Who Is Taxable?
| Author | Vern Krishna |
| Pages | 24-39 |
CHAPTER
2
WHO IS
TAXABLE?
A.
INTRODUCTION
In
this
chapter
we
turn
to the
first
question
a tax
system needs
to
address:
Who is
taxable?
The
answer will have
a
significant influence
on
the
structure
of the Act and on its
administration.
The
question needs
to
be
addressed
at two
different
levels. First,
one
must determine
the
type
of
persons
and
entities
who
should
be
taxable
in
Canada. Second,
one
needs
to
establish
the
requisite legal link between
the
person
or
entity
and
Canada.
For
Canadian
income
tax
purposes,
individuals
and
corporations
are
treated
as
separate taxable entities. Thus,
an
individual
is a
taxpayer,
as is a
corporation.
In
contrast,
a
partnership
is not a
taxpayer
in its own
right,
but is
treated
as a
conduit
for its
partners,
who are
liable
for any
tax
on the
partnership's income. Trusts
are
hybrid entities,
in
that they
are
taxable
in
their
own
right
for
some purposes
and are
treated
as
con-
duits
for
other purposes.
The
second aspect
of the
determination
of who is
taxable requires
consideration
of the
appropriate link between
the
taxable person
and
the
taxing jurisdiction.
A
country
can
exercise
its
constitutional author-
ity to tax by
asserting
its
jurisdiction over persons (natural
and
artifi-
cial)
and/or
property.
In
either case,
one
must
establish
the
appropriate
criteria
to
link
the
person
or
property
to the
country.
A
tax
system
can
levy
tax on
persons
and
property
on the
basis
of any
one or
more
of
several criteria.
For
example,
a
person
may be
taxable
on
24
Who Is
Taxable?
25
the
basis
of his
citizenship, domicile, residence,
or on the
source
of his
income. Each
of
these criteria
reflects
a
different
value
and
connection
between
the
taxpayer
and the
state.
Citizenship,
for
example,
is a
strong
political
link between
a
taxpayer
and her
country,
but
raises
difficult
administrative
issues
if the
taxpayer does
not
reside
in the
country
and
has no
intention
to do so.
Citizenship does, however, have
the
advantage
that
it is a
fairly
certain test
for
linking
an
individual
to her
country. Indi-
viduals
are
generally certain
of
their citizenship
and can
easily prove
it.
Unlike
the
United States, Canada
has
never used citizenship
as a
principal
or
determinative criterion
in
establishing
the
liability
of an
individual
for
Canadian income tax. Instead, Canada uses
the
concept
of
residence
to
determine whether
an
individual, corporation,
or
trust
is
liable
to
tax.
It
also uses
the
concept
of
source
of
income
to
establish
the
liability
of
non-residents
for
tax.
A
resident
of
Canada
is
taxable
on his
worldwide income, regardless
of
the
location where
it is
earned.1
Thus, Canada uses "residence juris-
diction"
and
exercises
full
tax
liability over
the
worldwide income
of its
residents.
A
non-resident
of
Canada
is
taxable only
on his
Canadian
source
income.2
That
is,
Canada exercises "source jurisdiction" over
non-residents. Thus, residence
is the
primary basis
of
exerting
tax
juris-
diction,
and
source
of
income
is
secondary. Understanding
the
concept
of
residence
for tax
purposes
is the
first
step
in
answering
the
question,
Who is
taxable?
B.
RESIDENCE
The
concept
of
residence
for tax
purposes
is not
synonymous with phys-
ical
presence. Residence depends
on the
legal
and
economic nexus that
a
person
has
with Canada. Similarly, residence
for tax
purposes should
not be
confused
with residence
for
immigration purposes.
The two
tests
are
quite
different
and
serve
different
purposes.
1)
Individuals
ITA,
s. 2,
subs.
248(1)
IT-221R2
3
February 1983 Determination
of an
Individual's
Residence
Status
1
Income
Tax
Act,
R.S.C.
1985 (5th Supp.),
c. 1,
subss.
2(1)
&
2(2)
[ITA].
2
Ibid.,
subs. 2(3).
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