Here’s a question that comes up with predictable regularity in cross-border files, usually right after someone realizes the T1135 threshold has been crossed.
If an individual is a factual resident of Canada, but a tax treaty tie breaker assigns their residence to another country, do they still have to file Form T1135?
Most practitioners instinctively say yes. Factual residency is a powerful concept in Canadian tax law, and the T1135 rules are notoriously unforgiving. Once you accept that someone is a Canadian resident in any sense, it feels safer to assume the form is required and move on.
That instinct, while understandable, is wrong.
The correct answer only becomes clear when you slow down and follow the Income Tax Act all the way through, instead of stopping once you get uncomfortable.
The Fact Pattern We’re Dealing With
Assume your client is an individual with significant residential ties to Canada. They maintain a home here. Their spouse and children live here. On a common-law analysis, they are a factual resident of Canada.
At the same time, the client also maintains a home in another country and spends enough time there to be considered a resident under that country’s domestic tax rules. To keep things concrete, assume the other country is the United Kingdom.
You now have a classic dual-resident situation.
You apply the tie-breaker rules in Article 4 of the Canada-U.K. tax treaty. After working through permanent home, centre of vital interests, and habitual abode, you conclude that the client’s personal and economic relations are closer to the U.K. For treaty purposes, the client is resident in the U.K. and not Canada.
That conclusion does what it is supposed to do. It shields the client from Canadian tax on their worldwide income.
Then the loose thread appears.
The client owns well over CAD$100,000 of specified foreign property. Securities, foreign accounts, maybe interests in foreign entities. The T1135 threshold is clearly exceeded.
So the question becomes unavoidable: even though the client is treated as a non-resident of Canada for treaty purposes, do they still have to file a T1135 because they are a factual resident?
Where the T1135 Obligation Actually Comes From
The place to start is not residency concepts or CRA commentary. It is subsection 233.3(3) of the Income Tax Act.
That provision imposes a filing obligation only on a “reporting entity.”
A reporting entity is defined in subsection 233.3(1). And a reporting entity is a “specified Canadian entity.”
This is the first critical filter. If you are not a specified Canadian entity, the T1135 simply does not apply to you. The value of your foreign property becomes irrelevant.
So everything turns on whether this individual qualifies as a specified Canadian entity for the year.
What Makes Someone a “Specified Canadian Entity”
For individuals, the definition is mercifully short. A specified Canadian entity includes:
“... a taxpayer resident in Canada in the year...”
There are additional exclusions and wrinkles for trusts and corporations, but none of that matters here. For an individual, the only question is whether they are a taxpayer resident in Canada for purposes of the Act.
At this point, many people stop and say: well, they are a factual resident, so that’s the end of it.
It isn’t.
Factual Residency Is Not the End of the Analysis
Under Canadian tax rules, an individual can be resident in Canada in two main ways.
- Factual residency, determined under common-law principles by looking at residential ties such as a home, family, and personal connections. On our facts, the client clearly meets this test.
- Deemed residency, under subsection 250(1), which applies in situations like sojourning in Canada for 183 days or more. That rule is not doing any work here, but it exists in the background.
Based on domestic rules alone, the client looks like a resident of Canada. If that were the end of the story, the T1135 would almost certainly be required.
But it is not the end of the story, because tax treaties do not just affect tax rates and exemptions. They can override residency itself.
The Treaty Tie Breaker and Subsection 250(5)
When an individual is resident in two countries under domestic law, the treaty tie-breaker rules determine a single country of residence for treaty purposes. That much is familiar.
What is often overlooked is how the Income Tax Act responds to that treaty determination.
Subsection 250(5) addresses this directly. It provides that where, under a tax treaty, an individual is resident in the other country, the individual is deemed not to be resident in Canada for purposes of the Act.
The wording matters. The provision begins with “Notwithstanding any other provision of this Act.” That language is not subtle. It means the treaty result overrides other residency rules, including the common-law factual residency analysis.
Once subsection 250(5) applies, the individual is deemed to be a non-resident of Canada for purposes of the Income Tax Act. Not for some purposes. For the Act.
What This Does to the T1135 Analysis
Once you accept the effect of subsection 250(5), the T1135 analysis becomes mechanical.
- Because of the treaty tie breaker, the client is deemed not to be resident in Canada under the Act.
- If the client is deemed not to be resident, they are not a “taxpayer resident in Canada.”
- If they are not a taxpayer resident in Canada, they do not meet the definition of a specified Canadian entity in subsection 233.3(1).
- If they are not a specified Canadian entity, subsection 233.3(3) does not apply to them.
And if subsection 233.3(3) does not apply, there can't be a T1135 filing obligation, even if the client owns more than $100,000 of specified foreign property.
How to Document Things
If you are papering this properly, the memo almost writes itself.
Start with the facts. The client owns specified foreign property over the $100,000 threshold. The client is a factual resident of Canada. The client is also resident in a treaty country under that country’s domestic law. The treaty tie breaker assigns residence to the other country.
Then restate the rules. The T1135 applies only to specified Canadian entities. A specified Canadian entity includes an individual who is a taxpayer resident in Canada. Subsection 250(5) deems an individual to be non-resident where a treaty assigns residence elsewhere.
Finally, apply the rules to the facts. Because subsection 250(5) applies, the client is deemed not resident in Canada. As a result, the client is not a specified Canadian entity and has no T1135 filing obligation.
That is the entire chain. Break any link and the conclusion changes. But if the facts hold, the conclusion holds.
Final Thoughts
Yes, this is a lot of analysis for a single information return. Unfortunately, that is the nature of cross-border tax work.
The upside is that once you understand how these provisions interact, the answer is not ambiguous. Factual residency on its own does not create a T1135 obligation. Treaty residency can eliminate it entirely.
The key is resisting the urge to stop once something feels familiar. The Act does not reward shortcuts, and the T1135 is a perfect example of why.
Does this analysis change in a year of emigration? Sometimes. Timing matters, and the answer depends on the specific facts and the calendar.
But that’s a separate discussion, and one best saved for another post.
Usual Disclaimer: What is written here is not formal tax advice. I'm not a tax lawyer. I’m not your CPA. It’s possible, or dare I say even probable, that the comments and opinions expressed here contain material errors, are out of date, or that important stuff has been left out. Don’t use this info to make tax decisions. Hire a pro to help you.