THE GUARANTEED, NO-FAIL, RECIPE FOR A CANADIAN TO BECOME A NON-RESIDENT FOR TAX PURPOSES

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With increased personal income tax rates coming into effect this year on taxable income over $200,000 per year, I feel confident in predicting that more and more Canadian resident individuals will seriously think about the possibility of becoming non-residents. Fortunately, in this country, unlike our neighbor to the South, we only have to worry about shedding residency, not citizenship, to avoid continued taxation.

For example, the highest marginal tax rate in Ontario is now 53.5%. The prospect of having the taxing authorities winding-up with a bigger slice of their incomes than they do will undoubtedly motivate many to start thinking about “heading for the door”!

But, how does one achieve that?

Many people wrongly think that staying out of the country for 183 days or more each year translates into being a non-resident-certainly that is not the case.

In most cases, residency for Canadian tax purposes is based on what is often called “factual residency”.

That is, although, the Income Tax Act (“the Act”) has certain provision that will deem a person to be resident in Canada, it does not define “resident in Canada” or “ordinarily resident”. Residency in this sense, as opposed to residency as a result of a deeming rule, is what I mean by “factual residency”.

Because there is no definition of “resident in Canada” or “ordinarily resident” in the Act, reference must be made to the decisions of the Courts for guidance on how these terms should be interpreted.

By far, the leading Canadian decision in this area is that of the Supreme Court of Canada in Thomson v. M.N.R, 2 DTC 812.  In that oft-quoted decision fro 1946, which is heavily influenced by UK case law, the court indicated that to be “resident” in a place meant to “dwell permanently or for a considerable time, to have one’s settled or usual abode, to live, in or at a particular place”.

In addition, with respect to being “ordinary resident”, the decision contained the following frequently quoted passages:

“one is ‘ordinarily resident’ in the place where in the settled routine of his life he regularly, normally or customarily lives.”

“It is important only to ascertain the spatial bounds within which [the individual] spends his life or to which is ordered or customary living is related. Ordinary residence can best be appreciated by considering its antithesis, occasional or casual or deviatory

residence. The latter would seem clearly to be not only temporary in time and exceptional in circumstance, but also accompanied by a sense of transitoriness and of return.”

 

However, applying these principles to the facts of any contentious situation can often be quite difficult and subjective. In looking at the numerous decisions of the courts, one can often see situations where it is likely that, had a different judge heard the case, or had a more skillful counsel presented it, the outcome might have been quite different.

 

In this regard, in attempting to apply the basic principles generally associated with Thomson, the Courts will look at numerous factors that relate to what are often called “residential ties” to Canada.

 

A rather succinct and abbreviate summary of these factors is found in this passage from the decision of the Federal Court of Canada in The Queen v. Reeder, 75 DTC 5160:

 

“a. past and present habits of life;

  1. regularity and length of visits in the jurisdiction asserting residence;
  2. ties within that jurisdiction;
  3. ties elsewhere;
  4. permanence or otherwise of purposes of stay abroad.”

For those looking for something more detailed and extensive, the decision of the Tax Court of Canada in Wassick v. M.N.R., 95 DTC 19, is quite interesting and useful in that it listed the following 33 indicia that could be considered:

  • past and present habits of life;
  • regularity and length of visits in the jurisdiction asserting residence;
  • ties within the jurisdiction;
  • ties elsewhere;
  • permanence or otherwise of purposes of stay;
  • ownership of a dwelling in Canada or rental of a dwelling on a long-term basis (for example, a lease for one or more years);
  • residence of spouse, children and other dependent family members in a dwelling maintained by the individual in Canada;
  • memberships with Canadian churches or synagogues, recreational and social clubs, unions and professional organizations;
  • registration and maintenance of automobiles, boats and airplanes in Canada;
  • holding credit cards issued by Canadian financial institutions and other commercial entities including stores, car rental agencies, etc.;
  • local newspaper subscriptions sent to a Canadian address;
  • rental of Canadian safe deposit box or post office box;
  • subscriptions for life or general insurance including health insurance through a Canadian insurance company;
  • mailing address in Canada
  • telephone listing in Canada;
  • stationery including business cards showing a Canadian address;
  • magazine and other periodical subscriptions sent to a Canadian address;
  • Canadian bank accounts other than a non-resident bank account;
  • active securities accounts with Canadian brokers;
  • Canadian driver’s licence;
  • membership in a Canadian pension plan;
  • holding directorships of Canadian corporations;
  • membership in Canadian partnerships;
  • frequent visits to Canada for social or business purposes;
  • burial plot in Canada;
  • will prepared in Canada;
  • legal documentation indicating Canadian residence;
  • filing a Canadian income tax return as a Canadian resident;
  • ownership of a Canadian vacation property;
  • active involvement in business activities in Canada;
  • employment in Canada;
  • maintenance or storage in Canada of personal belongings including clothing, furniture, family pets, etc.;
  • obtaining landed immigrant status or appropriate work permits in Canada

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All of this can leave an individual who is looking to escape from the burden of increasingly high rates of Canadian taxation (“the expat”) quite confused and uncertain, especially if that expat is unable to totally extricate himself/herself from some forms of “ties” to Canada.What about the positions and administrative practices of the Canada Revenue Agency? As a general rule, they are consistent with the comments above, and now summarized in CRA Folio S5-F1-C1 (“the Folio”)

However, many would-be expats and their advisors are often unaware of the fact that there is a relatively easy to use and foolproof “recipe” for becoming a non-resident for Canadian tax purposes, even if the expat will maintain some “ties” with Canada.

This recipe requires only three (3) ingredients:

  • The expat is resident for tax purposes in a country (“the new country”) that has a typical “tie breaker” rule in its tax treaty with Canada
  • The expat has no “permanent home available” (“PHA”) in Canada, and
  • The expat has a PHA in the new country.

Each of these ingredients will be discussed below:

 

The expat is resident for tax purposes in a country that has a typical “tie breaker” rule in its tax treaty with Canada

Canada’s tax treaties generally have “tie breaker” rules (usually in Article 4(2) or IV(2) of such treaties) to deal with situations where an individual would otherwise be considered to be resident in both Canada and the other country that is party to the treaty.

These provisions provide rules to determine which of the two countries can treat the individual as a resident for the purposes of that treaty.

The one found in Article IV(2) of the Canada-US Tax Convention  is fairly typical of most of them, and states as follows:

“Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:

(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);

(b) if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;

(c) if he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and

(d) if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.”

In this connection, the expat should also be mindful of the following comments contained in paragraph 1.42 of the Folio:

“There may be situations where an individual’s worldwide income is subject to another country’s full taxing jurisdiction, however, the country’s domestic laws do not levy tax on an individual’s taxable income or taxes it at low rates. In these cases, the CRA will generally accept that an individual is a resident of the other country unless the arrangement is abusive (for example, treaty shopping where the individual is in fact only a resident of convenience). Such could be the case, for example, where an individual is placed within the taxing jurisdiction of a particular country in order to gain treaty benefits in a manner that does not create any material economic nexus to that country.”

 

The individual has no “permanent home available” (“PHA”) in Canada

In connection with the question of what is a “permanent home”, the CRA states in paragraph 1.46 of the Folio:

“A permanent home (as that term is used in income tax treaties) may be any kind of dwelling place that the individual retains for his or her permanent (as opposed to occasional) use, whether that dwelling place is rented (including a rented furnished room) or purchased or otherwise occupied on a permanent basis. It is the permanence of the home, rather than its size or the nature of ownership or tenancy, that is of relevance.”

It is important to stress that there no requirement that a PHA must be owned by the would-be expat. Accordingly, just transferring ownership of it to a family member or family trust would be dangerous if the facts indicated that it is still available to him or her on visits to Canada.

On the other hand, comments contained in paragraph 1.49 of the Folio imply that, where the expat maintains ownership of a dwelling place in Canada that is leased to a third party on arm’s length terms and conditions, it generally would not be considered a PHA in Canada.

The individual has a PHA in the new country

This ingredient will generally always be present in any situation where the expat is a tax resident under the laws of the new country.

In addition, as indicated, the PHA may be rented-it need not be owned.

 

If these three ingredients are present, there will be no need to look at the other factors in the “tie breaker” rule, such as the often uncertain “centre of vital interests” test.

More significantly, the expat would not need to concern himself/herself about such things as having a Canadian driver’s license; maintaining club memberships in Canada; maintaining Canadian bank accounts or credit cards; or maintaining investments in Canada. Rather, the expat would have the comfort and certainty of knowing that he or she will be deemed to be a non-resident of Canada, in spite of such “ties”, as a result of the application of subsection 250(5) of the Act.

 

The next question is what are some treaty jurisdictions that have favourable tax regimes, especially for Canadian expats earning income from investments?

There is some excellent material about many jurisdictions, including the UK, Ireland, Switzerland, Spain, Portugal, and Israel that is contained in a December 2015 newsletter published by Ruchelman P.L.C.C., a New York-based law firm-see:

http://publications.ruchelaw.com/news/2015-12/InsightsVol2no10.pdf

In addition to various jurisdictions mentioned there, it should be noted that Barbados has a favourable tax regime for certain types of residents that should also be explored.

 

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