For tax purposes, the distinction between a resident and a non-resident of Canada is essential in determining how much a taxpayer owes. Canadian residents are taxed on their worldwide income, whereas non-residents of Canada are taxed on their Canadian sourced income.
A Guide on Tax Residency Determination in Canada outlines what the Canada Revenue Agency ("CRA") considers when determining an individual's residency status for tax purposes. To become a non-resident of Canada, an individual needs to break all primary residential ties and most of one's secondary ties.
Thinking of Leaving Canada
Individuals leaving Canada can fill out the CRA Form NR73 – Determination of Residency Status Form.
It is important for individuals intending to depart Canada and become non-residents for tax purposes to be aware of the "departure tax." This tax, levied by Canada on residents and their assets when they cease to be Canadian residents, can have significant financial implications.
Form NR73
Completing Form NR73 is a proactive step that can provide a notice of determination regarding your residency status from the CRA. This reduces uncertainty and empowers individuals with the knowledge of their status as tax residents or non-residents of Canada.
Filing Form NR73 may "invite the CRA" to scrutinize an individual's situation. This means that the CRA may review an individual's financial and personal circumstances very closely to ensure that they are accurately represented in the form or otherwise. The CRA often takes a conservative approach to determining one's Canadian residency status. As tax collectors, it is within the CRA's best interest to have an individual pay tax as a resident of Canada.
Leaving Canada
When individuals depart from Canada, their eligibility for the Canada Child Benefit ceases upon the termination of their residency status. To discontinue the disbursement of such benefits, it is imperative to formally notify the CRA of the change in residency status to pre-empt any potential penalties.
Additionally, individuals will no longer receive GST/HST payments from the CRA upon becoming a non-resident.
Tax-Free Savings Account ("TFSA")
A TFSA essentially allows individuals to place money aside in an account tax-free. This means that individuals can save money in a TFSA without having to pay tax on the income they earn from their investments. TFSA contributions are not deductible for Canadian income tax purposes. However, it is important to note that once an individual becomes a non-resident of Canada, they should no longer contribute to their TFSA.
The funds can remain in a TFSA after an individual emigrates from Canada, and any withdrawals or earnings that have or will accrue in the TFSA will not be taxed in Canada. The amount earned or withdrawn may, however, still be taxed in the country that an individual currently resides in.
While not being a resident of Canada for tax purposes, the TFSA will no longer be able to accrue additional contribution room.
Registered Retirement Savings Plan ("RRSP")
Generally, it would be a good practice to refrain from contributing any amount to an RRSP, as one would be unable to deduct any contributions made.
If there was a significant amount of income expected to be on an individual's final Canadian tax return, an RRSP contribution in the year of departure may be beneficial. This RRSP contribution would be tax deductible.
Home Buyers Plan and Lifelong Learning Plan
Commencing from the date an individual leaves Canada, they have 60 days to repay any amount owing under the Home Buyer Plan or the Lifelong Learning Plan. These plans are special programs that allow individuals to withdraw funds from their RRSPs to buy a home or pay for their education. Should payments fail to be made, the balance due will be included in one's taxable income for the final Canadian tax return. Simply put, individuals may be subject to tax on the amount they owe under these plans if they do not repay it within the specified period.
It may be beneficial to include the balances owing from the Home Buyers Plan and Lifelong Learning Plan as income in the final Canadian tax return if the expected income in the year of departure is meagre. From this, an individual will pay low tax on the income included and have no obligation to repay the balance owed.
Deemed Disposition and Disclosure of Canadian Assets
Individuals intending to depart Canada and become non-residents of Canada for tax purposes need to be aware of the "departure tax." The departure tax is a tax levied by the Canadian government on residents and, consequently, their assets when they cease to be Canadian residents.
An individual is deemed to have disposed of their assets at fair market value ("FMV") and reacquired by the taxpayer whether the assets were sold prior to emigration or not. This is known as a "deemed disposition" and is a departure tax that may need to be reported as a capital gain when completing an annual return. Half of any net gains that result from the deemed disposition will be included in an individual's income for the tax year and taxed accordingly. This means that individuals may be subject to tax on the increase in value of their assets, even if they have not sold them.
Assets that are subject to the departure tax include but are not limited to:
- Stocks of all companies
- Foreign trusts
- Mutual funds, exchange-traded funds, partnership interests
- Specific personal property (if appreciated in value)
- Real estate situated outside of Canada
Upon becoming a non-resident of Canada, property totalling $25,000 or more must be disclosed on Form T1161 of the final personal tax return. Departure tax applies to most properties; however, some exceptions include:
- Canadian real or immovable property such as Canadian resource property and timber resource property.
- Property of a business that is maintained through a permanent establishment, including eligible capital property and property described in the inventory of the business.
- Property that is deemed to be an "excluded right or interest" of the taxpayer, as defined in subsection 128.1(10) of the Income Tax Act, including but not limited to Pension Plans, RRSPs, RESPs, TFSAs, RRIFs, DSPs, and RCAs.
- Property belonging to an individual who is a resident in Canada for less than 60 months in the 120 months preceding the disposition when that resident came to Canada, or any property acquired through inheritance after that individual became a Canadian Resident.
- Life insurance policies. This is only applicable to Canadian residents, not non-residents who own foreign life insurance policies. These non-residents will be subject to departure tax.
Deferral of Departure Tax
Due to the list of many exempt assets, most Canadians do not pay departure tax. However, for those who do have significant assets and need to pay departure tax, a special election (Form T1244) allows them to defer payment of the tax.
This election must be made by April 30th of the year after an individual emigrates from Canada. Should an individual make this election and the amount of tax owing on the income from the deemed disposition of property is greater than $16,500 ($13,777.50 for Quebec), adequate security must be provided to cover the amount. Appropriate security that can be provided to the CRA could be bank guarantees, letters of credit, or shares of a corporation that are equal in value to the taxes owed.
When is Departure Tax Due?
Barring any special election of deferral of departure tax, it is generally due by April 30th of the year after an individual emigrates from Canada.
Conclusion
In conclusion, once an individual becomes a non-resident of Canada, they should inform their banking institution, financial advisor, and pension administrator about their residency status. It is advisable to consult with tax professionals and lawyers given the complexity and potential implications of tax residency status.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.