Tax basics for Canadian expats
Canadians are taxed on worldwide income; two Canadian tax experts advise on how Canucks abroad can avoid paying more tax than they need to.
As Canadians are taxed on worldwide income, it's important to plan ahead to avoid paying more than you should. Determining what the tax consequences are of moving to another country, either permanently or temporarily, requires some foresight.
Since Canadian residents are taxed on worldwide income; maintaining residency in Canada will require you to file a Canadian tax return on an annual basis, including in that tax return income from all sources, both Canadian and foreign. You may also be required to file a tax return in the country you are going to live in.
If you sever your Canadian residency for tax purposes, a final "departure tax return" should be filed in Canada.
Since many other countries around the world have lower individual income tax rates than Canada, you may want to sever your residency in order to be in a situation where you will no longer be taxed on your worldwide income in Canada.
It is important that before you make that decision, you first determine if you are even in a position to be able to sever residency and whether it makes sense in your situation. Tax residency does not affect your citizenship or legal residency status. It is specific to tax.
Determining if you are a resident of Canada for tax purposes depends on your intention at the time you leave Canada. You must ask yourself if you plan to return to Canada in the "foreseeable" future. If your plans are not to return to Canada, you may be in a position to sever your residency with Canada if you support your intention to remain abroad by severing your residential ties with Canada.
There is no specific time period after which you will be seen to be a non-resident of Canada, so it is important that the steps you take to prove your intention to be a non-resident are followed carefully.
Residential ties with Canada
Residential ties with Canada typically are seen as primary or secondary. It is important that you sever all primary residential ties when ceasing residency. Maintaining any significant primary ties could be looked at by the Canada Revenue Agency (CRA) as causing your residency to be maintained in Canada.
Secondary residential ties are looked at collectively by the CRA. No one secondary tie would likely be seen as causing you to be viewed as maintaining Canadian residency. However, efforts should be made to sever all ties to Canada.
Some common examples of primary ties are maintaining a residence(s) in Canada available for your use, leaving a spouse or common-law partner in Canada and supporting dependents in Canada.
Some common secondary ties are personal property left behind in Canada, maintaining Canadian bank accounts, Canadian credit cards, and professional and/or club memberships in Canadian organizations.
In addition to the above, it is important that you inform any Canadian residents making payments to you, such as financial institutions that you have investments with that you intend to be a nonresident of Canada.
Not only does this show the CRA your intention to be a non-resident, but it also ensures that payments made to you after your departure are subject to the appropriate nonresident withholding taxes. If these non-resident withholding taxes are not withheld by the Canadian payer, you will be required to voluntarily remit the withholding tax after you have left Canada.
If your residency status is questioned by the CRA, they may ask you to submit a form NR73 - Determination of Residency Status (Leaving Canada). It is advisable that you fill in this form at the time of your departure and keep a copy for your records, in case it is requested.
It is not advisable that you submit this form to the CRA unless you and your tax advisor have difficulty determining your residency status.
If you become a non-resident of Canada for tax purposes, you must file a final departure tax return in Canada, due 30 April after the year in which you sever your residential ties with Canada. There are various tax implications that could arise in this final return. The most common example is the deemed disposition of certain assets, based on fair market value, you own.
The pro-ration of personal tax credits for your period of residency is another example of many. Apart from the departure tax return itself, rental properties owned by non-residents have specific filing requirements in Canada on an annual basis.
This is just a sample of some of the issues that should be considered on your departure from Canada. It is important that you seek professional advice to ensure that all of your departure tax issues are taken into consideration in your final tax return.
Maintaining Canadian residency
If you decide to maintain your residency with Canada, or your significant ties to Canada cause you to be seen as a resident, keep in mind that you will still have to file a Canadian tax return on an annual basis reporting your worldwide income, even if this income was earned in another country.
In most cases, you will be allowed a foreign tax credit for any foreign taxes already paid on this income but it does not prevent you from meeting your tax filing requirements in Canada.
If you do not file your tax return, you may receive a request at some point from the CRA requesting that you do file.
Since the tax implications will vary based on an individual's specific circumstances, professional tax advice should be sought before acting on any information provided in this article.
Ernie and Wayne / Expatica
Ernie and Wayne are Canadian Chartered Accountants and Tax Advisors. Their firm focuses on international tax for Canadians around the world. For further information on their firm and the services they provide, visit www.trowbridgepc.ca.
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