We frequently receive queries from clients who are considering a move to the US or other country for business or personal reasons. They usually wish to know whether they will qualify as a non-resident of Canada for tax purposes, and the tax implications of non-residency.
Determination of Non-Residency
When a taxpayer leaves Canada, he generally wishes to be considered a non-resident by Canada Revenue Agency (CRA) in order to avoid Canadian tax on his worldwide income. Instead, he will be taxed only in the new country of residence. In determining the residence status of an individual who is leaving Canada, CRA considers the following factors:
- Permanence and purpose of stay abroad
- Residential ties within Canada
- Residential ties elsewhere
- Regularity and length of visits to Canada
In evaluating the first factor, CRA formerly used a two year test. Current CRA practice does not put a minimum time limitation on the taxpayer’s absence.
On the issue of residential ties, maintaining a year round dwelling place in Canada that is available for the non-resident’s use is a primary indicator of Canadian residence. In other words, the individual’s home should be sold or leased on a long term basis. Leaving a seasonal cottage vacant would not on its own be an indication of residence, providing other ties were severed (see below).
The individual’s spouse and minor children should accompany him/her to the new country of residence, but they can stay behind for a reasonable period of time for legitimate personal reasons. The taxpayer should set up a residence in the new country. This residence can be purchased or rented.
CRA provides a list of other ties which the non-resident generally should not retain. Metaphorically-speaking, these are items that are set on one side or the other of a scale which ultimately leans one way or the other to determine the residency/non-residency status.
- Furniture and clothing
- Bank and investment accounts
- Credit cards
- Club memberships
- Provincial medical insurance
- Seasonal residence
- Professional memberships (resident status)
- Professional memberships (on a resident basis)
Typically, having one or two ties from the above list will not cause CRA to consider a person a Canadian resident, but having a number of ties could result in them coming to a different conclusion.
Frequent visits to Canada, along with other ties, may cause CRA to consider an individual to be a continuing resident of Canada.
When you cease Canadian residency, there are various tax consequences:
You are deemed to dispose of certain assets such as shares of Canadian and foreign corporations, and mutual funds held outside your RRSP or RRIF. This means that you must pay tax on capital gains accrued to the date of departure, and will owe no future Canadian tax on any further appreciation. You also must bring into income any existing reserves. Under securities law, your Canadian broker can no longer manage your non RRSP portfolio once you are non-resident.
If you sell your home prior to departure, any gains normally will be tax-free under the principal residence exemption. If you decide to keep your home and rent it out, it becomes a taxable property once you are non-resident. This means that appreciation while a non-resident will be taxable. You can either elect a deemed disposition at departure and only pay tax on the gain from departure to date of actual future sale, or pay tax upon future sale on the proportion of the total gain which accrued while a non-resident. The choice depends on an educated guess as to future appreciation of the property.
For other real estate holdings, you do not have to declare a deemed disposition on departure, although you can choose to declare a disposition if there is a loss which you could use to offset other gains. Canadian tax will be payable on any capital gains realized on an actual future sale. The cost base at that time is dependent on whether there was a deemed disposition on departure. A non-resident selling Canadian real estate must declare the sale and request a “clearance certificate” from CRA in order to receive the proceeds. If there is a gain, the clearance certificate will require a withholding tax to be forwarded from the gross proceeds. A Canadian tax return must be filed by the following April 30th and the gain will be taxed at graduated rates, with this amount to be offset against the amount withheld on the clearance.
If you hold rental property while a non-resident, you must have a Canadian agent who can file an annual election with CRA declaring you to be a non-resident. Upon filing of this NR6 form, the agent will withhold Canadian tax at 25% of estimated net income. You will then file a special annual Canadian tax return by June 30 of the succeeding year declaring only your net rental income, and will either owe additional tax or receive a refund depending on the accuracy of the estimate. If the NR6 is not filed, you can file the same tax return, but your withholding will be at 25% of gross rent.
You must declare your new non-resident status to your bank, broker, and all Canadian pension sources. Pension, interest, and dividend payments to non-residents are subject only to Canadian withholding tax according to the tax treaty with your new country of residence. Rates are typically 10% to 25%. CPP and OAS payments may not be subject to any withholding tax, depending on your country of residence. OAS is subject to the clawback rules, requiring you to provide annual proof of your worldwide income. For departing retirees, OAS will continue abroad as long as the person lived in Canada for at least twenty years after the age of 18; otherwise, the OAS will stop in the seventh month after emigration.
Your RRSP or RRIF can remain intact with your Canadian broker if you cease Canadian residency. Lump sum withdrawals from RRSP are typically subject to 25% withholding tax depending on your country of residence. Withholding rates for periodic payments from a RRIF are dependent on the tax treaty in force.
Typically, you will pay tax on your worldwide income in your new country of residence. Canadian withholding tax may be creditable against tax otherwise payable.