Working abroad can provide both career building and adventure. But Canadians moving to certain exotic locales can also take a tax holiday. Dozens of countries charge residents little or no tax. And Warren McCann, partner at Kudlow McCann, has seen clients leave to work in those countries and return years later with significant nest eggs. “They can accumulate a lot of net worth tax-free,” he says.
Qatar, for instance, which has many expatriates working in oil production, levies no income, capital gains or sales taxes. Residents of the Bahamas pay only a 3.9% social security levy on their incomes. In Hong Kong, residents pay a maximum income tax of 15%, and there is no tax on capital gains or dividends.
Getting ready to leave
To shed Canadian tax obligations, a client must become a Canadian non-resident. That means establishing residency in her destination country and cutting ties to this one. Otherwise, she’s still liable for Canadian tax.
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In places that have tax treaties with Canada, such as Hong Kong, your client will be paying Canadian taxes beyond what she’ll pay locally. Tax rates are also set out in the treaty, including Canadian dividend (up to 15%) and interest (up to 10%) taxes. For non-treaty, no-tax countries, such as the Bahamas and Qatar, that means paying full Canadian tax. “If you move to a treaty country, it’s a lot easier to become a non-resident of Canada than if you move to a non-treaty country,” says Michael Cadesky, managing partner at Cadesky and Associates. Canada tends not to have treaties with countries with no taxes, or that tax only some income types, he adds.
In addition to outlining tax rates, treaties dictate the ties that would cause governments to consider people resident. (You can’t be resident in two treaty countries.)
The first major tie is usually principal residence. If your client sells her Canadian home or rents it out to an arm’s-length party, and then takes up full-time residence with her partner and children in another country, she’ll be considered a resident of that other country.
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Once residency is dealt with, treaty coverage lets her keep other ties to Canada, such as bank accounts, without needing to worry about their effect on residency status. But, if your client moves to a non-treaty country, she’ll have to sever more ties. Otherwise, “it’s very likely that she’ll still be considered a Canadian resident,” says Cadesky. Other everyday ties she could eliminate include local phone numbers and credit cards.
“If you’re not dealing with a treaty country, the Canadian government can still make you a resident, even though the other country might say you’re a resident as well,” McCann adds.
No matter where she’s going, your client should return her health card and driver’s licence to her province, because she’s no longer eligible for healthcare as a non-resident, says Cadesky; nor can she legally drive.
Plus, if a client’s going to a non-treaty country, those cards can be used by CRA to establish secondary ties to Canada and dispute non-residency status, adds McCann.
Keeping ties
If your client decides to keep ties, such as a house, investments or bank accounts, make sure she has good reason, says Cadesky.
For instance, “Let’s say you rent your home,” he says. “It would be reasonable to have a Canadian bank account to which rent payments are deposited.”
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For Canadian investments, “a reasonable explanation might be you have a broker you’ve worked with for years, and you wanted to continue with that particular person because of the personal relationship.” He cautions, clients moving to non-treaty countries shouldn’t make the decision to keep a tie lightly, since each tie increases the risk CRA will deem them Canadian residents.
There’s no minimum number of days someone must be outside Canada to become a non-resident, says Allan Madan, founder of Madan Chartered Accountant. Instead, CRA will consider your client to have become a non-resident after she leaves Canada; her spouse or partner and dependants leave Canada (if applicable); and she becomes a resident of her new country.
CRA considers your client’s intention to return to be a tie in and of itself, adds Cadesky. “If you were to leave for nine months and then come back, it would look very suspicious, and CRA may say that your intention was to always to return. On that basis, CRA may believe you were always a resident,” he explains.
Other items that could cause CRA to consider her a resident include owning a cottage or a safety deposit box, membership in Canadian unions or professional organizations, and even magazine subscriptions sent to a Canadian address. To get CRA’s non- binding opinion on your client’s residency, fill out form NR73. Your client must indicate how long she intends to be gone, whether she plans to return, and the ties she plans to keep.
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Cadesky and Madan recommend reviewing the form, but not sending it in. Cadesky explains: “Many of the answers to questions are yes and no,” and if you can’t elaborate, “the form can give a misleading overall impression.”
While that form is voluntary, your client must file a tax return the following April 30. Since it’s her exit return, CRA also requires she list all her property if its total value is over $25,000. She should use form T1161 and submit it with the return.
CRA deems your client’s assets to be sold at fair market value the day she leaves, says McCann. To report these assets, fill out form T1243. Some assets, including real estate, registered savings funds, pensions, interests in trusts and stock options, are exempt from this deemed disposition. Canadian life insurance policies, other than segregated fund policies, are also exempt (see “Canadian insurance abroad,” below).
Report capital gains or losses from the disposition on Schedule 3 of the return. The disposition may create a hefty tax bill for your client, but CRA allows emigrants to defer payment until they actually sell their properties.
To enter into a deferral agreement with CRA, your client should fill out form T1244. She won’t incur interest, but if she owes more than $14,500, she must provide security to cover the amount, such as bank letters of guarantee or credit, and Canadian or provincial bonds.
Canadian insurance abroad
Can a client keep her policy? Yes. For most policies sold in Canada, “continuing is never a problem,” says Lawrence Ian Geller, president of L.I. Geller Insurance Agencies. “The insurer cannot change the contract or cancel the contract while you continue to pay premiums.”
But if your client knows she’s about to leave the country, she can’t buy a new policy. That’s because Canadian insurers won’t sell to non-residents. The insurer will ask your client if she intends to reside elsewhere. If your client knows she’s going to leave and buys a policy anyways, the insurance company may void it, Geller says. On the other hand, if she doesn’t intend to go abroad when she buys the policy, it should stay in effect.
Is the policy taxable? All life insurance policies, except segregated funds, are exempt from Canadian exit tax, says CRA. A segregated policy would undergo a deemed disposition when your client becomes a non-resident—meaning she could have to pay tax.
Once your client is out of the country, there will still be tax to pay. “Segregated funds have a capital component which is non-taxable, and an interest or earnings component which is taxable as income when distributed. It’s taxable whether you’re in Canada or elsewhere,” says Geller. As a non-resident, the interest and earnings would be subject to withholding tax of up to 25%.
Is insurance a residential tie to Canada? If CRA looks at your client’s ties to Canada, it would consider insurance a secondary tie, says Warren McCann, partner at Kudlow McCann. Primary ties include owning a home and having a spouse and children in Canada. Like professional memberships, insurance policies could be one of a number of items CRA could put forth to argue your client hasn’t truly severed her residential ties. But “in itself, it wouldn’t make you a resident,” he says.
While your client is away
If your client becomes a non-resident, her new country’s securities laws may bar you from advising her without a local license. Before that happens, tell her what to expect while she’s away.
If she earns Canadian income while abroad, such as rent payments from her old house, she’ll have to pay tax on it, says McCann. Use CRA’s income tax package for non-residents.
And, payments from a Canadian source, including interest payments from financial institutions, are also subject to withholding tax. The usual rate is 25%, though it varies, says Cadesky.
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Canadian financial institutions usually hold back taxes, but if they don’t, your client must report the income. She can also apply to have the tax reduced by filling out form NR5. CRA will use the information she provides on the form to determine her eligibility for reduction. If the agency approves her application, it will authorize Canadian payers to take off less tax. To make the election, write “Section 217” at the top of your client’s return. Your client’s filing deadline is also extended to June 30.
While she’s gone, your client should keep her registered accounts, says Madan. Along with pensions, they maintain their tax-deferred status even when a client is a non-resident. He cautions the standard withholding tax would apply to RRSP withdrawals while she’s away. While your client could contribute to her RRSP from afar, it wouldn’t make sense, as she wouldn’t have any Canadian income from which to deduct contributions, he adds.
Madan also reminds clients who have withdrawn registered money under the home buyers’ plan that they have 60 days to pay it back once they become non-residents. If they don’t, the amount is included in their incomes for the year.
As for TFSAs, Madan says some places treat them as taxable foreign trusts. Your client won’t accumulate contribution room while she’s a non-resident, and she can’t make contributions either. If she does, she’ll be subject to a 1% penalty each month. If she wants to take money out of a TFSA, she won’t incur Canadian tax. That contribution room would be added to her future limit when she returns.
Coming back
Your client should plan to be a non-resident for at least two years before returning to Canada, recommends McCann. The less time she’s gone, the more likely CRA will scrutinize her non-residency status and assess her as a resident retroactively. When she leaves her foreign home, your client will be relieved to hear that most low- or no-tax places, including Hong Kong, Qatar and the Bahamas, don’t have exit taxes, says Cadesky.
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Once landed in Canada, she should let CRA know she’s back by filling out form NR74, says Madan. CRA deems the adjusted cost base of your client’s property to be its fair market value on the date of her re-entry.
Any gains on foreign property accrued while your client is a non-resident of Canada aren’t taxable when she returns, Madan says. “Let’s say I move to Qatar and buy a [$400,000] apartment there, and I’m a non-resident of Canada,” he explains. “Five years later, [say] it appreciates to $700,000. My cost basis when I come back would then be $700,000.”
If your client deferred the tax on the deemed disposition of her assets when she left Canada, she can reverse that agreement in order to reduce or eliminate the gain she reported the year she left.
To do so, she should write to the International and Ottawa Tax Services Office by the filing deadline of the year she re-establishes residency. She must list her properties and their fair market values. (Once her taxes are settled, CRA will also return all or part of her security.) Going forward, your client will also have to fill out form T1135 if she owns foreign property worth more than $100,000. She’ll also have to re-apply for certain tax credits, including the Child Tax Benefit and the GST/HST credit.
After a waiting period, your client will be eligible for provincial health care again. In Ontario, new residents must be in the province for 153 of the last 183 days.
Despite the residency interruption, your client should also be eligible for CPP and OAS when the time comes, says McCann. The government calculates CPP payments using the best 40 years of a person’s contributions between ages 18 and 65. “You could be a non-resident of Canada for five years, but if you worked in Canada the other 40, you’d still get full CPP,” he explains. To be eligible for OAS, your client must be a Canadian resident for 20 years after age 18.