Non-Resident Taxation for Canadians

Residents of Canada pay taxes (lots of taxes) on their world wide income. The normal taxation system is very complicated and using a C.A. (Chartered Accountant) is always a good idea.

What is somewhat less understood is the tax system for Canadians who reside outside of Canada i.e. non-resident taxation.

In this section, we want to be very clear that we are not advocating tax evasion, that is illegal. We only wish to make you aware that the Canadian Government recognized that there should be different tax rules for Canadians who live abroad and therefore they developed a different set of taxation laws to cover this situation.

The fundamental requirement for moving into the non-resident taxation system is:

  • You are leaving Canada with the intent of taking up residency in a foreign country e.g. Lake Chapala, Mexico.
Very Important Note
This does not mean you cannot return to Canada nor does it have any effect on your citizenship. You will always retain your citizenship and the right to return if you decide to. (There could be some tax implications which we will address a little later.)

Becoming a non-resident is a very simple procedure. It is merely a statement on your “last tax return” for the year in which you leave Canada and take up residency in a foreign country. Example: This will be my last tax return.

You do not need permission, you simply inform CRA (Canada Revenue Agency) that you have become non-resident. CRA will then set up a non-resident account.

There are a number of other things you need to do:

Inform all financial institutions that you deal with that:

  • “As of (date) you have become a non-resident and they should amend their records to comply with the rules for a non-resident and deduct non-resident taxes in accordance with the Tax Treaty between Canada and (new Country of residence).
  • Inform any organization from which you will receive revenue (Pensions, Fees, Dividends, etc) that you have become a non-resident (as above).
  • As there will be a “Deemed Disposition” of any asset that would normally be taxed upon actual disposition, you will need to establish the value of the asset as of your departure date and calculate the departure tax due.
    • This can be a complicated process if you have significant assets which would be taxable on disposition, and therefore should be planned in advance of your departure date. A Chartered Accountant with a full understanding of the non-resident tax rules should be used. Not all Chartered Accountants work in the non-residency tax area. It’s very important that you ensure that the Chartered Accountant you intend to use has a complete understanding of all the rules.
  • There are exceptions to the “Deemed Disposition” on departure date rule. Basically CRA recognizes that imposing departure tax on “Taxable Canadian Property” (TCP) i.e. assets, would create hardship if the actual TCP was not disposed of at the time of departure. (Examples: RRSP’s, Life Insurance, Real Property etc). Many items are not taxable upon departure but will be taxed upon actual disposition. It is also possible to defer payment of departure taxes by application to CRA and the provision of security for the amount of taxes payable.
  • Some items are not taxable upon departure i.e.
    • Primary Residence
    • Any asset which has been previously taxed (Personal items – car household items, etc)
    • Cash/savings (though interest and dividend are taxable), etc
  • Again, declaring non-residency must be planned and a knowledgeable C.A. used in the planning.
  • There are also “rules” that apply to establishing non-resident status. Again, the basic rule is that you are taking up residency in a foreign country.
  • CRA can challenge your non-residency status if you maintain “too many ties” to Canada. Though there is no absolute definition of “too many ties”, some items are certainly on the “Do not have” list:
    • A primary residence in Canada
      • You can rent out your residence but it must be on a long term basis and “at arms length” – in essence, your residence becomes an investment property.
    • A spouse living in Canada
      • This would not be a problem if you had a legal separation (i.e. divorce proceedings under way)
    • Canadian Health Care
      • This refers to the Provincial programs. You could have a private insurance policy with a Canadian company that provides coverage in your country of residence.
    • A vehicle registered in Canada.
      • Currently you can register vehicles 10 years and older in Mexico (program expires May '06). Within the next few years, any vehicle will be able to be registered in Mexico – (approximately 2009 re the NAFTA Agreement)
    • Canadian Drivers License
    • Club/Association Memberships

These are major items. If you have left Canada, why would you need them?

  • There are many other items that “count against you” if you retain them. One or two may be O.K. but “too many ties” (undefined) could lead to a challenge.
    • Multiple Bank Accounts
    • Multiple Credit Cards]
    • Mailing Address (including Post Office Box)
    • Safety Deposit Box
    • Personal Stationary/Business Cards
    • Telephone/Answering Machine
    • Magazine subscriptions (unless directed to foreign residence)
    • Active business ties
  • To get an idea of what CRA looks for, check out Form NR73, available on their web site or you can view this form in: PDF nr73-04e.pdf (36 KB). It is optional for determining your “official” status though we believe some items requested are inappropriate and we do not recommend its use (personal choice)
  • This form also looks for items that support having established residency in your new country.
    • Mailing Address
    • Bank Accounts
    • Memberships
    • Drivers License
    • Health Care Coverage, etc

Are there benefits to becoming a non-resident?

This depends on your individual situation and should be reviewed with a qualified person (Chartered Accountant, Tax Consultant, CFP, etc). Canada has Tax Treaties with many countries which establish withholding tax rates on revenue received from Canada by a non-resident. Currently, the rate for Canadians resident in Mexico is 15%.

What this means is that any income you receive from Canada will have 15% withholding tax deducted at source and the balance will be paid to you. Examples are; CPP, OAS, Company Pensions, Dividends, and Interest on Investments (not on Capital Gains), Rental Income (must be managed by an Agent), RRIF Payments.

The basic calculation is to establish the tax you would pay as resident (with allowances which will not apply if you become non-resident) versus the 15% withholding tax. You can then base your decision on the results. "Sample calculation - Non-Resident Taxes"

Disclaimer:
  • Becoming a non-resident is a personal decision. For some people, it may be advisable; for others it may not be. We do not make any recommendations. This section is simply an overview of the major issues on non-residency. It is not intended to be fully comprehensive and does not cover all situations. You should seek professional advice from a qualified person prior to making your decision. For further information go to www.cra-arc.gc.ca/tax/nonresidents

Returning to Canada

If you legitimately moved your residency to a foreign country and handled all the taxation issues appropriately and then your situation changes and you wish to return to Canada, you can do so.

You would need to inform CRA and explain your reason for returning. CRA will review your case and, if legitimate, change your status to ‘resident’ with ‘no tax penalties’. The issue here is basically that CRA must be satisfied that you did not declare non-residency for the purpose of tax reduction and then return when you have received the benefits - i.e. that you did not have the ‘intent’ to leave Canada.

Upon your return, you will need to ‘reverse’ any tax deferrals you received and notify any financial institutions and companies/organizations from which you receive revenue of your change in status.

Again, the use of a Chartered Accountant is recommended to ensure you re-establish your residency appropriately, especially with CRA

Financial Freedom

Financial Freedom is in integral part of our Focus program and there is a fully comprehensive conference dedicated to Non-residency, given by a qualified speaker on this very important topic. You will discover that the Canada/Mexico Tax Treaty has some very favorable tax implications if you are a non-resident of Canada. You will have the opportunity to ask your personal questions plus you will receive valuable hand out materials regarding non-residency, for reference. Even if you currently aren’t planning on becoming a non-resident or moving to Mexico, you will learn valuable information that will help you make informed decisions. Many of our Canadian Focus participants have said this conference alone was worth the price of the trip.“ 8-Day Focus on Mexico Program” details
 
The rules for Canadian non-residency explained.