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.
First it was an additional 4% in personal income taxes. That was a little present from Justin Trudeau’s government shortly after he took office. Now, there is the prospect of rather Draconian measures aimed at dealing with perceived abuses involving private corporations. I have no doubt that many will say “enough is enough”. It is not necessarily just the additional taxes that these changes will represent. It is also the realization that there is a government in power with a decidedly leftist antagonism towards, and lack of appreciation for, those who have been successful financially.
This is the first of a multi-part series of articles that is designed to provide valuable information and guidance to those contemplating making such a move, as well as their professional advisors.
CANADIAN TAXATION AS A NON-RESIDENT
If a current Canadian resident ceases to be a resident, in most cases, his or her ongoing liability for Canadian tax will generally either be totally eliminated or drastically reduced. It does not matter whether he or she is a Canadian citizen.
A Canadian resident is subject to Canadian tax on worldwide income from all sources; a non-resident will generally only be subject to Canadian tax on certain Canadian source income. In particular,
- Gone will be any concern for Canadian taxation on capital gains, except for gains on Canadian real estate or resource properties, or certain other assets that derive most of their value from Canadian real estate or resource properties.
- Gone will be any concern for Canadian taxation on employment income (including stock options), except for income relating to employment duties exercised in Canada.
- Gone will be any concern for Canadian taxation of dividends, except for dividends from corporations resident in Canada, which may be at a rate of as low as 5% with proper planning.
- Gone will be any concern about Canadian taxation of interest income, except for interest from Canadian sources that is either from related parties, or participating interest.
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RRSPs and RRIFs can be emptied for a maximum tax rate of 25%, and much lower in certain cases.
There will generally not be any need to file a Canadian tax return after the year of departure unless the expat earns rental income from Canadian real estate; has income from an unincorporated Canadian business; has income from employment in Canada; or has a capital gain subject to Canadian tax.
If the expat has kids that are remaining in Canada, if he or she waits until five(5) years after departure, he or she can put assets in an offshore trust that would not be subject to Canadian income tax (except for tax on Canadian dividends) and their kids can enjoy the benefits of income accumulation free of Canadian tax.
BECOMING A NON-RESIDENT
There are a great many misconceptions about what it takes for a Canadian to become a non-resident. I wrote an article about some of these on my Blog last year (see https://taxca.com/blog-2016-23/).
The key point is that, in the absence of a tax treaty applying (which I will discuss in the next article in this series) a Canadian expat will need to cease to be “factually resident” in Canada.
The Income Tax Act (“the Act”) does not actually use the term “factually resident”. I am just using it here to distinguish it from “deemed resident”, which will rarely apply to an expat.
Rather, the Act just uses the term “resident”, which is not actually defined in the Act. However, its meaning has been considered by the Courts, which years ago adopted approaches that are mainly derived from old UK tax cases.
The leading Canadian case on the meaning of “resident” is Thomson v Minister of National Revenue, [1946] SCR 209, 2 DTC 812. In this decision, Rand J. of Supreme Court of Canada held residence to be:
“a matter of the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living with its accessories in social relations, interests and conveniences at or in the place in question.”
In the Act, a reference to a person resident in Canada includes a person who is “ordinarily resident” in Canada. In Thomson, it was held that:
“one is ‘ordinarily resident’ in the place where in the settled routine of his life he regularly, normally or customarily lives”.
The key point here is that a Canadian will still be resident in Canada if his/her absence is of just a temporary nature.
Unfortunately, unlike the situation in the U.S., where there are generally fairly clear-cut, objective tests to determine whether someone is a “resident alien” or not, factual residency is often quite grey and subjective.
The CRA’s positions on this issue, which, for the most part are consistent with the case law, are found in Folio S5-F1-C1. But don’t take this as gospel-there are few hard and fast rules-the totality of the expat’s situation has to be considered.
Based on the way that the CRA and the Courts have applied the law over many years, a would-be non-resident will need to be very diligent in severing “primary” ties to Canada (place of residence; spouse, dependents) and do a fairly thorough job of severing “secondary” ties to Canada (bank accounts; credit cards, memberships; drivers’ license, etc.). Visits to Canada should be kept to a minimum, and, ideally, strong residential ties should be established elsewhere. There is no need to give-up Canadian citizenship or passport to be non-resident, and maintaining RRSP/RRIF does not generally cause a problem. In addition, maintaining rental real estate in Canada can normally be tolerated.
One could get a fairly good idea of the kind of things that the CRA might look at by reviewing their form NR73. While I never would recommend completing and submitting this form to the CRA if one can avoid it, it is certainly useful as a tool to “get into the head of” the CRA in terms of how they look at this issue, and plan accordingly.
In the next articles in this series, I will review how using one of Canada’s many tax treaties can be quite valuable to the expat, both in terms of buttressing non-resident status, as well as reducing Canadian tax if there are continuing sources of income from Canada.
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).
