Recent developments have made taxation and investing for Canadian expatriates even more difficult.
Canada Revenue Agency is upholding tighter parameters and rulings, and expatriate Canadians are expected to remain on the radar for quite some time. The international investment environment has become exceptionally dynamic with intensified compliance and regulatory standards, including:
- New strict regulation: tax implications
- Tighter parameters and rulings
- Dynamic international investment environment
- Stringent compliance standards
Canadian expatriates are facing progressively stringent tax regulations. Traditional approaches to managing expatriation and repatriation have provided many with negative balances owing.
Expatriates must look beyond traditional planning models in order to protect their residency or non-residency status. Customised residency and non-residency strategies are required as each case is unique and requires a comprehensive review. The strict regulatory environment surrounding residency and non-residency issues requires a comprehensive inventory of all your personal assets in order to help you make decisions.
There are no magic formulas that can be applied to determine if you have Canadian tax residency status. Canada Revenue Agency (CRA) requires a tax return to be filed with them for more reasons than if you have not met the 183-day guideline.
Determining your residency status should be done with a professional prior to engagement with Canada Revenue Agency on this subject including the submission of tax returns and NR73 – Determination of Residency Status (leaving Canada). It is very important that you seek a professional review of all your financial and personal assets when leaving Canada for an extended period of time.
Things that impact your residency status:
- Registered investments and open investments
- Your address and name on correspondence addressed to you
- All personal assets held in Canada (this includes house, car, corporation, etc.)
There are many different tax classifications that might apply to you which include; deemed resident, deemed non-resident, resident, non-resident, factual resident. Your tax obligations are not limited to filling returns but also include reporting on assets held in Canada.
Departure tax return
Carefully consider your final departure tax return in Canada as there are many tax implications that arise. This return should be submitted at the appropriate tax deadline in the corresponding calendar year that you leave Canada.
The first step is to consider carefully what your departure date will be. Once you have defined the departure date it will be easier to understand your expatriation process and the next steps. In your final departure return you may sever your assets formally in a process called deemed disposition and decisions need to be made about what requires reporting under Part XIII (25% on subject amounts for non-residents).
Special filing regulations exist for all types of properties including but not limited to, rental, residential and land. Problems may occur the following year from T3 slips (Canadian capital gains, interest and dividends). There are many issues that need to be considered on departure from Canada and professional advice from a specialist on your final tax return is recommended.
Ways to reduce tax in Canada
- Keep a travel log: Document and record days inside and outside of Canada during the year of your move.
- File a return for partial years if possible: You must file a return to receive partial credits and payments from CRA. Some countries with tax treaties will not leave you with tax obligations to Canada; and you might be eligible for credits or payments.
- Stay compliant with Canadian tax filing requirements that must be filed for foreign reporting and special filings. Be aware that there are potentially large penalties for not being compliant with foreign reporting requirements.
You may incur tax obligations to a foreign jurisdiction when working in the foreign country – however it is essential to establish residential ties overseas. Please seek independent tax council in the new foreign jurisdiction. Some employers pay you out of another currency and or country than where you are working; however you may still have tax obligations in the country where you reside. In order to properly understand if you have tax obligations in a specific jurisdiction; careful document, plan and learn what tax classification applies to your scenario.
Ensure that you clearly understand what taxes will be paid by your company and obtain a copy of your tax return filed in foreign jurisdiction on your behalf. You can request a tax stamped letter from your company with the amount paid by the company on your behalf.
Exposure to Canadian tax is the main concern of individuals living and working overseas. Worldwide income is taxable if an individual is found to be a resident of Canada for tax purposes. CRA can revoke approvals for non-residency and tax classification retroactively if new information surfaces that they have not been informed. Penalties and interest will accrue from several years previously. Documentation is critical to maintaining your desired tax classification. The NR73 – Determination of Residency Status (leaving Canada) review period can take 3-4 months at the international tax office in Ottawa.
Your final departure tax return is not filed at the local Winnipeg tax office, but at the tax office in Ottawa. Establishment of major ties overseas is critical. What you give up in Canada to sever your ties you should try to re-establish overseas.
Total wealth planning
Although tax planning is initially considered the most important issue when working or moving overseas, there are other points of equal importance. In each category of wealth planning there are areas that an expatriate or repatriating Canadian should consider. Obtaining competent tax and financial planning advice (with full disclosure of the job opportunity and future plans) is critical. If this is overlooked, expats may find themselves paying taxes on offshore earnings several years after they assumed that ties had been severed. Remember, that as every case is different, avoid generic advice by former well-meaning expats. Tax laws change continuously.
Closed countries for investing
There are over 50 countries that are ‘closed’ for investing in non-registered funds and have international investment restrictions from security industry regulations. This has implications for non-residents of Canada. There are large banks and brokerage firms that do not open or do any switches in overseas RRSP and Open (non-registered) accounts. Binding investment restrictions in the Canadian investment market can affect tax classifications and tax obligations. An inventory of all assets prior to departure is one of the most important steps in the expatriation and repatriation process.
Information supplied by The Expatriate Group Inc, specialists in Canadian tax and financial services.