You have left Canada to work in another country that does not have a tax treaty with Canada. You have a wife who is seeking Canadian citizenship and must remain in Canada for a few years more to obtain citizenship. How do you become a non-resident of Canada for tax purposes to achieve your goal?
A recent visitor to Canadian Tax Resource posed such a question. I have included the original e-mail (excluding personally identifiable information).
My situation seems complicated (on top of which I know very little about taxes). Here is some data:
- I am a Canadian citizen and a resident of Ontario.
- As of August 2008 I have been working abroad in a country with low taxes and no tax treaty with Canada.
- My wife and my 15 month son are living with me abroad.
- My wife is a landed immigrant and currently needs and must live in Canada for another year and a half in order to obtain citizenship.
- We receive child tax benefits.
- My wife and I are taking distance education university courses from a Canadian university and I have an OSAP student loan.
- My wife has a Spousal RRSP that I have contributed to.
- We do not own a home in Canada but are renting a portion of my parents home.
I would like to become a non-resident and thus avoid paying Canadian taxes. However, I need my wife to get her Canadian citizenship for which she will have to live in Canada (without me) for about 1.5 years sometime within the next 4 years before her permanent resident card expires.
How can I accomplish both my wife’s citizenship and non-residency?
I understand I can apply for non-residency later (i.e. after my wife gets her citizenship), and the status is back-dated to when I left Canada….but can they or how can they find out if my wife was actually living in Canada for the 1.5 year to get her citizenship? (which I assume would significantly hurt my non-residency bid).
- Does having an RRSP hurt my chances of non-residency?
- Does getting child tax benefit hurt my chances of non-residency?
- Does having an OSAP loan hurt my chances of non-residency?
- Does taking a distance university degree (either me or my wife) hurt my chances of non-residency?
If I were to purchase a house in Canada in the future (after my wife gets her citizenship), would it be advantageous to first declare non-residency then purchase the house OR vice versa? How would either scenario affect my chances of non-residency?
Thanks in advance for reading this…as you can tell, I really need help.
Analysis
The issue of immigration is outside my scope of taxation and requires the input from an immigration attorney. Below outlines the general rules associated with the tax implications of emigrating from Canada.
Determining Residency
The CRA has an Interpretation Bulletin (IT-221R3) on this matter that may referred to directly. According to the CRA, the most important factor in determining residency for tax purposes is whether or not the individual maintains residential ties with Canada while abroad. The residential ties considered most significant are the existent of:
- A residential dwelling in Canada whether owned or leased. However, if the property were rented to an arms length party the dwelling would not generally be considered a residential tie but the CRA would look at the other facts in the circumstances to determine residency.
- A spouse or common law partner in Canada. If a spouse or common law partner remains in Canada then this would result in a significant residential tie.
- Dependents remain in Canada. If the individuals’ dependents remain in Canada while the individual is abroad, then this would be considered a significant residential tie to Canada.
Note that even if the above have been met in terms of severing residency that there is no dwelling in Canada and the spouse and dependent have left with the individual, other, secondary factors may be considered to determine residency.
Secondary are viewed as a whole to determine if any one tie is significant. The existence of a single secondary residential tie would not normally result in residency for tax purposes but taken with other ties may result in residency in fact. Such secondary ties include:
- personal property in Canada (such as furniture, clothing, automobiles and recreational vehicles),
- social ties with Canada (such as memberships in Canadian recreational and religious organizations),
- economic ties with Canada (such as employment with a Canadian employer and active involvement in a Canadian business, and Canadian bank accounts, retirement savings plans, credit cards, and securities accounts),
- landed immigrant status or appropriate work permits in Canada,
- hospitalization and medical insurance coverage from a province or territory of Canada,
- a driver’s license from a province or territory of Canada,
- a vehicle registered in a province or territory of Canada,
- a seasonal dwelling place in Canada or a leased dwelling place referred to in ¶ 6,
- a Canadian passport, and
- memberships in Canadian unions or professional organizations.
Other factors may also be considered in some circumstances. These can include magazine subscriptions or safe deposit boxes.
The CRA will also consider the regularity with which the individual visits Canada. Occasional visits are typically not considered but if the visits are more than occasional and secondary residential ties are maintained then this may result in residency for tax purposes.
It is advisable to get a determination from the CRA on residential status when leaving Canada. This may be obtained from the International Tax Services Office.
Consequences of Severing Residency
The rules for a deemed disposition upon emigration from Canada can be complex and professional advice is strongly recommended.
Generally, on the date residency is officially severed and the individual has left Canada all accrued tax liabilities must be brought up to date. In technical terms this is called a deemed disposition and all of your assets are deemed to have been sold immediately before you left Canada. All accrued income and gains are realized and taxes must be paid upon departure.
Note that certain types of property are exempt from this deemed disposition and include such things as real property situated in Canada and pensions, stock options, RRSPs, and rights in a trust.
The issue with a deemed disposition is that there is no factual sale of property and a hefty tax bill may result with no real cash inflow. The ITA thus allows a taxpayer to provide security in lieu of paying the resulting tax.
Re-Establishing Residency In Future
It is possible to unwind the deemed disposition if at a later date the individual returns to Canada and establishes residency. The tax that was paid would be refunded and the adjusted cost base restored.
Conclusion
Since the wife wishes to obtain Canadian citizenship and must reside in Canada for the next 1.5 years it would appear that the individual will not be able to sever residency until after citizenship has been obtained.
Once the wife has obtained citizenship she and the dependent children would need to leave Canada to reside with the Husband abroad. In addition, it would not be advisable to purchase a home in Canada unless the intent was to rent the property to a third party who was at arms length. Thus you would not be able to purchase a home and have your parents rent the property from you.
On their own, the RRSP, the OSAP loan, the distance education courses, and paying your parents rent do not necessarily result in residency. However, taken together may result in residency. It is advisable to present all of the fact to the CRA to obtain a ruling on residency.
Finally, be aware that upon departure or severing residency there will be a deemed disposition and any accrued taxes must be paid or security provided. Severing residency would also result in a loss of the child tax benefit and you would no longer be eligible for Canada Student Loans or OSAP.
{ 20 comments… read them below or add one }
Imay have an opportunity to relocate abroad and take my wife and daughter with me, all costs covered by my employer (via overseas branch)
My question and #1 concern is, assuming I sever all other ties as you have mentioned above, is it possible to aquire tax free status for the duration of my stay abroad WITHOUT having to sell our home? My 25 year old son could stay and look after the place and we would not charge rent. He could place the utilities in his name etc. Also, is it possible for CRA to committ to us having tax free status based on a proposal or application PRIOR to us accepting the position?
Your input is greatly appreciated,
Mark
You should read the CRA bulletin Interpretation Bulletin (IT-221R3) carefully and seek the assistance of a professional.
You must sever significant residential ties. Significant residential ties include the status of the dwelling place, the location of the spouse or the location of dependents. Paragraph 6 of the above bulletin goes into detail as to whether they will consider you to have left for tax purposes.
It would appear that if you lease it to a family member, that the CRA may still consider you a resident.
Ideally, your company should also provide you with assistance with dealing with these matters as well. Speak to your employer.
me and my wife are non-resident canadian, living in saudi arabia. my 18 year daughter plans to attend a university in ontario, canada. does this affects my non-residency?
appreciate your input
It should not affect your residency. Residency is based on more than one single factor. If you had a family home, your spouse, bank accounts, club memberships all in Canada you would likely be considered a resident.
A child studying in Canada alone does not constitute residency for you. Although it would for your daughter who would be a resident after 183 days.
My daughter is living and working in France. She has been a non-resident of Canada for the past 3 years. She has been accepted to a master’s program at an Alberta University and will need financial assistance. Are there any Canadian, Albertan or BC (her last permanent residence in Canada) student loan or bursary programs available to assist her? She will not be residing in Canada during the program, as she can complete all of the courses remotely.
thank you for any assistance you can provide.
@ Keith:
I am not familiar with all of the student financial aid packages. I would suggest that your daughter first contact the Financial Aid Office of the university to find out.
You can also contact Canada Student Loans & Grants at http://www.hrsdc.gc.ca/eng/learning/index.shtml.
i am currently living in jamaica and i want to file my taxes so i would like to know where and how can i accomplish this task.
@ Latoya
Assuming you are still a resident of Canada, go to the CRA site and obtain a tax package and mail I t to the CRA.
I am going overseas on a company work transfer to the UK for two years. We have a residence that we will be renting to third parties, and the entire family will be moving to the UK. I understand that Canada has a tax treaty with the UK and thus, for the duration of our overseas work assignment, the entire family will be deemed non-residents of Canada.
However, my husband and I withdrew the maximum allowable amount from our RRSP under the HBP to purchase our residence (combined $40,000). Our tax advisors have told us that this amount will have to be repaid within 60 days of our date of deemed non-residency, or it will be taxed in income. Is there any way to appeal this requirement given that I am going overseas for a set period of time and will become a resident of Canada subsequent to my return?
@ Cynthia:
Unfortunately, when you become a non-resident of Canada you must either repay the balance of funds you withdrew from your RRSP under the HBP before the date you file your tax return or no later than 60 after you cease to be a resident of Canada, whichever is earlier.
I have been offered a job in Saudi Arabia, my wife and children will remain in Canada while I will obviously be located in Saudi Arabia. Appreciate if you you could let me know the tax implications of this arrangement. Many thanks
@ A Khan:
One of the key variables in determining if you are a resident of Canada for tax purposes is whether you have your spouse and children residing in Canada. From my perspective, you will be liable for Canadian income tax on your worldwide income.
You should take a read through the following CRA document and consider hiring an international tax specialist (PriceWaterhouseCoopers or Ernst & Young have such services):
http://www.cra-arc.gc.ca/E/pub/tp/it221r3-consolid/README.html
See also:
http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/rsdncy-eng.html
I have lived overseas since 1996. Have no CDN residence, dependent children or employer. But have kept passport, driver licence and credit card due to me working all over world. Can I buy a cottage and still keep non-resident status?
@ Rick
Although a cottage is considered a significant residential tie, on its own does not necessarily mean someone is a resident for tax purposes, and the CRA would look at other factors to determine if you are a resident.
The fact that you have a drivers license and credit card in Canada combined with owning a cottage starts you down the path towards being a resident even if you are in Canada less than 183 days.
It is advisable that you seek the a ruling from the CRA before purchasing a cottage.
Hi Tax Guy,
In your ‘becoming a non-residant’ articla, you mentioned;
‘Note that certain types of property are exempt from this deemed disposition and include such things as real property situated in Canada and pensions, stock options, RRSPs, and rights in a trust.’
If a parent wants to become a non-resident and the only tie is a rental property, can this parent gives the property to his or her adult child at Adjusted Cost Base without deemed deposition and attracts capital gain?
Thanks.
There is a deemed disposition on the earler of the date of the gift or the date they ceased to be a resident. No tax is payable on the disposition.
HI Tax Guy,
I’m in a bit of a disagreement with my fiance, hopefully you can solve this for us!! We are both non-residents living abroad for 5 years now. I had contact CRA before leaving to find out if I needed to file a non-residency form, however I did not have enough ties and they said that I would just be deemed a non-resident. My fiance filed the forms as he had his own business etc.
I still have RRSP’s that have not been touched since leaving. I have a Canadian bank account that we just recently opened and have begun transferring money back home. I have a canadian credit card that has been used very rarely and only for necessary emergency type transactions. Mainly kept it to maintain credit as we hope to return home soon and buy a house. The country we currently live in is tax-free. I am also enrolled (as a non-resident) in a Canadian University online program.
Firstly, will we be taxed on the money that we have been putting into the Canadian bank account once we return? Is there a maximum amount we can transfer?
Secondly, will I be audited for the use of the credit card here and there? I have generally paid it off using cash in hand at the branch, however recently I used our new account to pay it off. This issue has come up as I have used it more in the last three months than I usually would in a year (about 4 transactions using the new account to pay it off) and now we’re curious as to the implications, if any.
Thanks.
@ Monica:
First, if you are a resident of Canada you are taxed on your worldwide income. Second, if you are not a resident of Canada, any income you earn (other than capital gains or income earned inside an RRSP) is subject to non-resident withholding tax.
When you leave Canada, you are deemed to have disposed of your assets at their fair market value and would need to pay the tax thereof if you had any taxable gains when you became a non-resident. Any interest earned inside the bank account would be subject to non-resident withholding tax.
When you become a resident of Canada, you are deemed to have acquired all of your assets at their fair market value on the date you became a resident.
In either case, the money placed in the account would not, itself, be taxed but rather the income earned is taxed. Which tax applies, depends on your residency status.
In determining residency, the CRA looks at your overall situation and not the status of one particular item by itself. If you have a credit card, bank account, and an RRSP and the CRA has said you are still not a resident, then you are not a resident. If you establish other ties to Canada, you may move yourselves closer to becoming residents (buying a house in Canada or having depended children here would definitely deemed you to be residents).
Dear Tax Guy
I am a South African married to a Canadian non resident. My husband has been out of Canada since 1993 and has obtained a non residency status from the CRA. He has a drivers license and a credit card and a professional license/membership in Canada. We have a joint non resident bank account that our salary is deposited to as a requirement of our employment with a Canadian overseas school. We were married in Canada have a daughter but I am not a Canadian resident or citizen nor have I ever lived there with the exception of a 3 month period on a student visa. My husband and I also have Australian residency which if we do not return to Australia in the next 2 years will expire. We are considering Canada as a place to settle but still unsure. I would like to purchase a recreational property in Canada but my husband is concerned about affecting his tax status. If we purchased the property in my name as a non resident, non citizen would this negatively affect my husbands tax status and could it impact us if we returned to live in Canada?
Best Regards
Michelle
@ Michelle – If I understand the current situation, your husband holds a Canadian professional designation, has an interest in a Canadian bank account, a Canadian credit card, and holds a Canadian drivers licence. Neither you, your husband or dependent children live in Canada and he is deemed to be non-resident.
You are considering purchasing recreational or vacation property in Canada before actually retiring to live and are concerned with residency status.
The CRA’s bulletin at http://www.cra-arc.gc.ca/E/pub/tp/it221r3-consolid/it221r3-consolid-e.html#P123_18961 indicates that if a dwelling place is acquired in Canada and is available for occupation, that it will be considered a significant residential tie to Canada. However, if that person has never been a resident of Canada and the property is leased then it will generally not be considered a significant residential tie.
Given the additional residential ties (drivers licence, bank account, credit card) that you may be close to being considered a resident. I would suggest posing the question to the CRA directly prior to the purchase.