Canadian tax guide

An increasingly large number of Canadians are making the transition to location independence. In this article, I explain how this transition works from a tax perspective and what should / should not be done. I also answer frequently asked questions and provide a few tips.

 

Overview

Canada is one of the world’s largest economies and a leading country in nearly every fields. Its forty million or so people enjoy some of the highest living standards in the world and a level of wealth rivalled only by a few other nations. Unfortunately, the scope Canada’s taxation system is also rivalled only by a few and things are likely to get even worse as the CRA continues its war on tax evasion and money laundering.

While technically a residential taxation country, Canada relies heavily on domicile rules when it comes to residency issues. As a result, “leaving” can be fairly hard and that is especially true in the context of location independence.

For those who qualify as tax residents, federal rates are progressive and range from 15% on income up to ~ 46000 CAD to 33% on income above ~ 200000 CAD (the first ~ 12000 CAD is tax-free). Provincial and territorial rates are also progressive and range from 4% to over 20%. There is no capital gains tax per se, instead, the first half of all gains are taxed as normal income. Deductions, tax credits and allowances are available provided that certain conditions are met. There are no wealth, inheritance, capital duty, stamp duty or estate tax in Canada. An annual return must be filed by all taxpayers and the deadline for payment is the 30th of April.

 

Tax residency

In the vast majority of residential taxation countries, a physical presence test is used to determine tax residency. If you pass the test, you are deemed to be a resident while if you do not, you are deemed to be a non-resident. In most cases, 183 days is the magical number.

In Canada, the domicile rules are what is used to determine tax residency. Under the domicile rules, you are deemed to be a tax resident of the country where you have the most ties. This includes physical assets (house, car, RV etc), financial assets (bank accounts, credit cards, pension etc), social connections (close family, memberships etc) and work connections (business, employment etc).

As a result, the only sure way of “leaving” Canada is to establish significant ties elsewhere. Otherwise, it is likely that even if you travel constantly, you will still be deemed a tax resident in Canada.

It is important to note that there have been a number of court cases involving Canadians living abroad on temporary residence permits (one year in most cases) and that in the majority of those cases, the CRA has successfully argued that the defendants be deemed tax residents of Canada based on the limited duration of their residence permits and that back taxes should be paid if applicable on any income received since leaving Canada. It is thus crucially important that you secure a long term residence permit in your chosen country and that you document everything you do in relation to leaving Canada to avoid future issues. Getting a non-binding determination from the CRA may also help although I would not advise doing so without professional help.

If you do qualify as a non-resident, you will only need to file a tax return in Canada if you have Canadian-sourced income. To re-qualify as a Canadian tax resident, you will simply need to move back to Canada and re-establish ties.

 

F.A.Q.

Question 1: Is spending 183+ days abroad enough to qualify as non-resident for tax purposes?
Answer 1: No, see the “Tax residency” section for more details.

Question 2: Do I need to close all my Canadian bank accounts, credit cards etc in order to qualify as non-resident?
Answer 2: You can continue to use your Canadian bank accounts, credit cards etc but be aware that doing so may create a tax liability in Canada (interests earned, capital gains etc).

Question 3: If I qualify as a tax resident of Canada, can I tax-optimize?
Answer 3: Absolutely. There are many rebates / credits available and some provinces also offer very advantageous structures. Manitoba is a good example.

Question 4: As a non-resident, will I still have access to universal health care and social services?
Answer 4: No. You will need to purchase health insurance and pay your own way.

Question 5: What will happen to my assets in Canada (real estate, RRSP etc) if I become a non-resident?
Answer 5: They will be deemed to have been sold / liquidated and any gains realized will be subject to taxation (similarly to if you died). See form T1161 for more details.

Question 6: I have kids in Canada, can I become non-resident?
Answer 6: In practice, it will be nearly impossible to become a non-resident if you have kids living in Canada with an ex-partner (they will be deemed a very strong tie up until they become adults).