If you are considering emigrating from Canada, tax considerations will be extremely important. The tax implications can be (and are) the subject of a whole book; below we review just some of the most important highlights. It is generally wise to obtain professional advice that is tailored to your specific situation.
Will you become a non-resident of Canada?
If you become non-resident, you will no longer be subject to Canadian tax on all of your worldwide sources of income. You will generally be taxed only on certain “Canadian-source” income (e.g., income from rent on property in Canada, dividends from Canadian corporations, capital gains on Canadian real estate). From a Canadian tax point of view, it is therefore often desirable to become non-resident (though you will lose benefits such as the Canada Child Benefit and the GST/HST Credit). Of course, taxes should not be the only consideration; other issues such as health care, cost of living, safety, political stability, civil rights and quality of life must not be overlooked.
Just because you are moving out of Canada does not automatically mean that you will become non-resident.
If no tax treaty applies
First, you have to establish that you have taken up residency somewhere else. Canadian courts have held that you have to be resident somewhere. Generally, you are considered resident in the place where you regularly, normally or customarily live in the settled routine of your life. There are no precise rules to be applied; each case depends on its facts.
Second, since it is possible to be resident in more than one country at the same time, you must establish that you have “cut your residential ties” with Canada. Those ties are evidenced by such things as:
“Significant” residential ties
- keeping a home in Canada
- having your spouse remain in Canada
- supporting dependent children who remain in Canada
“Secondary” residential ties
- keeping personal property such as furniture, clothing, and automobiles in Canada
- having bank accounts with Canadian banks
- having credit cards issued by Canadian financial institutions
- social ties such as memberships in Canadian clubs and religious organizations (on a resident basis)
- maintaining provincial health care coverage
- keeping a Canadian driver’s licence, or a vehicle registered in Canada
- professional memberships in Canada (on a resident basis)
“Minor” residential ties
- having a seasonal residence in Canada
- renting a safety deposit box in Canada
- renting a post office box in Canada
- keeping a telephone listing in Canada
- continuing to use stationery and business cards with a Canadian address
No one factor is conclusive, but in the CRA’s view all of the “significant” ties and most of the “secondary” ties must be cut to establish non-residence. The CRA will also look at your general mode and routine of life, and whether you are making regular or extended visits to Canada.
Examples
- X is transferred from Vancouver to his company’s Bermuda office for several years. He keeps his Canadian bank accounts and club memberships. His wife and children remain in Canada, and continue to live in his Vancouver home. He visits them regularly.
X will likely be considered by the CRA to remain resident in Canada throughout the time he is in Bermuda.
- Y is transferred from Vancouver to her company’s Bermuda office for a three-year posting. She and her husband sell their Vancouver home and buy a new home in Bermuda, where they move with their children. Y cancels her Canadian credit cards and closes most of her Canadian bank accounts, but keeps one savings account at a Calgary bank branch.
Y will likely be considered by the CRA to have become a non-resident of Canada. Keeping one Canadian bank account will not cause her to remain resident in Canada.
Note that certain people are deemed to be resident in Canada even though they are working abroad. This includes members of the Canadian Forces and Canadian diplomats posted outside Canada, as well as their spouses if the spouse was ever resident in Canada for tax purposes.
If a tax treaty applies: “tie-breaker” rules
Canada has tax treaties with over 90 countries, including of course the United States and virtually all of our significant trading partners other than tax havens. The tax treaties provide tie-breaker rules for determining residence, if a person would otherwise be considered resident in both countries under the domestic laws of each country. Most tax treaties follow the same model, though there are minor differences among them. (Tax Information Exchange Agreements that Canada has with many tax havens are not tax treaties, and the paragraphs below do not apply to them.)
Generally, under the tax treaty tie-breaker rules, a person is deemed resident in the country where he or she has a “permanent home available”. A person who has a permanent home in both countries, or neither, is deemed resident in the country where his or her “personal and economic relations” are closer (also called “centre of vital interests”). If this cannot be determined, one looks to the “habitual abode”, and if that does not answer the question, it is determined by citizenship.
In each case, the specific treaty between Canada and the other country needs to be examined carefully, as the specifics of the rules will vary.
If you are resident in another country under a “treaty tie-breaker” rule, then you are deemed by the Income Tax Act (subsection 250(5)) not to be resident in Canada, even if you have not cut your ties with Canada.
Thus, if you move to a country with which Canada has a tax treaty, it is easier to become non-resident, by means of a “permanent home” (which can be an apartment you rent) in only that country, or by having your “personal and economic relations” stronger in the other country.
Departure tax payable if you become non-resident
If you become non-resident for Canadian tax purposes (including due to a treaty tie-breaker rule as per above), you may be required to pay tax as a result. This is sometimes called the “departure tax”. In fact, it is ordinary income tax payable on capital gains that are deemed to be triggered just before you become non-resident. These capital gains must be reported on your Canadian tax return for the year in which you become non-resident.
On becoming non-resident, you are deemed to dispose of much of your property at its fair market value. Thus, capital gains may be triggered, depending on your cost base in each property. However, this rule generally does not apply to certain property, including:
- real property (e.g., land and buildings) in Canada, which will instead be taxed when you eventually sell it
- interests you have in RRSPs, RRIFs, RESPs, RDSPs, TFSAs and a whole alphabet soup of other plans and arrangements
- various rights you may have, such as under an employee stock option agreement
- property used in carrying on an active business through a permanent establishment in Canada.
This is only a very general overview; the departure tax has many complications, and you should obtain professional advice relating to your specific situation.
Note that if you do not pay your Canadian tax liability, the CRA can, under Canada’s tax treaties with some countries, arrange for the local tax authority to enforce collection of the Canadian tax you owe. This can happen in the United States (if you are not a US citizen), the United Kingdom, Germany, the Netherlands, New Zealand, Norway and Spain.
Passive income — withholding taxes
Once you are non-resident, Canada will impose a withholding tax on most kinds of “passive” income, other than interest (which since 2008 is taxed to non-residents only in limited circumstances). It is called “withholding” tax because the payer is required to withhold the tax, send it to the CRA, and send you only the balance after deducting the tax.
The income this applies to includes:
- dividends from Canadian corporations
- rent on real estate in Canada
- royalties paid from Canada
- pension income, including OAS and CPP/QPP payments
- RRSP/RRIF withdrawals
The withholding tax rate is 25%. However, if you are resident in a country with which Canada has a tax treaty, the rate may be reduced to 15%, 10%, 5% or even zero. The tax on dividends, pension payments and some royalties is generally reduced by treaty; the tax on other amounts may not be. In each case you must check the details of the particular tax treaty as it applies to that kind of income. Note also that, in many cases, whatever Canadian withholding tax you are charged will be allowed as a foreign tax credit in the country of which you are resident, so the withholding tax will not represent a real cost to you.