This article discusses how you can become a non-resident of Canada, and the pros and cons of completing Form NR73 (the Determination of Residency Status form). I will also review 10 major tax implications of becoming a non-resident of Canada for those considering leaving to work, live or retire abroad.
How to Become a Non-Resident of Canada
To become a non-resident of Canada, you have to break all of your primary and most of your secondary ties to Canada.
Primary ties include:
(1) A personal residence in Canada, which can be either rented or owned by you
(2) A spouse or common-law partner living in Canada
(3) Dependents living in Canada
If you have a single primary tie to Canada, then you are a factual resident.
Secondary ties include:
(1) Driver’s license
(2) Health card
(3) Bank accounts
(4) Credit cards
(5) Furniture and clothing
(6) Memberships in clubs
(7) Pension plans, RRSPS, and TFSAs
(9) Pets in Canada
(10) Other personal possessions
For secondary ties, think of it as a weighing scale. More secondary ties that you have, the heavier the scale, and the more likely it is that you will be considered a factual resident of Canada.
Pros and Cons of Form NR73
If you are leaving Canada, you have the option of filling out the Determination of Residency Status form (Form NR73) with the CRA.
By completing this form, the CRA can provide you with a notice of determination on your residency status. By doing so, you will lessen any uncertainty and become fully aware of your status as a tax resident or nonresident of Canada.
By filing Form NR73, it may ‘invite the CRA’ to scrutinize your current situation. The CRA often takes a conservative position in determining your Canadian residency status and, as tax collectors, it is in their best interest to have you pay tax as a Canadian resident.
Tip: In lieu of filing form NR73, consider filing a departure tax return with the CRA on or before April 30 of the following year in order to become a non-resident of Canada. The departure return clearly states the date that you emigrated from Canada.
10 Major Tax Implications
1. Canada Child Benefit
- You will stop receiving the Canada Child Benefit upon becoming a non-resident of Canada. You should inform the CRA of the change in your residency status to halt any payments.
2. GST/HST Credits
- Upon becoming a non-resident, you will stop receiving GST/HST tax credits from the CRA.
3. Repay Home Buyers Plan and Life Long Learning Plan
- From the date you leave Canada, you have 60 days to repay any amounts that you owe under the Home Buyers Plan or the Life Long Learning plan. If you fail to make payments, your balances owing will be included in your taxable income for your final Canadian tax return.
- If very low income is expected in the year of departure, it may be beneficial to include the balances owing from the Home Buyers Plan and Life Long Learning Plan as income in your final Canadian tax return. This way, you will pay low tax on the income included and have no obligation to repay the balances owing.
4. TFSA (Tax-Free Savings Account)
- After leaving Canada, the funds in your TFSA can still remain
- Any earnings accrued in your account and withdrawals will not be taxed but, they may be taxed in your current country of residence. You will not be able to accrue additional TFSA contribution room for any years in which you are non-resident of Canada.
- If you make a contribution, as a non-resident, you will be subject to a 1% penalty for each month the contribution remains in the account.
5. Stop Contributing to your RRSP (Registered Retirement Savings Plan)
- Most likely, you will not have any income upon leaving Canada. As a result, contributing to your RRSP will become unnecessary, as you will be unable to deduct any contributions made.
Tip: If you expect to have a significant amount of income on your final Canadian tax return, then consider making an RRSP contribution in the year of departure. The RRSP contribution will be tax deductible.
6. Inform your Bank, Financial Advisor and Pension Administrator
- Upon becoming a non-resident of Canada, you should inform your bank, financial advisor and pension administrator about your change in residency status.
- Your bank must begin withholding 25% of tax from any interest that it pays you. The same tax also applies for dividends paid to you.
- 25% of tax will be withheld from payments made to you from the Old Age Security, the Canada Pension Plan and Registered Pension Plans.
- As you can see, 25% tax is withheld from passive income paid to non-residents of Canada. The withholding tax rate can be reduced by a Tax Treaty that Canada has with your new country of residence.
- If a retired Canadian does not inform the CRA that they are a non-resident of Canada, they will continue to receive the gross amount of CPP and OAS payments without withholding tax being properly deducted. You will then have to repay the amounts received, plus interest and penalties.
7. Disclose All Canadian Assets
- When you become a non-resident of Canada, you must disclose all of the property that you own (totaling $25,000 or more) on Form T1161 of your final personal tax return. These are classified as ‘reportable properties’ and penalties of up to $2,500 can be levied by the CRA for non-disclosure.
Tip: Canadian real estate, RRSPs, RESPs, and certain types of property do not have to be disclosed.
8. Deemed Disposition of Property
- When you become a non-resident, you are deemed to dispose of all of your property at its fair market value. Any unrealized gains will be subject to income tax, even if you have not sold the property. This is known as departure tax, and it can add up to a significant amount.
- For instance, imagine selling all of the property you own and having to pay tax on the profits. This is what actually happens when you emigrate from Canada.
Assets that are subject to departure tax include:
o Stocks of all companies, private and public
o Mutual funds, exchange-traded funds, partnership interests
o Real estate situated outside of Canada
o Foreign Trusts
o Certain personal property, if it has appreciated in value
Departure Tax is not applicable to the following:
- Real property situated in Canada such as Canadian resource properties and timber resource properties.
- The property of a business that is maintained through a permanent establishment, including capital property, eligible capital property and property described in the inventory of the business.
- Certain property of a returning former resident who last emigrated after October 1, 1996. This will no longer be treated as having realized accrued gains on departure.
- Property belonging to a short-term resident (an individual who is a resident in Canada for less than 60 months in the 120-month period preceding the disposition) when that resident came to Canada or any property acquired through inheritance after that individual became a resident of Canada.
- Property that is deemed to be an “excluded right or interest” of the taxpayer. This refers to future benefits and payments under certain plans and arrangements, including pensions, RPPs, IPPs, RRSPs, RRIFs, RESPs, DSPs, and RCAs. For the full extensive list, please consult Section 128 of the Canada Income Tax Act.
- Life Insurance policies also fall under this category. However, this is only applicable to Canadian residents. Non-residents of Canada that own foreign life insurance will be subjected to departure tax.
- Most Canadians do not pay departure tax because of the exceptions. Those Canadians who own investments outside of their RRSPs, or are business owners, should be prepared to pay departure tax upon becoming a non-resident of Canada. (There is a special election available to defer paying departure tax by providing the CRA with security or collateral for paying it later).
Security and Deferring Departure Tax
- It is possible to defer the departure tax for those who intend to regain residency status or for those who do not have the funds to pay the tax. This can be done by providing the Canada Revenue Agency with deemed acceptable security such as bank guarantees, letters of credit, shares of a corporation which is equal in value to the taxes due. In order to select the payment you must file the Form T1161. Remember that security is only required if the tax owing on the deemed disposition is in excess of $14,500. Also, if you have already paid the departure tax and intend to return to Canada, then you are eligible for a tax refund. The taxes that are owed on the deemed disposition is due by April 30th or (June 15th if you are claiming self-employment income) of the year following the year in which you move.
9. Selling Your Home After Leaving Canada
- If you sell your home after leaving Canada, you will have to pay 25% tax on the gross selling price of your home.
- For example, if you sold your home for $400,000, then you would have to pay taxes of $100,000. A situation like this may lead to financial hardship for many Canadians who are non-residents.
- Fortunately, there is a special tax election that you can make to reduce the amount of tax to 25%of the gain on sale of your home. The gain is calculated as the selling price, less than the original purchase price. You can claim the principal residence exemption for the period of time that you lived in the home. With the principal residence exemption, the increase in the value of your home while you lived in it will not be subjected to capital gains tax.
Tip: If you rent your home while you are a non-resident, which many Canadians choose, you will need to file a Section 216 Tax Return to report the rental profits earned.
For example: assume that the fair market value of your home when you left Canada was $390,000 and that you sold it for $400,000. The gain will be $10,000, which is subject to 25 percent tax, i.e. $2,500.
10. File Final Canadian Personal Tax Return
- You must file a final Canadian tax return for the taxation year you leave Canada.
- Disclose your date of departure on the final tax return.
- Have your personal tax credits reduced by the number of days that you were outside of Canada.
- List all of the assets that you own, if those assets have an aggregate cost of $25,000 or more.
- Pay departure tax or file the applicable forms for deferring departure tax.
Be aware of the primary and secondary ties and how they impact your residency status with Canada. If your goal is to become a nonresident, then you should sever all of your primary ties and most of your secondary ties. Lastly, file a departure tax return instead of Form NR73 to become a nonresident.
If you become a non-resident of Canada, you should call the CRA to stop receiving GST/HST credits, and the Canada Child Benefit. Repay any balances owing under the Home Buyers Plan and Life Long Learning Plan. Stop contribution to your RRSP and TFSA. Also, inform your bank, financial advisor and pension administrator about your change in residency status and disclose all Canadian assets. You are deemed to dispose all of your property at its fair market value and any unrealized gains will be subject to departure tax. If you plan on selling your Canadian residence upon departure, you will have to pay 25% tax on the gross selling price of your home. Lastly, don’t forget to file a final Canadian personal tax return for the taxation year you leave before heading abroad.
About the Author – Allan Madan
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation . Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
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