If you’re a Canadian resident or Non-resident contemplating a permanent move away from the country, whether it’s for retirement in a warmer place or due to work relocation, there are crucial aspects to think about.
Before making this move, it’s important to understand the potential tax implications and any required tax and estate planning actions that might arise from your departure. Below, you’ll find important tax planning considerations to discuss with your financial, tax, and legal advisors to manage your tax responsibilities when leaving Canada and to meet your tax filing obligations in a timely manner.
Step 1: Residency considerations before departing
Determining your factual residency in Canada is crucial as it impacts your Canadian tax obligations. If you are considered a resident for tax purposes, you are subject to Canadian tax on your global income. Therefore, it’s necessary to assess your residential ties with Canada before physically leaving the country to potentially avoid remaining a tax resident. Even if you no longer live in Canada, you might still be viewed as a resident due to various ties, such as family connections or prolonged stays in Canada or abroad, like temporary moves for work, education, or extended vacations.
Residency ties can be categorized as significant and secondary, encompassing factors like owning a home in Canada, having family members residing in Canada, property ownership, social connections, economic ties, and more. It’s crucial to sever significant residential ties to prevent being considered a factual resident for tax purposes by the Canada Revenue Agency (CRA). Even if significant ties are severed, secondary ties might still play a role in determining your tax residency status.
The date when you transition from being a Canadian resident to a non-resident for tax purposes is determined by several factors, including when you sever residential ties with Canada or become a resident of the new country. You can also request the CRA’s position on your residency status using form NR73, Determination of Residency Status, if you plan to leave or have already left Canada.
Deemed residency might be relevant if you’re not a factual resident but spend a certain amount of time in Canada. The residency tie-breaker rules in tax treaties between Canada and other countries could help avoid double taxation, determining the primary country for tax purposes.
Step 2: Income tax considerations upon departure
When ceasing to be a Canadian resident, there are tax implications to address, such as the deemed disposition of worldwide assets at their fair market value upon departure, potentially leading to a departure tax liability. However, certain assets might be excluded from this deemed disposition, including real estate in Canada, property used for business in Canada, and others.
Registered plans like RRSPs, RRIFs, TFSAs, and others have specific tax implications upon departure, including tax deferral opportunities and possible taxation in the new country of residence. Additionally, considerations for private corporations and trusts when leaving Canada are essential due to potential tax consequences.
Tax compliance requirements upon departure include filing a personal income tax return for the year of departure and specific forms like T1243 and T1161, disclosing deemed dispositions and property lists, respectively.
Step 3: Managing tax liability and other considerations
Options like deferring departure tax payment by posting security, triggering capital gains or losses, utilizing principal residence exemptions, or planning for income splitting are strategies to consider to reduce emigration tax. Real estate-related tax issues for non-residents involve withholding tax on rental income and requirements for selling real estate in Canada as a non-resident.
In conclusion, leaving Canada involves complex tax considerations. Proper planning and understanding of Canadian and foreign income tax implications are crucial for a smooth transition to your new home. The CRA’s Income Tax Folio S5-F1-C1 can be a helpful resource to determine your tax residency status.
Each person’s situation is unique, and not all tax planning opportunities suit everyone. Consult your tax advisor to discuss your circumstances and implement effective tax planning strategies well before your planned departure from Canada.
Key points and considerations
Residency Considerations:
- Factual residency and determining residential ties.
- Significance of significant and secondary residential ties.
- Understanding deemed residency and residency tie-breaker rules.
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Income Tax Considerations:
- Deemed disposition upon departure and its implications.
- Treatment of various types of assets subject to deemed disposition.
- Handling of registered plans upon emigration.
- Tax implications for private corporations and trusts upon departure.
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Tax Compliance Requirements:
- Filing requirements for personal income tax returns and specific forms.
- Considerations for managing tax liabilities upon departure.
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Strategies to Manage Tax Liability:
- Deferring departure tax payment through security posting.
- Planning considerations to reduce emigration tax (e.g., principal residence election, triggering capital gains/losses, income splitting, lifetime capital gains exemption).
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Real Estate Tax Issues for Non-Residents:
- Withholding tax on Canadian rental income for non-residents.
- Procedures for selling real estate as a non-resident of Canada.
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When selling property in Canada as a non-resident, you must inform the Canada Revenue Agency (CRA) either before or within ten days after the sale by submitting form T2062. Failure to do so may result in a 25% withholding tax on the proceeds (50% for certain properties), plus a possible $2,500 penalty.
Once the necessary forms are filed and the CRA issues a compliance certificate, the withheld tax can be reduced to 25% of the capital gain. Sellers can also request a “Comfort Letter” from the CRA to retain withholding tax until the review is complete. Usually, the purchaser is responsible for remitting the tax to the CRA.
Non-resident sellers can file a Canadian tax return to avoid potential double taxation in their foreign country of residence. To avoid any headache please call the experts at Sell Home Express.