Globalization is luring Canadians every year to work, travel or retire in low- or tax-free countries with the mistaken belief that they can shed their tax obligations at home.
But experts in the field say the only way to legally free yourself of Canadian income tax is to completely sever ties with the country and become a permanent resident elsewhere.
Things like maintaining provincial health coverage, Canadian bank accounts, cars, membership in social clubs or supporting a spouse and dependent children living in Canada affect your status as a non-resident in the government’s eyes.
“You cannot reduce your tax burden if you are a Canadian resident working and living abroad,” says Allan Madan, a chartered accountant and tax expert in Toronto.
Cleo Hamel, a senior tax analyst with H&R Block, says many Canadians only realize their mistake years after departing the country. Many assume payment of Canadian taxes isn’t required if they live outside the country for a year.
“Most people think about the actual move or they think about the life that they’re going to lead outside of the country, without actually thinking or researching if there are any tax implications,” she said from Calgary.
Expats who maintain close ties with Canada must file tax forms annually and pay Canadian taxes on their worldwide income. Credit is given for any taxes paid to the 93 countries that have tax treaties with Canada to prevent double-taxation.
Technology that allows electronic records to flow easily between governments is making it harder to get away with not paying taxes on worldwide income. Canadian law requires that the government be notified of transfers from foreign to Canadian bank accounts.
The restrictions have prompted some Canadians to completely sever their Canadian ties.
Madan says he’s been fielding a growing number of calls in the past couple of years, especially from middle-aged, high-income executives seeking to relocate to tax-free or low-tax zones in the Caribbean or the Middle East.
“For the most part, that’s where their work is taking them, but they’re decision is heavily influenced by the tax situation,” he said in an interview from Toronto.
Someone making $1-million a year abroad can save more than $450,000 in Canadian taxes by changing their residency from Ontario to a tax-free country like Saudi Arabia.
The tax savings would be much less if they relocate to the United States or Europe where tax rates are similar to Canada.
Michael Cadesky, an international tax specialist with Cadesky and Associates, says people are much more mobile these days because of globalization, EU laws that let their passport holders work without permits, and NAFTA that allows some professionals to work in the United States, Canada and Mexico.
The Toronto tax expert said workers tend to relocate to countries where jobs are available in their industry, while retirees move to warmer climates or the U.S. Some leave to return to their country of birth.
While tax savings influence the decision about becoming a non-resident of Canada, Cadesky said it is rarely the only factor and driving force.
“The tax rates in Canada are sufficiently manageable, even though they’re high, particularly for people that have investment income,” he said.
Canada Revenue Agency says about 20,000 people a year request a determination of residency, with 60 to 75 per cent coming from people leaving Canada.
Cadesky said the easiest way to qualify in the 93 countries that have tax treaties with Canada is to establish a permanent residency in the new country. He said CRA tends to be “quite reasonable.”
Cadesky warns there are many traps that can ensnare foreign workers who try to navigate through the process without the help of a tax professional.
“It’s a horrible exercise if you try to do it yourself,” Cadesky said.
He advises that workers being transferred by their company seek an allowance to spend on tax advice.