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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.
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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
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.
Economic Ties
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.
Social Ties
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.
Other Factors
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.
Related Forms
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.
Tony Theaker, CA
tony@hutcheson.ca
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.
Our dynamic Team are always contributing the latest tips and techniques to keep you in the know with all things tax, accounting, and bookkeeping. See more from this author below.
Hello,
Could you share tips on how to fill the NR73?
I used to be a Canadian PR but it expired in Jun 2017. I have always worked in Nigeria and have never had paid employment in Canada. I tried to renew my PR and had an IAD appeal with no success. I filed my 2018 taxes and during assessment, submitted a letter showing my gross income which is higher than my actual pay. Nigeria has tax system that allows only self funded pension(there is no government or state pension). The pension is like a deferred future income. The CRA is requesting for back taxes due to the deferred income. However, Nigeria has a tax treaty with Canada which clearly states that residency for tax purpose is determined by the country of -citizenship. I am a Nigerian citizen (but my wife and children stayed back in Canada). The treaty also states salaries earned in Nigeria cannot be taxed in Canada. I objected to the reassessed back tax and the CRA has requested I fill an NR73 form.
Will appreciate useful tips on filling the NR73.
Thank you
can a non-resident Canadian citizen purchase a condo and leave it vacant.
I am relocating to USA as green card holder on family basis after 3-4 months…I am Canadian Citizen, just became a citizen in December…own no property, just a car worth $17500…money in TFSA account…and I am incorporated….give services as a contractor…I have no family in Canada, all alone
I want to keep TD bank account as CAD to US$ conversion is not good at moment
What departure tax or formalities I will have to do? Please guide.
Hello Tony,
I will be leaving canada for 4 years as my husband is working in another country (non canadian firm).
Our whole family (my husband, me and our two kids) will all be outside of canada.
I don’t know if I am considered a resident or non-resident. I called CRA but they did not give a firm answer.
My background,
– I have a rental property in Alberta.
– i have another single family home that belongs to my parents (who lives oversea), so I use that as my primary mailing address and I can stay here anytime I want.
– I have rrsp, resp, tfsa and active bank accounts.
– I have a valid drivers license and passport.
– I have a job offer to come back to (within the next 3 years).
I want to be considered a canadian resident because I have a small canadian small business and with the small business deduction I enjoy a much lower tax rate.
I am getting Child benefits monthly for my kids. I called in and ask them to cancel the payments, but CRA wouldn’t and said it is tied to my residency. AMD as long as I am a resident then I will get the funds.
I don’t want to make a mistake on my tax filing and later learn I was actually a non-resident and owe taxes back to the government.
Based on my information, would you consider me a resident or non-resident using CRA standards?
Thank you,
Sel
. Question: Based on the information below, is the person considered as a deemed non resident of Canada since Canada has tax treaty with the other country for Year 2012-2016?
· In 1992, severed ties with Canada and established a residency and ties with USA.
· Canadian and USA Citizenship
· My spouse & children migrated to Canada on December 31, 2011 under my sponsorship while I reside in USA.
· On June 2012, spouse and I had a marriage breakdown but no divorce decree or legal separation filed.
· No dependents age as of January 2017
· Visits Canada every weekend or Holidays
USA Employment Income
USA home and address
USA Driver’s license
USA Vehicle Registration and Insurance
Files US Taxes
USA Medical, Dental and Vision Insurance
No Canadian Income, Investment Properties or Retirement Plans
II. Question: Based on the information below for the Year 2017 and 2018, will the person considered deemed non resident of Canada since Canada has a tax treaty with the other country even he commutes daily from Canada to USA for work?
· Starting March 2017, I have been staying overnight to sleep in Canada between 10 – 11 p.m. to commutes 6:30 am daily from Canada to USA for work and mostly weekends to stay.
No dependents age as of January 2017
· Maintained and kept a rental place in USA
· No bank accounts in Canada but CDN credit card has no activities.
· No Canadian Driver’s License or Vehicle registered
· USA Health, Vision and Dental Insurance through USA employer.
· No Canadian Income , Investment Property or Retirement Income
No Canadian MSP
· Canadian Costco Membership
· No Canadian leased or rental abode
USA Employment Income
USA Driver’s License
USA Vehicle Registration and Insurance
USA Tax Filing
On June 2012, spouse and I had a marriage breakdown but no divorce decree or legal separation filed.
Canadian and USA citizenship
No dependents
spouse and I had a marriage breakdown but no divorce decree or legal separation filed but lives in one house on separate rooms for financial reasons
III. In the future, will the person still be considered as a deemed non resident of Canada since Canada has tax treaty with the other country? In what point will the person has to file Canadian taxes?
· staying overnight to sleep in Canada between 10 – 11 p.m. to commute to USA for work leaving at 6:30 a.m. and mostly weekends to stay.
· Does not maintain a USA place
· No bank accounts in Canada but CDN credit card has no activities.
· No Canadian Driver’s License or Vehicle registered but only USA vehicle registered and USA driver’s license.
· USA Health, Vision and Dental Insurance through USA employer.
· No Canadian Income, Investment property, Retirement Plan
No Canadian MSP
· Canadian Costco Membership
· No Canadian leased or rental abode
No Dependents
No Canadian Drivers License or Vehicle registered
spouse and I had a marriage breakdown but no divorce decree or legal separation filed but lives in one house on separate rooms for financial reasons
Canadian and USA Citizenship
USA tax filing
USA Vehicle registration and Insurance
USA Drivers License
USA Employment Income
Question 3: A factual resident who commute daily from Canada to USA for work still maintains a USA abode who becomes a factual resident who sojourns 365 days in Canada (see B). In the future, will the person still be still be considered as a deemed non resident of Canada since Canada has tax treaty with the other country? At what point will the person has to file Canadian taxes?
A) You are a deemed resident of Canada for tax purposes if you are in one of the following situations:
You lived outside Canada during the tax year, you are not considered to be a factual resident of Canada because you did not have significant residential ties, and you are a government employee, a member of the Canadian Forces including their overseas school staff, or working under a Canadian International Development Agency (CIDA) assistance program. This could also apply to the family members of an individual who is in one of these situations. For more information, see Government employees outside Canada.
You sojourned in Canada for 183 days or more (the 183-day rule) in the tax year, do not have significant residential ties with Canada, and are not considered a resident of another country under the terms of a tax treaty between Canada and that country.
Notes
If you are a deemed resident of Canada, and also establish residential ties in a country with which Canada has a tax treaty and you are considered to be a resident of that country for the purposes of that tax treaty, you may be considered a deemed non-resident of Canada for tax purposes.
You become a deemed non-resident of Canada when your ties with the other country become such that, under the tax treaty with which Canada has with the other country, you would be considered a resident of that other country and not Canada.
As a deemed non-resident of Canada, the same rules apply to you as a non-resident of Canada.
The 183-day rule
When you calculate the number of days you stayed in Canada during the tax year, include each day or part of a day that you stayed in Canada. These include:
the days you attended a Canadian university or college;
the days you worked in Canada; and
the days you spent on vacation in Canada, including on weekend trips.
If you lived in the United States and commuted to work in Canada, do not include commuting days in the calculation.
B) You are a factual resident of Canada for tax purposes if you keep significant residential ties in Canada while living or travelling outside the country.
The term factual resident means that, although you left Canada, you are still considered to be a resident of Canada for income tax purposes.
Notes:
If you have established ties in a country that Canada has a tax treaty with and you are considered to be a resident of that country, but you are otherwise a factual resident of Canada, meaning you maintain significant residential ties with Canada, you may be considered a deemed non-resident of Canada for tax purposes.
You become a deemed non-resident of Canada when your ties with the other country become such that, under the tax treaty that Canada has with the other country, you would be considered a resident of that other country. As a deemed non-resident, the same rules apply to you as a non-resident of Canada.
Situations where you could be considered a factual resident
You may be considered a factual resident of Canada if you are:
working temporarily outside Canada;
teaching or attending school in another country;
commuting (going back and forth daily or weekly) from Canada to your place of work in the United States (U.S.);
vacationing outside Canada; or
if you spent part of the year in the U.S. , for example, for health reasons or on vacation.
This may be helpful to some of you
Hi there
Do I need one NR4 form to take care of my British pension and cpp and old age security. I am over 65 and return to uk in couple of months.
Hi this is
they will issue you NR4s for CCP and OAS. However your British pension would not require a Canadian slip
Hi
Thanks for the info. So I do not actually have to search the web for the form and they will automatically send the form to me. Just clarifying.
Yes, it’s their responsibility to send you the form. However you need to tell them you’re leaving Canada.
Also there’s a tax consequence to leaving Canada on a permanent basis
do you have any other assets?
Also will Canada withhold taxes or will my taxes be based on my completed NR form. No I don’t have any assets just my pensions.
What do you mean by a tax consequence
No, they shouldn’t withhold taxes on CPP and OAS, however you need to call them to confirm
if you don’t have other assets you should be fine
Yes I will provide my address in uk as well as my new bank account number
that should work, good luck
remember, this is general information only and you should contact a tax professional for actual advice…cheers
Thank you so very much. Regards
You’re welcome.
Hi Tony,
I have dual US and Canadian citizenship. I want to return to the US for an undetermined to work. I want to insure that I considered a non Canadian resident for tax purposes during this time.
When I leave Canada I will not have primary ties or home, family, and personal property. I will have secondary ties, I do have credit cards and bank accounts, but I can close those if needed. I can also replace my Canadian DL and export my car if needed. I do have a Canadian passport but I will refuse to surrender that.
As a US citizen with a US job and established home, would I also have to break the secondary ties as well?
Thanks,
John
If all residential ties with Canada were severed by a Canadian citizen and equivalent ones established along with permanent residency in another country that had zero income tax and filing requirement, would the CRA still consider an individual a resident of Canada for tax purposes? Sounds like it could be challenged in court but that doesn’t mean it wouldn’t be attempted. I haven’t heard of any precedents in case law. If a court found in a favor of the CRA in such a case it seems that would make the Canadian system de facto taxation by citizenship.
I have a Canada/US tax related question. How to avoid potential double-taxation of a capital gain as part of departure tax, while moving back from Canada to the US AND keeping a US property without selling it the same year. My interpretation is that in Canada, the accrued capital gain on that property (half of it) will be subject to my marginal tax rate in Canada in the year of departure. At the same time, I am not selling the property in the US at the same year, so there is nothing to offset my Canadian tax obligation with in the US. Later, lets say, 5 years down the road, I choose to sell that US property, and (lets assume it is not fully treated as my primary residence, so no (or partial) exceptions for capital gain) I pay a capital gain tax on the same property in the US, including on the gain accrued while living in Canada and which was already taxed under the Canadian code. Additionally, I believe, the US does not allow to use foreign tax credit on tax paid overseas on an income sourced in the US, which is this case. This is clearly a double-taxation, unless, I guess, I choose to sell the US property in the same year I leave Canada. This seems a weird incentive, especially if I consider living in it when back to the US. Am I missing something?
I could not find any of the international tax articles or blogs discussing this issue, although it seems prevalent. Can you help clarify? Many thanks.
Hi Tony Theaker,
The extra charges of a government on the purchasing of property in the form of general country tax can be eliminate easily with in a seven days according to the rules and regulations of a government,If you write an application with the authentic reasons for a elimination of property tax and also attached a legal documents of a property tax pairs after that submitted in the government office by the tax layers which is helpful for you to approved the claim of your property tax in the seven days without any allegations of a government on the application of your property tax ,Remember don’t write any irreverent reasons in the applications of property tax you want to submit in the office of government and also don’t attached any illegal or extra document of property which increase the chances to refuse or neglect your claim application ,So keep it in your mind all the instructions and requirements given to you by the tax layer after concerning this kind of matter according to the current policy of government .
Thanks
Hi Tony
We moved to Canada 11 years ago from the UK. We are now considering moving back. Our question is my husband is a consultant and is incorporated. Can we leave Canada and leave the business bank account open or do we have to close it? We are intending on becoming non resident. If it has to be closed I am presuming we have to pay 25% tax on the total amount. Our financial adviser at the bank has advised that this would be the only tax we pay on withdrawal and I wonder whether this is true. Any advice would be appreciated.
Thank you
Hi,
I got job offer to work in Oilfield in Iraq (middle east) and the total net yearly income is about CA$90,000. I live only with my spouse in Canada (both of us are Canadian and Iraqi citizenships). My employer in Iraq will pay tax to the Iraqi government about 11%. I would like to know approximately (amount or percent) the mount to be paid for taxation in Canada.
Kind Regards,
Mohamad Sahib
Oops, what I meant to say was, whatever the decision of the CRA is, is it binding? I realize that simply submitting the form doesn’t mean you are non-resident. My mistake.
Hi Tony,
Good article, clear and concise, and simplified on a complex tax issue.
Question: While the form is not required, if I fill in a Form NR73 is the decision by CRA official and binding? I.e. will it be put on file and thus my future tax returns must indicate that I’m non-resident.
Further, if you disagree with the decision (assuming it is binding) would a judicial review be the only way to dispute it and potentially have the decision changed?
A second question: what are the types of assets deemed disposed of (or perhaps the list of assets not deemed disposed of is shorter?)
Thanks in advance!
Hello, I am living and working in the gulf and have signed on for an additional (third) year with my employer here.
I am struggling to decide if I should file as a non-resident. I have read some information and do not own any property or vehicles in Canada.
I have some secondary ties: bank accounts and credit cards, driver’s license, RRSP’s and Student Loans. I also maintain my Teaching certification as it is required for most work places abroad.
I am not planning to return to Canada next year and am unsure of when (or if) I will.
Should I file the NR73 Determination of Residency Status form? I have had some colleagues advise against this, but in my situation maybe it is best?
Hello Peter, I am living and working in the gulf and have signed on for an additional (third) year with my employer here.
I am struggling to decide if I should file as a non-resident. I have read some information and do not own any property or vehicles in Canada.
I have some secondary ties: bank accounts and credit cards, driver’s license, RRSP’s and Student Loans. I also maintain my Teaching certification as it is required for most work places abroad.
I am not planning to return to Canada next year and am unsure of when (or if) I will.
Should I file the NR73 Determination of Residency Status form? I have had some colleagues advise against this, but in my situation maybe it is best?
Hi,
I am a little confused. Say I moved to a country like Switzerland that has a tax treaty with Canada, but that has a tax rate lower than Canada. And say I wanted to keep some ties to Canada such as an RRSP account. Does that make me a deemed non resident or deemed resident (in which case I would have to pay more taxes to the Canadian government in addition to what I would be paying in Switzerland)?
Thanks,
Ivan
Informative article, thank you! I left Canada more than 10 years ago and have no ties (property, asset, family etc.) or income from Canada, I’ve established residence in another country. Is there any steps I should take since I didn’t know about NR73?
Hi Peter,
Thanks for the kind words. The NR73 form is optional and given that you have/had no ties to Canada when you left, you shouldn’t need to obtain CRA’s opinion on your residency status. Therefore, assuming you filed an exit (emmigration) T1 tax return when you left Canada, I wouldn’t think need to do anything at this point. If you have any other questions, please feel free to email me at tony@Hutcheson.ca or call 250-381-2400.
Hi Tony – I recently moved back to Canada after working in the US for 13 years. I was filing my taxes in the US as a resident but made the error of also filing as a resident in Canada during the same period and not disclosing my US income. I believe I was a US resident the entire period but I fear that the CRA will ding me once they see my 2015 tax return which will show US income for the first time. Do you have any suggestions on how to correct my tax status without incurring higher taxes? Thanks.
Hi Ajay,
It sounds like the first thing that we’d need to determine is, based on any ties to Canada, whether or not you would have still been considered a resident of Canada during any or all of the 13 years you lived in the US. From there, we could assess whether you had any tax filing obligations in Canada during those years (did you have any income from Canadian sources during that period?) and take it from there. If you’d like to chat further, please give me a call at 250-381-2400 or email me at tony@Hutcheson.ca
Hi,
I am canadian citizen working in US on TN visa, I was present in US for more than 200 days so from US tax perspective I am resident of US but I still have lot of ties with canada (bank accounts, RRSP, TFSA, Car registration, licence).
I do understand I have to file as US resident and Canada-Non resident but I dont understand “Deemed Disposition of Property ” clause for departure tax, do i have to pay capital gain tax on bank balances, those are just checking account and not producing any interest or dividend.. any insight on what is included in deemed deposition of property and on what articles I have to pay capital gain tax , I also have RRSP and TFSA
Hi Tony
My wife and I are planning to move to Spain.
We presently have our house up for sale in Ile Perrot, I also have a rental in Cornwall, Ontario.
My wife will retire at the end of this year.
When I sell my house I would like to deposit the money in my bank account here till I find a house in Spain and settle in.
Some people tell me I cannot keep money in the bank or I will pay taxes but the bank told me I can keep money without penalties.
Are there consequences as a non-resident to keep money in the bank even if I’m not collecting interest.
Do I have to file a Tax Return because of the money in the bank?
I have a management company in Cornwall who collects the rent, I am aware that he has to file an NR6 every month and withhold 25%(he already has customers with similar situation)
Do I get the 25% back, do I have to file an Tax Return every year?
If I sell the rental apparently a withholding tax of 25% will apply to the gross sales amount unless I apply for a clearance certificate.
What amount of the 25% do I get back if I apply for a clearance certificate?
Is it worth it for me to sell the rental before I leave Canada?
I am 62 and can receive a pension but I will wait till 65.
Can I receive a lump sum pension from Quebec and CRA. I was told that they would calculate the amount of years I would live.
Then CRA and Rev Que. would calculate the tax on the lump sum and send me the balance.
Meaning if I lived another 20 years and I would collect $600/monthly aprox. from CRA = $7,200 yearly = total of $144,000.00 for 20 years then they would subtract the taxes and send me the rest.
Can I ask for a lump sum and is this correct?
Thank you,
Kind regards
Rob
Hi Tony
My wife and I are planning to move to Spain.
We presently have our house up for sale in Montreal, I also have a rental in Cornwall, Ontario.
My wife will retire at the end of this year.
When I sell my house I would like to deposit the money in my bank account here in Montreal till I find a house in Spain and settle in.
Some people tell me I cannot keep money in the bank or I will pay taxes but the bank told me I can keep money without penalties.
Are there consequences as a non-resident to keep money in the bank even if I’m not collecting interest.
Do I have to file a Tax Return because of the money in the bank?
I have a management company in Cornwall who collects the rent, I am aware that he has to file an NR6 every month and withhold 25%(he already has customers with similar situation)
Do I get the 25% back, do I have to file an Tax Return every year?
If I sell the rental apparently a withholding tax of 25% will apply to the gross sales amount unless I apply for a clearance certificate.
What amount of the 25% do I get back if I apply for a clearance certificate?
Is it worth it for me to sell the rental before I leave Canada?
I am 62 and can receive a pension but I will wait till 65.
Can I receive a lump sum pension from Quebec and CRA. I was told that they would calculate the amount of years I would live.
Then CRA and Rev Que. would calculate the tax on the lump sum and send me the balance.
Meaning if I lived another 20 years and I would collect $600/monthly aprox. from CRA = $7,200 yearly = total of $144,000.00 for 20 years then they would subtract the taxes and send me the rest.
Can I ask for a lump sum and is this correct?
Thank you,
Kind regards
Roberto
Hi Tony,
I am a Canadian left to the Gulf to work there. I do not intend to come back to live in Canada. I do not have any ties in Canada (closed my bank account, have no driving licence, have no home, have no personal belongings, no social ties, …etc). Actually, the only tie I have is my Canadian passport.
Also, my wife (64 years old) did not decide yet whether to come with me or stay with her son (who is 35 years old, lives and works in Canada).
My question is: am I considered none-resident?
What if my wife decided to stay in Canada?
Can I transfer some money every once in a while to her to help her continue living in Canada as she wanted?
Appreciate your response.
Jay
Hi Jay,
Having a spouse or dependent in Canada is considered a primary or significant tie to Canada which generally indicates that an individual hasn’t completely severed their ties to Canada. It often indicates that the move may be of a temporary nature (may not be true based on all of the facts; however CRA is likely to interpret it in this way). Generally, your exit date from Canada ends up being the date your spouse leaves Canada (if after the date you leave). As a result, if your spouse stays in Canada, you likely would be deemed to still be a resident of Canada and therefore be taxed on your worldwide income. You could file form NR73- determination of residency status with CRA to see whether they consider you to have exited and become a non-resident for income tax purposes or not. I think there is a strong likelihood that they will consider you a resident of Canada given that your spouse is still here. If you have any other questions, please feel free to email me directly at tony@Hutcheson.ca
Hello Tony,
I am a Canadian working abroad in the Middle East. I get paid bi-weekly and I get taxed both times. I also receive a bonus every month and get taxed heavily on that. This reduces my income quite greatly and I am wondering if there is a way to reduce my taxes or get max tax rebate at the year end. Is this possible? I have been reading articles online and most people sever ties with Canada to avoid paying huge taxes. Is this the only way to avoid taxes? Is there another way to save more? Or is severing ties with Canada and finding a new place to live abroad the only way to go? Any help will be greatly appreciated. Thanks in advance. Best Regards.
Hi Adnan,
I’ve replied below in general terms (given that I don’t know all of the facts of your situation). Hopefully this will provide insight into your situation, but please email me directly at tony@Hutcheson.ca if you have further questions or to discuss your situation in more detail. Note that tax residency issues are quite complex and need to be assessed on an individual basis based on all facts and potential exceptions that may apply due to those facts.
Here’s how it works in general- As a Canadian you are taxed on your worldwide income in Canada if you are considered “resident of Canada for income tax purposes.” Although you are working in the Middle East, you still could be considered a “resident of Canada.” That’s where the severing of ties comes in to play, as you’ve read about by the sounds of it. If the ties with Canada are severed, then you generally become a “non-resident of Canada for income tax purposes” and at this point, generally only income from Canadian sources would have tax implications in Canada (as opposed to your world-wide income being taxed in Canada).
So for the sake of the questions, let’s say you still have ties to Canada, that you haven’t been deemed to sever you ties with Canada and are still a resident of Canada for tax purposes. In this case, you would (depending on the tax rules in the country in the middle east you reside) need to report your income in that country and be taxed on it there. As a result of still being considered a resident of Canada, you would also need to report all of this income in Canada as well (reporting your worldwide income in Canada). Then, you need to consider any tax treaty that may exist between Canada and the country where the income is earned. These tax treaties are in place to try to help avoid income being subject to double taxation and how the income should be taxed.
Now the most likely issue for you, is that depending on where you are working, the tax rate may be quite low compared to the tax rates in Canada. Let’s say you pay a 10% tax rate in the country of residence in the middle east, but a 30% rate in Canada. Let’s also assumed that the country you live in also has first right to tax you on this income (per tax treaty or based on residency), then how in theory it would work is that you would pay the 10% tax in the middle eastern country. Then, since you are considered a resident of Canada, you need to report your worldwide income (ie these wages) and are taxed at 30% rate. You would then get credit for the 10% tax you paid in the middle east and it would offset the 30% tax you paid in Canada, but you would still end up paying 20% tax in Canada. (Therefore you overall tax rate is still 30%- 10% middle east/20% in Canada).
As a result, you essentially pay your Canadian tax rate of 30% overall (10% to Middle east/ 20% to Canada) while you are considered a resident of Canada for tax purposes. If your ties are severed and you become a non-resident of Canada, then in general (some exception may apply but are beyond the scope of this) assuming this income is earned in the middle east and you are a resident of that middle eastern country, then you would only be subject to tax on that income there. As a result, in the above example, you would only be subject to tax at the 10% overall rate.
Please email me at tony@Hutcheson.ca to discuss your situation further, if needed.
Dear Tony,
Thanks for the excellent information. My situation is a bit different:
I am planning to leave Canada with family (wife and son) for 5 to 10 years for a work assignment. My daughter (Canadian citizen) is 19 years old and is in a local university. I have all intentions of returning back to Canada after my work term and settle back. I do not want to pay taxes in Canada for this period, I have a Canadian passport and will not surrender that. If I transfer my house and car titles to my daughter do I still have significant ties with Canada? Is my intent to return after my work term considered favourably?
Thanks..
Hi Tony, I am a teacher and I am moving to Italy for a minimum 2 year contract. Italy has an agreement with almost every country EXCEPT Canada that entitles them to the same 2 year tax exemption that Italians get on their first 2 years of full time employment. If I cut my ties with Canada would I ten qualify for this 2 year exemption? Thanks!
What is the tax residence implication if a Canadian citizen permanently works in the US on a TN visa, but the spouse remains in Canada in the house they own? There is no presumption of intent to settle by virtue of the visa type, but because of the full time employment, SPT makes him a US tax resident – is this correct? Or do we have to apply the tax treaty here, in which case, he may end up being a Canadian tax resident/US non resident alien?
Hi Jake,
Generally speaking, you’re always best off to close all of your accounts, if possible. However, having these accounts does not necessarily mean you will be considered a resident for tax purposes.
All of the facts really need to be considered as to why the accounts are still open and why the funds are going into that account. Having your primary bank account in Canada definitely increases the likelihood of having the CRA consider you not to have severed your ties with Canada. But in the end, it really depends on all of the facts (like you’re your trips to Canada are for, what other ties you have in Canada, etc).
Also, remember that if you do severe your ties with Canada, you will deemed to have sold many of your assets at their market value on your “exit date” from Canada. This can trigger capital gains and additional tax in the year of departure.
Hi there, Thanks for the advice. I am a bit worried though: when you say one is deemed to have sold all assets, and withholding tax will apply. Does that also mean one’s primary residence that is worth hundreds of thousands of dollars? Who can afford to pay 25% on that?
Hi Steve,
Canadian real estate would need to be reported however no deemed disposition would occur. Down the road if you sold the Canadian property, you may then be subject to tax depending on the property value fluctuation from the time to exit Canada until the time you sell it. Also be cognizant that having a home available to you in Canada could cause a scenario where you have a significant residential tie to Canada and therefore CRA may deem you to still be a Canadian resident for tax purposes. Renting the Canadian property may remove this issue; however there could be non-resident filings required for a non-resident who rents Canadian real estate.
All the best,
Tony
My husband and I are moving to the U.S for a few years from Canada. I do not work, so there is no benefit for me to cut my ties. But if I don’t, will that effect his residency status with the CRA?
Hi Tony. Im curious whether after severing all my primary ties, but keeping a chequing account and credit would deem me a resident still. I have been working oversees, only been back to Canada 2 out of the 36 months that I have been gone. I’m going to stay another 2 years and would like to sever my ties but keep my income depositing in my chequing account. Would this be a big No-No? Thanks in advance! – J
Hi Tony,
I am moving in a couple of months from Canada to the US for a permanent position and have put my place for rent or sale, whichever I can secure first.
In case it rents, I would want to sever my remaining secondary ties to be on the safe side. In my case those would be my credit card and line of credit. My question is, do I have to close those before I become a non-resident or any time before I file 2013 taxes?
Your insight would be much appreciated.
Thanks
Hi Muhammad,
Generally speaking, it’s always safest to get rid of as many secondary ties as possible prior to leaving Canada. However; it is reasonable to retain Canadian accounts during your move until you are set up in the US but you would generally want to open US accounts and obtain a US credit card shortly after your move and to then close your Canadian accounts. Retaining the Canadian credit card and Canadian line of credit for a longer period wouldn’t mean that the CRA would definitely deem you to be a resident of Canada, but it’s always better to be on safe side and close them.
If you have any other questions, please feel free to contact me at tony@Hutcheson.ca
Hi Tony,
My wife and I are planning to relocate from Canada to Peru in about 2 years. Our intentions are that the move from Canada will be permanent and that we will be retiring, although both of these points could, possibly, end up being revised some time in the future. Visits to Canada are planned to be short and infrequent. We will not be maintaining any sort of residence in Canada or leaving any dependents or personal belongings behind. In accordance with CRA wording, you could say that we will be : normally, customarily, or routinely living in another country; living outside Canada throughout the tax year; and staying in Canada less than 183 days in the tax year. I plan on keeping open at least one Canadian bank account as well as continuing to use a couple of Cdn credit cards and keeping my provincial drivers’ licence until it expires. No professional memberships will be maintained. I plan to become a legal resident of Peru at the earliest opportunity. My wife has Peruvian citizenship. To me, it seems to be more or less clear that we would, under the described scenario, be considered to be non-residents of Canada once we have spent at least 6 months out of the country.
In addition, I plan to be collecting a pension from a Canadian firm which could be initially auto-deposited into my Canadian bank account and withdrawn via ATMs in Peru (hopefully with minimal fees). Approximately 10 years later, if we’re still in Peru, I should also begin to receive CPP and later on, OAS benefits. From what I’ve read on the CRA web site, it seems that all these sources of income will be subject to a non-resident withholding tax. Is that correct?
Things seem more-or-less clear up to this point for me but become more murky due to the following points…
Am I correct in thinking that because my sources of income will both be of Canadian origin that I will not be seen by the CRA as a “non-resident for tax purposes” (for this particular purpose alone) even if I severed all my other primary and secondary residential ties eventually to make the definition of non-resident under the aforementioned scenario even more precise?
This definition has important implications, as you well know, because it delineates those who must pay tax to the CRA while living abroad from those who can legally avoid doing so. It’s confusing to me that the CRA could define me as a non-resident on the one hand but also define me as a resident (due to my income being from Cdn sources) on the other. In other words, I am considered a non-resident when it’s convenient for them to hit me with a non-resident withholding tax but I’m simultaneously considered a resident when they want me to pay tax on my Cdn sourced income. Do I sound too cynical? Maybe there’s something I missed here about which you can enlighten me? Is there a way a person can legally avoid paying taxes on Cdn-sourced income while living abroad or is legal tax avoidance for those living abroad limited only to those whose earnings are also solely from non-Canadian sources?
I’m also wondering if the non-resident withholding tax which I will be liable for paying (15% in this case) due to us living in Peru is going to be considered to be “the” tax rate for me or will it be an “extra” tax rate over and above what I would pay if I lived in Canada. In other words, for simplicity’s sake, using an example of an income of $1,000/month, would the payor have to withhold $150 at source, remit it to CRA and send me the remaining $850, leaving me to pay more tax on that amount according to my tax bracket based on income?
Hopefully you can help me get a better sense of what to expect. Thanks, in advance, for your thoughts.
Hi Peter,
It sounds like you are on the right track with regards to how to go about severing your ties with Canada to become a non-resident for tax purposes when you move to Peru.
Your question isn’t uncommon, so I’ll go into a little more detail.
Currently, as a resident of Canada for tax purposes you would be subject to Canadian income tax on your worldwide income, if you were to have income from sources in other countries. For example if you had a rental property in the US, you would need to report this rental income on your Canadian tax return in addition to all of your Canadian source income. There are tax treaties in place between Canada and many other countries to avoid double taxation. I’ll get to that point below.
Conversely, once an individual severs ties with Canada, they are no longer subject to tax on their worldwide income, but rather they are subject to tax only on certain types of Canadian source income. So you are correct in your interpretation that you will still be taxed on your Canadian pension, CPP and OAS payments in Canada even after you sever your ties with Canada and become a non-resident for tax purposes. Generally speaking, they will withhold 15% at the source of the pension and remit it to CRA on your behalf. You will generally not need to file a tax return in Canada unless they withheld over 15% as long as these remain periodic pension payments. Lump sum pension payments are subject to 25% withholding rates.
So becoming a “non-resident for tax purposes” really means that you are subject to a different set of tax rules than a resident tax payer. As a result, even as a non-resident taxpayer, you are still subject to tax on your “Canadian source income.”
Once you move to Peru and become a resident Peruvian taxpayer, you will need to report your worldwide income on your Peruvian tax return. As a result, you will be subject to tax in Peru on your Canadian pensions as well. Canada has a tax treaty with Peru which allows you to get credit for the tax that you have already paid to Canada (15%) on your Canadian pension income. These “foreign tax credits” are in place to eliminate double taxation. You could get credit for the Canadian taxes paid in Canada on your Peruvian tax return to the extent of taxes that you are subject to on your Canadian pension income in Peru. Basically it means that if you paid $1,000 withholding tax to Canada, you could get up to $1,000 foreign tax credit against in Peru if you were subject to at least $1,000 of tax relating only to your Canadian pension income in Peru. If you only were subject to $800 taxes in Peru on your Canadian pension income, you would only get a credit of $800. If your Peruvian tax rate is over 15%, than you will still end up paying some Peruvian tax on your Canadian pension income, less the credit for the 15% withheld in Canada.
So as you can see, since you are taxed on your worldwide income in Peru, whether or not Canada taxed you, you would still be subject to Peruvian taxes on your Canadian pension income. The tax treaties allow Canada to have first right of tax on your Canadian pension income of 15% rather than Peru getting all the tax revenues relating to your Canadian pension income. In the end, you will pay the higher of 15% tax or your Peruvian tax rate on your Canadian pension income, since if your Peruvian tax rate is 20% for example, you will pay 15% to Canada, 20% to Peru, but get a 15% foreign tax credit in Peru, therefore leaving a net 5% tax in Peru along with the 15% in Canada. That’s the basic concept at least.
Hopefully this answers your questions and helps you better understand how you will be taxed when you become a non-resident for tax purposes in Canada.
Tony Theaker, CA