Planning to Change Canadian Residency Status? Before you move, know your tax obligations
If you are planning to leave Canada, either temporarily or permanently, there are certain things you should know about how your move will impact your tax obligations.
Residency status and the value of your property that you currently own are two important factors in determining which government you owe taxes to and how much you must pay in taxes either before you leave or when you return.
If you are leaving Canada permanently, you will likely cease to be a Canadian resident for tax purposes. Before leaving, it is often sensible to complete and file a “residency determination request,” using form NR73. This will notify the CRA that you are not a Canadian resident, thereby ensuring that you will not have to pay Canadian income taxes on your worldwide income. It also notifies the CRA that you will no longer be eligible to claim certain tax benefits, such as the CCB and GSTC.
It is important that you sever other ties with Canada by taking certain actions, such as cancelling your driver’s license, closing bank accounts, selling your primary residence, and purchasing or renting a property in your new country. However, you are allowed to maintain a TFSA account in Canada, with your savings continuing to earn interest even after you leave; however, you are not allowed to make further contributions to the account. Therefore it is advisable to maximize your TFSA room and contribution prior to your departure. In addition to filing the NR73, you should also pay any outstanding taxes that you owe prior to your departure.
However, if you retain Canadian ties or spend a substantial amount of time in Canada, the CRA may continue to deem you a Canadian tax resident, particularly if you maintain a Canadian residence or have family members in Canada.
Returning to Canada
When returning to Canada it may be advisable to apply for a residency determination status using the NR74 application. It may be advantageous to have your residency factually determined particularly where the Canadian tax rate is lower than the tax rate in the country from which you left. It is also possible that the country that you lived in will not require that you pay any tax if you are paying taxes in Canada.
However, where you are deemed to be a resident of two countries, it is entirely possible that you will need to pay tax on your worldwide income to both countries of residence.
Many countries have a tax treaty with Canada that fundamentally alters how tax residency works because of the presence of tie-breaker rules. Tie breaker rules determine your primary residence on the basis of factors such as where your primary home is; where your main source of income is derived from; the residency of and age your children, if any; how long you reside in each respective country; and your citizenship.
To take advantage of tiebreaker rules and residency status so that you pay less tax, you should contact an experienced tax lawyer to help you navigate the rules while staying within the spirit and letter of the Income Tax Act .
Deemed disposition when you leave Canada
When you leave Canada you are deemed to dispose of your taxable capital property at its fair market value (FMV) and pay taxes on any capital gains. Because it is not necessary to actually sell your property, it is called a “deemed” disposition as opposed to an “actual” disposition
For example, you own a rental property that cost you $200,000. When you leave Canada, the fair market value of your rental property is worth $300,000. You will be required to pay tax on your capital gains tax of $100,000 before you leave. However, if there is a capital loss, you can use this to offset the taxes you will have to pay.
This rule applies to most properties. Some of the exceptions are:
- Canadian real or immovable property, Canadian resource property, and timber resource property.
- Canadian business property (including inventory) if the business is carried on through a permanent establishment in Canada.
- pension plans, annuities, registered retirement savings plans, pooled registered pension plans, registered retirement income funds, registered education savings plans, registered disability savings plans, tax-free savings accounts, deferred profit-sharing plans, employee profit-sharing plans, employee benefit plans, salary deferral arrangements, retirement compensation arrangements, employee life and health trusts, rights or interests in certain other trusts, employee security options subject to Canadian tax, interests in certain personal trusts resident in Canada, and interests in life insurance policies in Canada (other than segregated fund policies). For a complete list, refer to the definition of “excluded right or interest” in Subsection 128.1(10) of the Income Tax Act
- property you owned when you last became a resident of Canada, or property you inherited after you last became a resident of Canada, if you were a resident of Canada for 60 months or less during the 10-year period before you emigrated
List of properties
If the fair market value of all the property you owned when you left Canada was more than $25,000, you must complete Form T1161, List of Properties by an Emigrant of Canada, to list all of your properties inside and outside Canada and attach it to your 2018 return.
Exclude from your list any personal-use property valued at less than $10,000. Examples of personal-use properties are:
- household effects
You also have the option of deferring payment of the tax to a later date when you actually dispose of (sell) the property or when you return, if that is what you are planning. If the amount of tax owing from the deemed disposition is greater than $16,500, you have to provide the CRA with adequate security to cover the amount.
Deemed disposition when you return to Canada
When you immigrate to Canada, you are generally considered to have disposed of, and to have immediately reacquired, most properties you own on the date you immigrate. If you had previously elected to defer payment of the tax owing on the gain from the deemed disposition of property on emigration, you may now have to pay the deferred tax.
However, you can elect to make an adjustment or “unwind” the deemed disposition you reported when you emigrated from Canada. You can make this election to unwind if you still own some or all of the property that was deemed disposed of when you emigrated. If you make this election for taxable Canadian property, you can reduce the gain reported on your tax return for the year you emigrated by an amount you specify, up to the amount of the gain you reported.
The election to unwind may result in the reduction or elimination of the tax owing for the gain from the previously reported deemed disposition of property on emigration. If you make this election and you had previously elected to defer payment of the tax owing on the income from the deemed disposition, some or all of the security you may have provided may be returned to you.
To discuss what your obligations are before you leave Canada and how to pay less tax, either before you leave or when you return, contact a lawyer at Kalfa Law to help you navigate this process.
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-Shira Kalfa, BA, JD, Partner and Founder
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