Canadians are taxed on worldwide income, so it’s good to keep your house in order while living overseas. Two Canadian tax experts advise how to keep filing Canadian taxes abroad.
Living in a different country is exciting and can boost your career in ways living in Canada might not. Canadian tax authorities, though, tax Canadians on worldwide income. As a result, it’s important to plan ahead so you avoid paying more Canadian taxes abroad than is actually necessary to the Canada Revenue Agency. Determining what the tax consequences are of moving to another country, either permanently or temporarily, requires some foresight; sort out your taxation situation before you start organizing the other parts of moving abroad.
Maintaining residency in Canada requires you to file a Canadian tax return on an annual basis. Citizens must include income from all sources in a Canadian tax return, both Canadian and foreign. Your local tax authorities might also require a tax return from you. If you sever your Canadian residency for tax purposes, a final departure tax return should be filed in Canada.
Paying foreign or Canadian taxes abroad
Since many other countries around the world have lower individual income tax rates than Canada, you may want to sever your Canadian residency. If you do, Canadian tax authorities no longer tax your worldwide income in Canada. Before you make that decision, 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 taxes.
Determining if you’re a Canadian resident for tax purposes depends on your intentions when 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.
The Canada Revenue Agency doesn’t have a specific time threshold for when residency expires; rather, they consider all of the factors collectively for a holistic view of your residency situation. Ensure that you carefully follow all of the necessary steps when proving your intentions of leaving.
Residential ties with Canada
Canadian tax authorities separate residential ties into two categories: primary and secondary. It’s important that you sever all primary residential ties when ceasing residency. Maintaining any significant primary ties could be interpreted by the Canada Revenue Agency as maintaining residency in Canada. The Canada Revenue Agency looks at secondary residential ties collectively. No single secondary tie would tip the scale on Canadian residency. However, exhaust all options when severing your ties to Canada.
Some examples of primary ties are maintaining property, leaving a spouse or common-law partner, and supporting dependents. Common secondary ties are personal property left behind, maintaining Canadian bank accounts, credit cards, and memberships in Canadian organizations.
In addition, inform any Canadian residents and financial institutions making payments to you that you’re severing residency. This demonstrates your intentions to leave to the Canada Revenue Agency. It also ensures that payments made to you after your departure are subject to the appropriate non-resident withholding taxes. If these non-resident withholding taxes are not withheld by the Canadian payer, you’ll be required to voluntarily remit the withholding tax after you’ve left Canada.
Filing the right paperwork
If Canada Revenue Agency questions your residency status, they may ask you to submit Form NR73 for the Determination of Residency Status (Leaving Canada). It is advisable that you fill in this form at the time of your departure. Keep a copy for your records, in case the Canada Revenue Agency requests it.
It is not advisable that you submit this form to the Canada Revenue Agency unless you and your tax advisor have difficulty determining your residency status.
The departure tax return
If you become a non-resident of Canada for tax purposes, you must file a final departure tax return in Canada, due on 30 April after the year in which you sever your Canadian residency. 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) that 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 you should consider on your departure from Canada. It’s important that you seek professional advice; this ensures that all of your departure tax issues are considered in your final tax return.
Maintaining residency and paying Canadian taxes abroad
If you decide to maintain residency in Canada (or if your strong ties to Canada cause you to be seen as a resident), keep in mind that you must file your Canadian taxes abroad on an annual basis. On this return, you must report your worldwide income, not just income accrued in Canada. In most cases, Canadian tax law allows a foreign tax credit for any foreign taxes already paid on this income; however, it doesn’t prevent you from meeting your tax filing requirements in Canada.
If you don’t file your Canadian taxes abroad, you may receive a request at some point from the Canada Revenue Agency requesting that you file a tax return.
Tax implications vary based on an individual’s specific circumstances. As a result, you should seek professional tax advice before acting on any information provided here.