Thinking of emigrating from Canada to settle elsewhere? If you want to know your tax obligations when you leave Canada and learn more about tax compliance applicable as a non-resident of Canada, this article is for you!
Determine your residency status
First, the notion of tax residence is a question of fact. Thus, many factors must be analyzed in order to be able to establish your residence status. Generally, you will be considered as a non-resident if you have severed all your links with Canada.
However, in determining your status, it is important to understand the concept of de facto residency. Although you live outside of Canada, the Canada Revenue Agency (CRA) may consider you a resident of Canada if several criteria point in that direction.
Criteria to consider
The criteria to be considered are the primary and secondary links. Once these are analyzed, the CRA may treat you as a resident of Canada for the purposes of the Income Tax Act (R.I.R.). It should be noted that links must be analyzed as a whole and that a link alone should not conclude.
In addition, the following should be observed when determining residency status:
- residential ties to Canada and time period;
- the goal;
- the intention;
- the continuity of stay while living in Canada and abroad.
The Canada Revenue Agency also provides you with Form NR73 – Determination of Residency Status (Leaving Canada), allowing you to better target the actions to take before your departure from Canada. This form can therefore be used as a guideline, but should not be transmitted, since the determination of the status is very complex and many gray areas exist. By submitting it, you are asking the CRA to decide for you.
Double tax residency
As you will normally be deemed to be a tax resident of the new country of residence, depending on the local tax rules in force, there could be a situation of dual tax residence. This situation of dual tax residence can generally be resolved by means of tax treaties concluded between Canada and the various signatory countries.
Likewise, the articles of law contained in tax treaties may address situations where double taxation arises and will make it possible to define which country has the first right of taxation. Foreign tax credits will then be available to avoid double taxation. Tax treaties therefore alleviate your situation and not add an additional tax burden.
In addition, when a tax treaty has presumed you to be resident in another country, the L.I.R. will automatically presume you to be non-resident of Canada. However, it will be necessary to pay attention to the number of days spent in Canada in order not to be considered as a deemed resident.
Income subject to tax
As a resident of Canada, your income, regardless of where it comes from, is subject to Canadian tax for the portion of the year that you were resident. Following your departure, only Canadian-source income will be subject to tax in Canada.
Thus, income earned by non-residents remains subject to tax in Canada when it comes from:
- income from employment in Canada;
- a disposition of taxable Canadian property (TCP);
- of carrying on a business in Canada.
Therefore, the preparation of a Canadian income tax return will be necessary when at least one of these situations arise.
This will be the case if you have a building located in Canada. Forms called “certificates of conformity” (i.e. Certificate 116) will normally be necessary in order to inform the tax authorities of your actual or proposed sale, and to alleviate the related tax consequences.
Sale of your goods
When leaving Canada, the CRA considers you to have sold most of your property (with some exceptions) immediately before your departure at their fair market value (FMV) on that date. This is a deemed disposition on which a capital gain or loss must be calculated and reported on your tax return.
The affected property is presumed to be reacquired at the same FMV and will normally be used as the basis for calculating the capital gain or loss to be declared at the time of the actual disposition. However, the deemed disposition may create tax problems down the road in some countries because the cost of the goods may be different from Canada.
Inform the CRA of any change
In addition, it will be important to notify the tax authorities of your departure from Canada and to complete the prescribed forms that may apply at the time of your emigration.
In addition, if you start renting a property that previously served as your main residence, you must inform the CRA (and Revenu Québec, if applicable) of this change in use.
As for passive income (dividends, interest, pensions, etc.), which is paid to you in your capacity as a non-resident of Canada, a 25% withholding tax will usually apply on this income, which can normally be reduced by the tax treaties in force. As such, it will be important to notify all of your Canadian payors so that they issue the correct tax slip and apply the correct withholding rate.
Usually, unless you choose to do so on certain specific types of income (eg. choice under section 217), no tax return is necessary since the withholding corresponds to the final tax.
Leasing a building located in Canada, as a non-resident, is one of the options available and generally allows favorable treatment.
In addition, if you are a shareholder of one or more Canadian-controlled private corporations (CCPCs), a year-end will occur immediately before you leave Canada and a corporate income tax return will be required. Any dividend paid after the departure date will therefore be subject to withholding tax of 25% (before tax treaty).
Pension plan contributions
Finally, as a non-resident, your RRSP and TFSA contribution room ceases to accumulate when you leave Canada. Despite this, be aware that the income accrued within these plans remains tax-sheltered.
However, you can continue to contribute to your RRSP on your unused contribution room. When you withdraw from your RRSP, withholding tax will apply.
As for the TFSA, you will need to pay particular attention to contributions, as penalties and interest will apply to any contributions made after your departure.
If you have used a Home Buyers’ Plan (HBP) or a Lifelong Learning Plan (LLP), you will need to make sure that you have repaid it in full, no later than the earlier of the following two dates, in which case unwanted tax consequences could arise:
- before the date you file your Canadian income tax return;
- 60 days after your departure from Canada.
Leaving Canada requires excellent tax planning. Our tax specialists will be able to meet your tax compliance needs. They will help you prepare for your departure from Canada and can then assist you as a non-resident of Canada.