U.K. for tax purposes (because she is present there for more than 183 days), the Canada-U.K. Tax Treaty will “break the tie” and deem your daughter to be a resident of one country and not the other for taxation purposes.
Very generally, if your daughter is able to establish that she has a permanent dwelling available to her in the U.K. and does not have such a dwelling available to her in Canada, she will be treated as a non-resident by the Canada Revenue Agency. Otherwise, it is likely she will be viewed as a Canadian resident under the treaty if her centre of vital interest is still in Canada.
In Canada, the first $3,000 of income from most scholarships is exempt from tax. If such income is fully taxable in the U.K., then there may be little or no benefit to your daughter severing her ties with Canada, since tax rates in the low- to middle-income ranges are generally a little lower in Canada than in the U.K.
© The Vancouver Sun 2005
