Becoming A Non-Resident & Taxes

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.

Related Articles

• Non-Resident Owing Canadian Taxes
• Living Abroad And Becoming a Non-Resident
• Tax Implications For Canadian Marrying Foreigner And Residing Abroad
• Capital Losses & Becoming A Non-Resident