Moving from one country to another is a major life changing event. Although the potential tax may not be at the forefront of the decision-making process, it is important to be proactive and understand the tax liability from such a move. In general, you need to consider rules related to residency status, deemed disposition and departure tax, as well as current and future tax filing obligations.
Before you leave or move to Canada, it is important to first determine your tax residency. Generally speaking, Canadian income tax is levied based on the residency of the individual. Canadian residents are subject to Canadian income tax on worldwide income. Foreign tax credits may be available on foreign income to avoid double-tax. On the other hand, non-residents of Canada are generally only subject to Canadian income tax on Canadian-source income.
To determine your tax residency, you will need to examine your residential ties with Canada as well as with the foreign country. Some examples of residential ties include owning a home and having a spouse, common-law partner, or dependents in the country. Other factors include the location of your personal property, your social and economic ties, the length of time you spend in a country and your intent of living in a country long-term.
If you are a director of a corporation, a trustee of the trust, or a controlling shareholder of a private corporation, you should also consider the impact the change in your tax residency may have on the corporation or trust.
Departure Tax on Emigration
For Canadian residents moving to a foreign country, careful planning is required around the so-called “departure tax”. Upon emigration, an individual is deemed to have disposed of his or her capital property at fair market value, which can result in significant tax liability and cash flow burden from the realization of the inherent gain on the capital property.
The properties that are subject to deemed disposition rules include shares of private companies and non-registered investment portfolios. Canadian real estate property, Canadian property of a business and investments held in a registered account such as RRSP, RRIF or TFSA, are generally excluded from the deemed disposition rules.
A tax election may be available to defer the departure tax owing to the time the property is sold or to reduce the departure tax liability by using accrued losses on certain assets to offset the accrued gains. It may also be possible to defer the payment of the “departure tax” liability by posting acceptable security with the Canada Revenue Agency.
Deemed Disposition on Immigration
If you own properties (subject to certain exclusions, such as real properties in Canada and Canadian property of a business) and you immigrate to Canada, you are considered to have sold the properties and reacquired them for a cost equal to their fair market value. A valuation on the date of immigration is important since the fair market value amount becomes the new cost base of the property and this will impact the tax payable on a future disposition.
It is recommended to consult with a local professional in the country you are emigrating from to identify and calculate the potential tax consequence of becoming a non-resident of that country.
Avoiding Double Taxation
For emigrants, once you become a non-resident, your Canadian source income may be subject to the Canadian withholding tax. You may be able to avoid double taxation if the country of your new residence has a treaty with Canada. However, it is crucial to understand the taxation of all your sources of income in both countries.
For example, if you own an RRSP account prior to emigration, once you become a non-resident, you may continue to hold your RRSP account and investments can grow without immediate Canadian income tax liabilities until you withdraw the funds from your RRSP account. However, a foreign country may perceive the RRSP account as a regular investment account and any income earned in the year could be subject to foreign income tax. This can create a mismatch of the timing for taxation of the RRSP income and may result in double tax.
For immigrants, a similar situation could arise. After you become a Canadian resident, the foreign income you earn, which could have already been taxed by the foreign country, could be subject to Canadian income tax as well. A tax treaty between the two countries, if it exists, may provide relief from double taxation.
Tax Filing obligations
Earning certain types of income in multiple countries may lead to additional tax filing requirements. For example, if you continue to own a Canadian rental property after you cease to be a Canadian resident, you would still be required to file an annual Canadian income tax return.
It is recommended to consult professional advisors in both countries to fully understand your tax filing obligations and to ensure all deadlines are met.
Moving is always stressful and the potential tax on such a move may not appear as a priority. However, it is important to have a proactive discussion with a professional to understand the potential impact on you and how to structure your assets in a tax-efficient manner. This may include liquidating certain assets to help finance the “departure tax”, reduce future tax filing burdens and avoid double taxation.
Grewal Guyatt LLP has extensive experience in helping clients structure their immigration and emigration needs. We can help you understand your Canadian tax impact and assist you with strategies to reduce your overall tax liability. Our business valuators can help you with the required business valuation to determine the fair market value of your assets on immigration or emigration. For more information and assistance with respect to your upcoming change in tax residency, please contact our tax team.