Recently, I dealt with a client who had the following scenario regarding a move from Canada and the tax consequences associated with his emigration. He was also interested in ensuring that he severed his ties with Canada to avoid being deemed a resident for tax purposes. See below for details relating to this matter and general information on the factors CRA will use to determine whether an individual has severed their ties to Canada and whether or not the individual has become a non-resident for tax purposes.
I’ve recently accepted a 18 month contract in Bermuda and am set to move there in February of this year. I’m not sure if I will return to Canada after completing the contract or pursue another contract in Bermuda or another country, but I am wanting to break my ties to Canada to take advantage of their low tax rates. What are considerations that I should make and what types of things would CRA consider when determining whether I’ve broken my ties. I don’t want to end up having to pay Canadian taxes.
Severing your ties with Canada is not always cut and dry, but there are certain factors that the CRA will look at when determining whether or not an individual has severed their ties to Canada and consequently making that person a non-resident for income tax purposes.
Some of the factors that CRA will look at include the following:
Residential Ties generally include factors such as whether you maintain a permanent home in Canada when you leave or whether you sell your home (if it’s owned). You don’t necessarily need to sell your home to prove that you have severed ties, for example, in times when the real estate market is down, it could be reasonable to rent your home either for investment purposes or until the market recovered. However, you generally wouldn’t want to maintain a residence in Canada that you have unlimited access to or to rent your home with conditions to the renter that indicate your intention to return to Canada after the 18 month contract (such as a set 18 month rental contract with no extension available).
If you rent your home, you generally would not want to sublet it to someone, with an agreement to take it back in the future. CRA would also look at whether you maintained a mailing address in Canada after you left.
CRA would look at whether your spouse or common-law partner or any children would be moving with you or would be staying in Canada. Having a spouse or children staying in Canada would indicate that you still have strong ties with Canada and could affect CRA’s determination of your residency. Adult non-dependent children generally on their own would not be enough for the CRA to consider an individual to have strong ties to Canada for residency tax purposes, but in combination with other factors could become a consideration for CRA.
Other residential ties include whether you maintain personal possessions in Canada such as furniture, clothing, a vehicle or even a vacation home. They will also look at whether you kept your Canadian driver’s license, Canadian passport and Canadian Health or life insurance policies. All of these factors will play into the determination of whether or not you have severed your ties with Canada.
The CRA will look at whether you maintained bank accounts, investment or brokerage accounts, retirement accounts or Canadian credit cards when considering an individuals economic ties to Canada.
Closing all of your bank accounts may be ideal in showing that you are severing ties with Canada, however, often it is not realistic given penalties that could occur for closing RRSP accounts or losses that could be incurred in economic downturns in brokerage accounts. It is important to consult a Canadian income tax professional when leaving Canada, if you are planning on maintaining accounts mentioned above or any other types of accounts to ensure that you are not leaving yourself exposed to potential residency tax issues.
It is also very important to note that when you severe your ties with Canada and become non-resident, many of your assets will be deemed to be sold at their fair market value, which could create taxable gains. Some exceptions do apply to certain assets. Tax planning prior to becoming a non-resident of Canada can be very useful to manage and prepare for potential departure tax of this nature.
The CRA will look at any memberships that you retain after leaving Canada. These could be social, recreational or religious groups in Canada. They will also be looking at an individuals professional or union memberships in Canada or other memberships that are dependent on Canadian residency.
The Canada Revenue Agency will also look at factors such as the number of return trips an individual makes to Canada and the duration of these trips after you have declared yourself a non-resident. They will also consider whether you are still employed by a Canadian Company or Canadian Crown Corporation and whether you have either a set return date or a guaranteed job when you return.
Generally speaking, it’s not the number of ties you still have to Canada, but the significance of the tie and whether, from CRA’s perspective, it could indicate an intention of keeping or maintaining ties to Canada. Primary ties to Canada such a personal residence that is readily available for personal use, dependents or a spouse or a combination of other ties may result in a determination that an individual has not severed their ties to Canada and may still be a resident for tax purposes.
If you are unsure about whether the Canada Revenue Agency will deem you to be a non-resident for tax purposes given your ties to Canada upon departure, you can file form NR73- Determination of Residency Status with the CRA. The CRA will respond as to whether or not they consider you a non-resident based on the facts of your situation. This form is not required to be filed and often it may not be necessary as an individual may be able to build a strong enough case to show that they are a non-resident for tax purposes without having CRA review this form.
Planning on emigrating from Canada? Need help with your tax filings? Give us a call at 250-381-2400.
The information contained in this article is for general use only and should not be viewed as professional advice. Accounting and tax rules and regulations regularly change and individuals should contact a competent professional to obtain accounting and tax advice based on their specific situation.