What are the tax implications of leaving the country?
Residency: A fundamental element of the Canadian income tax system
Some friends of mine are preparing to leave Canada for various professional and personal reasons. As a tax specialist, they ask me about the possible tax implications of leaving the country. Here is a general explanation of the concept of “residency,” and how it affects the taxation of those who become non-residents.
Non-residents are generally only subject to pay tax on Canadian-sourced income, which can include wages, business income, rental revenue, and gains from the disposition of taxable Canadian property (e.g. Canadian real-estate).
A discussion of Canadian tax issues facing non-residents is beyond the scope of this article.
Residential ties: Primary and secondary ties
Canadian (tax) residency status is generally a question of fact. The tax courts determine an individual’s residency status by distinguishing between significant “primary” ties and “secondary” ties. Therefore, one must evaluate an individual’s “residential ties” to determine one’s Canadian tax status.
Primary ties include maintaining and/or using a Canadian residence, leaving a spouse or common-law partner in Canada, and leaving supporting dependents or minor children in Canada. Common secondary ties include holding Canad
ian bank accounts and credits cards, leaving personal property in Canada, having provincial health insurance coverage, holding a Canadian driver’s license, being a member of a Canadian professional organization or club, etc.
Depending on your situation, to become a non-resident, you should sever all primary ties and as many secondary ties as possible. The Canada Revenue Agency (CRA) could view you maintaining your primary and secondary ties as indicative of still being active in the Canadian economy, consequently subjecting you to Canadian tax on your worldwide income.
Tax residency status does not affect a person’s citizenship. Your residency status is used solely for tax purposes. For example, possessing a Canadian passport does not automatically make you a Canadian resident and liable to file a Canadian tax return including reporting your worldwide income.
In certain circumstances, a person may initially be considered to be legally a resident of two countries and thus possibly be subject to double taxation. Fortunately, Canada has entered into income tax treaties with other countries to provide relief from such situations. These tax treaties provide “tie-breaker rules” to determine which country is the country of residence, and thus has the first “right” to tax the individual.
Departure tax and other considerations
In the year of becoming a non-resident, you must file a tax return which includes “departure tax”, and which may include additional reporting schedules relating to your emigrating from Canada. Changing your residency status can result in numerous issues; the most significant is the deemed disposition of your capital assets. Upon emigration, the CRA considers capital property you own (with some exceptions) as having been sold at fair market value. This generally triggers taxes that are then payable (at the time of departure) on any unrealized gains on the property even if you, in fact, have not sold the property. This can create a significant tax liability. There are however, provisions to post security for the tax arising rather than making the payment of tax.
Prior to leaving Canada, there may be numerous tax planning issues for you to consider depending on your particular circumstances and the assets owned prior to your departure date. If you own a home which has appreciated in value, own private or public company shares, earn Canadian-sourced rental income, hold an RRSP/TFSA, etc. an analysis will need to be performed to evaluate the implication(s) of the change in your residency status and to determine the optimal strategy to minimize Canadian taxes.
The CRA and filing a departure return
In the year of emigration, you are required to “paper file” a return with the International Tax Service Office. Departure tax returns are generally under higher scrutiny than “standard” tax returns in order to ensure that the appropriate amount of Canadian tax is paid at the time of emigration.
Undoubtedly, this is a specialized area which requires professional knowledge. I strongly recommend seeking professional advice from a competent tax advisor that will ensure optimal filing positions are taken, and will minimize the possibility of costly errors.
Summary
Residential ties are the driving factor which determines an individual’s Canadian tax liability. If you are planning on leaving Canada, it is important to sever all primary ties and as many secondary ties as possible to minimize the risk of the CRA arguing that you continue to be subject to Canadian taxes after having left Canada. There are numerous tax issues which should be considered and there may be relevant tax planning opportunities which exist given your particular situation. For these reasons and more, it is important to speak with a professional tax advisor if you are planning on leaving Canada to ensure that you are informed about the tax issues you face and are properly guided to navigate your way out of the Canadian tax landscape.
This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article.
