Back in the 1950s, Walt and Shirley – who were friends of my grandparents – were thinking of leaving Canada to move to China. His work was going to take them there. It seems that the quality of dentistry in China in the 1950s left something to be desired. So, on the advice of his dentist, Walt had all his teeth removed before moving. After coming home from the dentist, Shirley confessed: “Walt, I don’t think I want to make the move after all.” Walt wasn’t impressed. “Hummy, you shud huf toed me dish shooner,” he replied. They never did leave. True story.
There is no shortage of Canadians who have considered leaving Canada. One advantage, of course, is that you may be able to escape the Canadian tax net. If you’re thinking of leaving, take the right steps to avoid the long arm of the Canada Revenue Agency (CRA).
Residency is important. Our government will levy a tax on the worldwide income of those who are resident here. Non-residents generally escape the Canadian tax net unless they earn income from Canadian sources. Your residence also affects: (1) certain tax elections, which may only be available to residents, (2) eligibility for the Canada child tax benefit and GST/HST credit or similar benefits, and (3) eligibility for Old Age Security benefits.
Although our Income Tax Act doesn’t define the term “resident,” there are plenty of court decisions and CRA publications (particularly Income Tax Folio S5-F1-C1, available at cra.gc.ca) that provide guidelines on who should be considered resident in Canada for tax purposes.
It’s a general principle that everyone must be resident somewhere for tax purposes. In fact, you can be resident in more than one country at the same time (in which case tie-breaker rules found in Canada’s tax treaty with the other country, if one exists, will determine residency).
Simply leaving Canada will not necessarily mean that you have given up Canadian residency for tax purposes. If you keep certain ties to Canada, the CRA might consider you to be an ongoing resident here.
The ties of most importance are your residential ties, which include the location of: (1) a dwelling place (leased or owned) that you have the ability to occupy on short notice, (2) the residence of your spouse or common-law partner, and (3) the residence of your dependants.
You’ll generally have a tough time arguing that you’ve given up residency for tax purposes if your spouse, partner or dependants still reside in Canada. If you happen to be living apart from your spouse due to a marriage breakdown, then your spouse won’t be considered a significant tie to Canada.
In addition to primary residential ties, there are secondary residential ties that the taxman will consider when determining whether you’ve given up residency. None of these secondary factors on their own will cause you to be resident in Canada for tax purposes, but the taxman will look at all of these factors, and if on balance these tend to exist in your circumstances, you could be considered resident in Canada.
These include: Personal property in Canada (cars, furniture, clothing, etc.), social ties (memberships in recreational or religious organizations), economic ties (employment with a Canadian employer, active involvement in a Canadian business, investment accounts, bank accounts, credit cards), landed immigrant status or work permits, provincial hospitalization and medical insurance coverage, a Canadian driver’s licence, a vehicle registered in a province, a seasonal vacation property, a Canadian passport, memberships in professional or union organizations, and a Canadian mailing address, post office box or safety deposit box.
If you hope to give up Canadian residency for tax purposes, you’ll have to not only sever significant residential ties to Canada, but CRA will look at the extent to which you’ve established similar residential ties to another country.
CRA will also look at the purpose and permanence of your departure from Canada. Is it your intention to permanently sever ties with Canada? If not, this fact will work against you if you hope to avoid tax here. Finally, the CRA will look at the frequency and length of your visits back to Canada.
You should be aware that giving up Canadian residence can result in a tax hit. Specifically, our tax law will deem you to have sold some of your assets at fair market value at the time of departure and any capital gains realized could be subject to tax. Certain assets will be exempt: RRSPs, RRIFs and Canadian real estate, for example. Visit a tax pro before leaving.