Each year I help over 500 clients file their Canadian and US tax returns as well as plan for both their Canadian and US investment accounts. I also regularly help new US clients plan for their move to Canada.
Can Canadians be subjected to tax consequences even after emigrating from Canada to the United States? According to the law firm Chang and Boos, a US-Canadian immigration law center, the answer is a resounding “yes.” In an article posted recently on the law firm’s website, one author wrote, “there are a number of Canadian income tax implications that must be kept in mind. In some situations, it may be very expensive, from an income tax perspective, to emigrate from Canada.” In this article we will outline some of the more significant Canadian income tax consequences which must be considered carefully by any individual emigrating from Canada to the US.
Am I Still a Resident of Canada?
Okay, so you’ve left Canada and made the United States your new home. It’s where you live, where you work, and of course, where you pay taxes now. But before you get too comfortable with your new arrangement, you may want to make sure that Canada knows you’re officially gone. Otherwise you may still owe taxes to your mother land.
In Canada, residency is not a cut and dried matter. The term resident is defined nowhere in the Canadian Income Tax Act, and referring to case law on the subject, we see that just being “gone” from Canada does not necessarily mean that a citizen has relinquished his or her residency. The Canada Customs and Revenue Agency (CCRA) has stated that the “determination of an individual’s residence is a question of fact and is based on a number of factors that have been set out by the courts.” These “factors” are what we will discuss in a little more detail below.
The first factor to be considered is something called permanence and purpose. In determining residency, the CCRA considers anything less than 2 consecutive years away from Canada to be an impermanent move, unless the individual in question has cut ties with Canada completely, and he/she can prove that the return to Canada was wholly unforeseen. Residential ties that may indicate the individual has retained his/her residency include:
- A home which may be vacant or leased for the short-term
- Spouse and dependents who may still reside in Canada, unless legally separated
- Personal Property. This could include furniture, clothing, automobile, bank accounts and credit cards
- Provincial medical coverage
- Professional memberships
- GST payments
- Social memberships or charity ties
Although a person may now be a resident of the United States (or some other country), the courts have found that he/she can still be a resident of Canada.
Another factor which must be considered is the regularity of visits to Canada once the individual has taken up residency in another country. While the occasional trips for business and family reasons are not necessarily an indication of current residency in Canada, frequent visits and prolonged stays very well could be.
How to Officially End Your Resident Status as a Canadian Citizen
Canadian residency can be terminated permanently by following a few simple steps. The Universal Tax Services in Ottawa has established procedures to allow for an emigrant to establish a determination of non-residency before he/she departs. While this is certainly not required of emigrants, it may be a good idea, particularly if they don’t want to run into tax difficulties at a later date. Simply ask for form NR73 if you want a determination of non-residency.
There are also a few steps you should take to ensure you will be granted non-resident status. Among these are:
- Either close all Canadian bank accounts or inform them of your proposed departure.
- Inform Canadian income sources, including mutual funds and security brokers, so they can withhold tax payments on certain types of income.
- Cancel social and professional memberships
- Ensure there is no residence which could be deemed as a sign of continued residency
- Cancel provincial health coverage
The Income Tax Implications of Ceasing to Be a Canadian Resident
The Canadian taxation system is based completely on residency. Residents of Canada are expected to pay taxes on income earned worldwide, while non-residents only need to pay taxes on certain types of Canadian-source income. Keep in mind that the moment one ceases to be a resident of Canada, the government of Canada will seek to collect all taxes due up to the date of official departure. This is called the “departure tax,” and is a prime example of why Canadian emigrants should be diligent about officially ending their residency.
This departure tax may involve more than income taxes as well. In October of 1996, changes were made to the departure tax which involved the taxing of the emigrant’s property at the time of departure. Once excluded from the departure tax, this new provision assumes that property will be disposed of before departure and states that, except for a few exceptions, departing Canadian citizens with property, which when added together totals $25,000 or more in fair market value, must pay taxes on that property as part of their departure tax. This is called deemed disposition and excludes only personal use items such as clothing and household goods totaling $10,000 or less.
Some property can even be taxed again and again. According to the Canadian law firm Chang and Boos, “Gains on actual dispositions of taxable Canadian property can be taxed again even though they were taxed at the time of departure. If the property loses value and is disposed of more than three years after departure, the loss may not be carried back to offset the previous gain. If the individual moves to the U.S. and sells the property after several years, there will be U.S. tax on the full gain calculated as the difference between the property’s proceeds of disposition less its original cost. In this situation, no foreign tax credit would be available to recognize Canadian tax already paid at the time of departure.”
The taxable Canadian property which falls into this category includes:
- Real property in Canada
- Capital property and inventory used in a Canadian business
- Shares of a private corporation situated in Canada
- Canadian resource property
Canadian emigrants who own rental properties in Canada will be subjected to a 25% tax on the gross income from that rental property each month unless they file an NR6 with the CRA.
Part-Year Residents in the Year of Emigration
For Canadian emigrants who leave Canada mid-year, the tax situation becomes slightly tricky. Remember, Canadian residents are expected to pay tax on their worldwide income while non-residents are only responsible to pay taxes on certain Canadian-source income.
Deductions which are usually allowed while an individual is a resident of Canada may not be allowed for the period of the year after he/she emigrated. This can cause some severe “tax headaches.” Canadian emigrants, can, however, elect to file a Canadian tax return in the year they emigrated and beyond. This can be advantageous for persons receiving pension or retirement benefits from Canada, and this amount is usually charged a flat 15% withholding tax under the provisions of the Canada-US tax treaty.
Emigrating from Canada is certainly not without its tax consequences, and there are several very important factors to be considered before one leaves. If you’re planning to emigrate from Canada in the near future, call me at 250-661-9417 to make sure you have covered all your bases. It just might save you a lot of time—and grief—down the road.