CANADIAN TAX CONSIDERATIONS FOR EXPATS WITH DEFERRED COMPENSATION

Tax PlanningPretend you are a young and single Canadian who has had a really fantastic year at his or her job on Bay Street.

The year is almost over, and you know you are in line to get a seven figure bonus at the beginning of next year.

You think to yourself that you could easily close-up everything in Toronto, pack everything up, hop on a plane and live somewhere else. You could continue to do your job remotely via the internet. It sure would be nice to get that fat bonus without the CRA taking a 53.5% bite out of it! Since employment income is always taxed when received, and since you would not be a Canadian resident when you get it, goodbye Canadian Tax Man!

If it sounds too good to be true, that is because it is. Unfortunately, the Income Tax Act (“the Act”) is designed in such a way that you cannot escape taxation on employment income already earned just by becoming a non-resident.

Oh, is it the dreaded “departure tax”?, you ask. No it is not that! The accrued right to the bonus is actually exempt from that[1].

Rather, it is the fact that even as a non-resident, you can still be subject to Canadian tax with respect to income earned in Canada, which covers your scenario. In fact, even if you had been working outside of Canada when you earned the bonus, you would still be subject to Canadian tax, since it was earned while you were a resident[2].

You think further, and ask whether you can beat the CRA if you move to a country that has a tax treaty with Canada. That should shield you from Canadian tax, right? Wrong again! Canada’s tax treaties generally will preserve the right of Canada to tax non-residents who earn income from working in Canada[3].

Furthermore, your employer will be obliged to withhold Canadian tax from your bonus at a rate that would come very close to the actual tax payable. So, you cannot rely on the fact that the CRA will not be able to collect the taxes from you after you clear everything out of Canada.
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So the answer is that if you want to prevent the CRA from taking a big bite out of your bonus from a Canadian employer, you have to earn it by working outside of Canada as a non-resident. In this age of the internet, that is becoming more and more feasible. So, maybe, with proper planning, you can really earn your bonus for next year tax-free!

[1] See subparagraph (a)(vii) of the definition of “excluded right or interest” in subsection 128.1(10) of the Act.

[2] Paragraph 115(1)(a)(i) of the Act.

[3] See, for example, Article XV(1) of Canada’s tax treaty with the U.S.-subject to certain exceptions, which would not apply to this type of scenario.

ABOUT THE AUTHOR OF THIS ARTICLE 

Michael I. Atlas, CPA,CA,CPA(ILL),TEP

Michael Atlas is one of the most prominent international tax experts in Canada. He advises accounting and law firms all across Canada, as well as select private clients (corporate and personal) worldwide. He can be reached by phone (416.860.9175) or email (matlas@TaxCA.com). 

 

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Michael Atlas
Michael Atlas is a Toronto-based CPA. He is one of Canada'a most prominent international tax experts.

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