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Introduction
As a recently re-patriated Canadian, I have lived through what
many other Canadians strive to do – leave their home country to
pursue travel and career opportunities in other countries; and at
the same time avoid the painful Canadian tax bite. But there is a
process that must be followed if you want to successfully leave
Canada and absolve yourself from paying Canadian taxes. Similarly,
once you have left, there are rules you must follow to avoid
looking like a resident for Canadian tax purposes. Finally, if you
do decide to come back, there is again a process that must be
followed upon your return. Failure to play by the rules can cause
you much grief down the road, both financial and emotional. A
little preparation before you leave will help you avoid sleepless
nights later wondering if the tax man is on your trail!
How to Leave Canada
How difficult could it be? Can I not just quit my job, sell my
cat, hop on a boat and sail off into the sunset, never giving a
thought to Canadian taxes ever again? Well, you probably could if
you had absolutely no assets in Canada, were definitely never
returning and did not need to legally earn money in any other
country for the rest of your life. I can think of few people in
this situation so planning your exit from Canada becomes critical.
In some cases, it may be difficult to know what your intentions
are when leaving the country. For example, take my situation:
After finishing university and working for a year, I left Canada
to go on a six month backpacking trip. Ten years and 75 countries
later I returned to Canada to begin raising a family. At the time
I left, I was expecting to come back soon so did not look into
what the proper process was for making oneself a non-resident. It
was only upon my return that I learned all the things I did wrong.
The first important concept to understand is the meaning of
residency. To put it simply, everybody must live somewhere. While
it is true that the internet has taken communications to the point
of allowing people to work on “virtual teams”, where the place you
are living has no bearing on the quality or timeliness of work you
can perform (think internet phones, email, web cameras and instant
messaging), countries and borders still matter. Yes, technology
and globalization are making these borders more transparent, but
these borders still exist, and for good reason. Whether right or
wrong, countries have reserved the right to provide for the well
being of its citizens by taking money from those citizens in the
form of taxes and spending this money to build and maintain the
infrastructure required to sustain the country. It is therefore in
no country’s interest to allow the concept of a “global citizen”
who owes his tax allegiance to no country.
If the Canada Revenue Agency (CRA) is to deem you a
non-resident of Canada you must accomplish two things:
1. Become a resident of another country (this one can be
tricky…I will discuss later in the article)
2. Satisfy enough conditions to convince them that you no
longer have residential ties to Canada
A somewhat surprising fact is that there exists no definition
of exactly what makes a person a Canadian resident. Each situation
is judged individually and is based on many components. The CRA
uses the NR73 Determination of Residency Status (Leaving Canada)
form to determine an individual’s residency status. Some of the
factors they consider are:
- what is the residency status of your spouse and children?
- will you keep a Canadian drivers license?
- how often will you return to Canada for visits?
- will you keep Canadian bank accounts, credit cards or
investments?
- do you have subscriptions to magazines or newspapers sent
to a Canadian address?
- will you stay eligible for medical coverage from a province
or territory of Canada after you leave?
- will you maintain memberships any Canadian social,
recreational, professional, religious or union organizations?
- will you keep a seasonal residence such as a cottage?
- will you keep a vehicle in Canada?
- will you keep personal items such as furniture, clothing,
appliances in Canada?
For an individual considering leaving Canada, this form in an
invaluable tool as it provides a checklist of items for you to
consider before your departure. A departing Canadian is not
required to submit this form to the CRA, though they will give you
an “opinion” on your residency status if you do complete it and
send it to them. Instead of actually sending the form, which I do
not recommend doing without professional advice, I suggest a three
step process in using this form:
1. Complete the form in full.
2. Plan for the problem areas
• For the items where your answer suggests you are a
Canadian resident, write out a plan for how you could change
this aspect of your departure to truthfully come up with the
opposite answer. For example, if you are planning on keeping
your provincial drivers license, an alternate plan would be to
investigate the process of getting a drivers license issued in
the country where you are moving to.
3. Professional review
• Take this information to an independent tax expert to
have them review your departure plan and help you decide which
aspects of your departure you need to change to minimize the
possibility you could be deemed a Canadian resident. These tax
experts should be up to date on recent tax rulings by the CRA
and know which aspects of a departure should be looked at. The
money you spend getting expert advice may well save you many
sleepless nights in the future.
It is very important to go through this exercise well in
advance of your departure as some changes you may need to make can
take substantial time.
Do you need to satisfy every condition on the NR73? No. Do you
need to satisfy most of the conditions? Definitely. Let’s suppose
you have cut all residential ties to Canada but you still have a
Canadian drivers license and a bank account with a small balance.
This would probably not qualify for meaningful residential ties.
Now if you also kept a car in Canada that you used during your
visits home, and had furniture and personal items in long term
storage, then this may be enough to tip the balance and qualify as
meaningful residential ties. Again, professional advice will help
here.
What To Do While You Are Away
You’ve been through the NR73 form, have reviewed it with a
professional and have made the necessary changes in preparation
for your departure. Next comes the giant going away party where
all your family and friends buy you litres and litres of your
favourite beverage then throw you on the airplane. So now you are
a non-resident and can forget about Canadian taxes, right? Wrong.
There are two major items you need to consider; first your “new”
residency status and second your final Canadian tax return.
Your New Residency Status
Now that you have left Canada, are you a resident of anywhere?
As mentioned previously, governments (including the Canadian
government) around the world expect that everyone is a resident of
somewhere. What the CRA expects you to do as a non-resident is to
establish these residential ties in some other country. Do they
check up on you to make sure this has happened? Probably not.
Would they be interested in you if they knew you had not
established residency somewhere? Probably yes. This becomes
particularly important if you think there is a chance you will
return to Canada sometime.
This process of establishing residency is going to be different
for each escapist’s particular situation. For a person who has
left Canada to live permanently in a low tax or tax free country,
it should be straightforward. You apply for the appropriate visas,
find a place to live (thereby establishing a new fixed address)
then start living. From the Canadian tax perspective, if it looks
like you are a resident of that country, then you are. If you are
spending substantially more than 183 days per year in your new
country and are doing what regular people do such as drive a car,
receive magazine subscriptions, use the hospitals, and so forth
then you will be fine. If you want a nice list of the things
you’re expected to be doing just look at the NR73 form again!
Establishing residency becomes more difficult for the escapist
that is not living in a single place. I will offer three different
examples of this. The first is the empty nester couple who buy
their dream sailboat and spend their retirement sailing from place
to place spending most of their time on their boat. If they spend
no longer than a few weeks at a time in any particular country,
what would their country of residence be? Unfortunately, in
absence of any clear country of residence, they would likely be
deemed to be Canadian residents by the CRA based strictly on their
Canadian citizenship. There is no easy way around this. Saying
this, I must admit that I have met many Canadian sailors over the
years that seem to be living “off the grid” and in fact do not pay
taxes anywhere. This sounds good, but you must face the fact that
at some point, health fails every person and eventually they will
be forced to sheet in the sails and head back to port somewhere
where their health needs can be provided for. If that country does
happen to be Canada, the CRA might find it strangely convenient
that they decided to opt for residency once they needed government
help. I suspect they may then be interested in knowing where the
couple had been paying taxes on their investment and retirement
income while they were away.
A second example is the independent consultant who is extremely
mobile and travels from place to place, contract to contract. This
could be a writer, a professional speaker, a business consultant,
and so on. It is possible to change ones location with such
frequency that it makes establishing any meaningful residential
ties nearly impossible. I have seen people in this situation
manage this in different ways. Some decide to live “off the grid”
in the hopes that nobody ever catches up to them. And in fact, for
an individual who truly does not live anywhere and earns income
from many sources across many countries, it makes it quite a task
for any particular government to claim rights to taxes on this
income. Other individuals in this position may maintain a
residence in a tax favourable country, even though they may spend
very little time there. It is much better to pay a small amount of
tax knowing that you are legitimate than be constantly on the
sneak from the tax authorities of whatever country you happen to
be in.
A third example is what I call the “Wandering Minstrel”, of
which I have met many over the years. I’m referring to those
escapists who leave Canada not in search of riches, or riding on
the wings of riches, but instead as a low budget, low income
adventurer. They usually do not earn much income in any particular
place, and the income they do earn is normally on a cash basis.
For this individual, escaping Canadian taxes is not the reason
they left the country, therefore many of these folks simply don’t
bother filing tax returns anywhere. This is a mistake. Since this
individual is not establishing meaningful residential ties
anywhere else, and is not probably not earning more than their
allowable personal deductions in Canada, it makes sense for them
to maintain their Canadian residency and file an income tax return
each year reporting their earnings as “Other income”. Besides
making it easier to return to Canada later, having Canadian
residency as a backup for any health issues that may occur is not
a bad idea, especially if the only cost are the provincial health
premiums (if applicable) and the trouble of filing income tax
returns each year.
The most important thing to remember in this area is that If
you leave Canada and do not establish significant residential ties
in another country, it is very possible that your residency will
default back to Canada in the case that the CRA had reason to
investigate your situation.
Your Final Canadian Tax Return
Your final Canadian tax return must be filed with the CRA by
April in the year following your departure. There is a deceptively
simple question on the very first page of the tax return that asks
if you had a change in Canadian residency and the date of your
entry to or departure from Canada. Do not forget to enter your
departure date here. If you do forget, this will hang over you
like a dark cloud. This is the flag that tells the CRA to not
expect any more regular tax returns from you as a Canadian
resident. You may know that US citizens are required to submit tax
returns to the United States regardless of their residency status.
This is not the case for Canadians – if you are a Canadian citizen
but not a resident you are not required to file an income tax
return. As far as the CRA is considered, if you have sent in your
final return and indicated you have left Canada, then you are no
longer their concern. There may be some exceptions here, the most
common I’ve encountered is a non resident who maintain ownership
of rental property in Canada with an arms-length, long term rental
agreement. In this case, they are required to send in a special
tax return as a non-resident for the net income received from this
property. Other exceptions may also exist.
In my case, I forgot to check this box when I submitted my
final tax return and this caused some problems when I eventually
returned. Because I had not indicated I was leaving Canada, the
CRA was expecting tax returns from me and had recorded me as a
“delinquent tax filer” as I had not submitted returns for many
years.
Unlike me, most people probably have assets and investments
when they leave Canada. As I left Canada not long after my
university studies, the only investments I had was a quart jar
full of unloved pennies, therefore this part of my tax return was
dead simple. Hopefully you will have investments to deal with. As
a departing Canadian, no matter what you do with your Canadian
investments, the CRA deems you to have sold all of them on the day
of your departure and any outstanding taxable capital gains you
may have are payable. For people with sizeable investments,
professional advice here is an absolute requirement.
How to Return to Canada
You are now a carefree non-resident and spend your days sailing
around the Caribbean or living in the rain forests of Costa Rica
or maybe even pouring Mai Tais in a nice beach bar in Phuket. It
was all going so well for so long, but somehow the appeal starts
to wane and you begin yearning for the cold, comfy winters of
Canada. With luck, your family and friends still vaguely recall
you and may actually want you to come back.
The day you step back into Canada with the intention of
becoming a resident is the same day that all your worldwide assets
and income become subject to Canadian taxes once again. Sad to
say, but that tidy little bundle you socked away in an offshore
bank account is indeed back on the books and any future income you
earn on it or capital gains you achieve will be taxable in Canada.
“But what if it’s hidden away so deep that the CRA will never find
it?” you may ask. Well, it’s your choice. You can either come
clean and be appreciative of the fact that you have assets to your
name or enjoy those sleepless nights wondering who may be on to
you.
On the day you become a Canadian resident – and this exact date
should be discussed with your professional advisor – you should be
sure to do a complete inventory of your assets and record all the
applicable exchange rates. To become a resident again, you
certainly do not need to convert all your money and/or investments
to Canadian dollars, but you need to realize that any gains or
losses that result from exchange rate fluctuations will be taxable
in Canada.
The first moment the CRA will likely be aware of your return to
Canada is when your social insurance number (SIN) is used, for
example, if you take a job in Canada your employer will be sending
in Canada Pension Plan (CPP) contributions, among other things,
with your SIN attached. What normally then happens is the CRA will
be expecting a tax return from you for the current year and you
are officially “back on the radar”.
There are two main items to note for your first Canadian tax
return as a returning citizen. The first is that yearly
deductions, such as the basic income exemption, must be prorated
from the day you became a resident (ie. You cannot claim the
entire yearly amount). Secondly, there is a special reporting
requirement (T1135) for individuals who own “foreign property”
that is valued at over $100,000. The rules and definitions of this
can be quite complicated so it’s important to have expert help
when filing this.
There are many other more detailed tax planning considerations,
especially for high net worth individuals, but those are well
beyond the scope of this article. The best advice I can give is to
recommend that a professional tax advisor be consulted before you
return and during the filing of your first income tax return.
To summarize, a successful and worry free departure from Canada
from a tax perspective requires planning, thought, professional
advice, and probably some life changes. Those that want to ensure
their tax relationship with Canada is severed once they have left
must ensure they establish residency in another country. They must
also ensure their final Canadian tax return indicates their change
in residency status. Finally, those that someday decide to return
should plan this return with the help of a professional and
understand that their worldwide income and assets will become
subject once again to Canadian taxes.
Taxes will be far from the most interesting aspect of any
Escapist’s dreams to start a new life outside of Canada, but with
proper planning and action, the happy Escapist will be able to put
their mind at ease and concentrate instead on the adventures that
lie ahead.
Kristofor
P. Olson
October 15th, 2006
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