Canadian
Residency for Tax Purposes
By Arun
(Ernie) Nagratha and Wayne Bewick
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November 2006
| Determining
the tax consequences of moving to another country, whether permanently
or temporarily, requires some foresight. Since Canadian residents are
taxed on worldwide income, maintaining residency in Canada will require
you to file a Canadian tax return on an annual basis, including in your
return income from all sources, both Canadian and foreign. You may also
be required to file a tax return in the country you are going to live in.
If you sever your Canadian residency for tax purposes, a final “departure
tax return” should be filed in Canada.
Since many
other countries around the world have lower individual income tax rates
than Canada, you may want to sever your residency in order to be in a situation
where you will no longer be taxed on your worldwide income in Canada. It
is important that before you make that decision, you first determine if
you are even in a position to be able to sever residency and whether it
makes sense in your situation. Tax residency does not affect your citizenship
or legal residency status. It is specific to tax. Determining if
you are a resident of Canada for tax purposes depends on your intention
at the time you leave Canada. You must ask yourself if you plan to return
to Canada in the “foreseeable” future. If your plans are not to return
to Canada, you may be in a position to sever your residency with Canada
if you support your intention to remain abroad by severing your residential
ties with Canada. There is no specific time period after which you will
be seen to be a non-resident of Canada, so it is important that the steps
you take to prove your intention to be a
non-resident
are followed carefully.
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Residential
ties with Canada
Residential
ties with Canada are typically seen as primary or secondary. It is important
that you sever all primary residential ties when ceasing residency. Maintaining
any significant primary ties could be looked at by the Canada Revenue Agency
(CRA) as causing your residency to be maintained in Canada. Secondary residential
ties are looked at collectively by the CRA.
No one secondary
tie would likely be seen as causing you to be viewed as maintaining Canadian
residency, however, efforts should be made to sever all ties to Canada.
Some common examples of primary ties are maintaining a residence(s) in
Canada that is available for your use, leaving a spouse or common-law partner
in Canada and supporting dependants in Canada. Some common secondary ties
are personal property left behind in Canada, maintaining Canadian bank
accounts, Canadian credit cards, and professional and/or club memberships
in Canadian organizations. In addition, it is important that you
inform any Canadian residents making payments to you, such as financial
institutions that you have investments with, that you intend to be a non-resident
of Canada. Not only does this show the CRA your intention to be a non-resident,
but it also ensures that payments made to you after your departure are
subject to the appropriate non-resident withholding taxes. If these non-resident
withholding taxes are not withheld by the Canadian payer, you will be required
to voluntarily remit the withholding tax after you have left Canada.
If your residency status is questioned by the CRA, they may ask you to
submit a form NR73 - Determination of Residency Status (Leaving Canada).
It is advisable that you fill in this form at the time of your departure
and keep a copy for your records, in case it is requested. It is not advisable
that you submit this form to the CRA unless you and your tax advisor have
difficulty determining your residency status and you are not willing to
accept the risk of being wrong.
Departure
tax
If you become
a non-resident of Canada for tax purposes, you must file a final departure
tax return in Canada, due April 30th after the year in which you sever
your residential ties with Canada. There are various tax implications that
could arise in this final return. The most common example is the deemed
disposition of certain assets you own, based on fair market value. Another
example is the pro-ration of personal tax credits for your period of residency.
Apart from the departure tax return itself, rental properties owned by
non-residents have specific filing requirements in Canada on an annual
basis. This is just a sample of some of the issues that should be
considered on your departure from Canada. It is important that you seek
professional advice to ensure that all of your departure tax issues are
taken into consideration in your final tax return.
Maintaining
Canadian residency
If significant
ties to Canada cause you to be seen as a resident, keep in mind that you
will still have to file a Canadian tax return on an annual basis reporting
your worldwide income, even if this income was earned in another country.
In most cases, you will be allowed a foreign tax credit for foreign taxes
already paid on this income but you must still meet your tax filing requirements
in Canada. If you do not file your tax return, you may receive a
request at some point from
the CRA requesting
you to file.
Arun (Ernie)
Nagratha CA and Wayne Bewick CA, CFP, CPA (II) are Tax Advisors with
Trowbridge Professional Corporation, Chartered Accountants and Tax Advisors.
Their firm focuses on international tax services for Canadians around the
world.
For further
information on their firm and the services they provide, you can contact
them at their Toronto office at
(416) 214-7833,
visit their website at www.trowbridgepc.ca,
or email Ernie at arun.nagratha@trowbridgepc.ca
or Wayne at wayne.bewick@trowbridgepc.ca |
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