In the last article in this Blog, I predicted that, “After the July 18, 2017 release from the Ministry of Finance, many affluent and successful Canadians will start to seriously consider finding a more hospitable place to reside.”
Feedback from my contacts suggest that my prediction was quite accurate.
The purpose of this article is to provide an overview of how Canada’s tax treaties can help a Canadian looking to become a non-resident.
Canada currently has tax treaties in force with 93 countries in various parts of the world.
There are two main ways that they can help, which I will discuss below
ENSURING NON-RESIDENT STATUS
As was discussed in the last article, the determination of residency under Canada’s domestic law is often quite gray and uncertain.
However, if a Canadian resident moves to a country which has a tax treaty with Canada, that uncertainty will often be removed.
This is because of the fact that virtually all of Canada’s tax treaties have a provision that comes into play where an individual would otherwise be a dual resident. That is, a person resident under the tax laws of both Canada and the other country. This provision is usually referred to as a “tie breaker” rule. It provides guidelines to determine which of the two countries can treat the individual as a tax resident.
The one found in Article IV(2) of the Canada-US Tax Convention is fairly typical of them, and likely the one of most interest to professional advisors in Canada. It states:
“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.”
Of particular significance to a Canadian expat is the fact that if, as a result of the application of the relevant treaty, an individual is treated as a non-resident for the purposes of that treaty, that individual will generally also be deemed, under subsection 250(5) of the Income Tax Act (“the Act”), to be a non-resident for the purposes of the Act.
Thus, if the individual can meet the requirements of the treaty rule to be a non-resident of Canada, that fact would effectively override the fact that he or she might be a factual resident of Canada. As such, it is quite possible that an individual could become a non-resident, even though that individual might maintain substantial ties to Canada. All the various “secondary ties” that the individual might have to Canada, such as driver’s license, club memberships, bank accounts, credit cards, etc. will be of no significance.
REDUCING TAX ON CANADIAN-SOURCE INCOME
In addition, residency in a treaty country may result in reduction of Canadian tax applicable to certain types of income, such as
- Dividends from Canadian corporations
- Registered pension plan (“RPP”) payments
- RRSP and RRIF payments
In the next article in this series, I will discuss my “Guaranteed No-Fail Recipe” for becoming a non-resident by using a tax treaty. It has only three (3) ingredients!