International Tax Advice Guide for Canadians

Allan Madan, CA
 Dec 19, 2010
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I am an International Tax Accountant in Canada.  I wrote this International Tax Guide for Canada to inform taxpayers of everything they need to know about international tax from a Canadian perspective. Whether you are an American moving to Canada, or a Canadian business expanding overseas, this guide is for you.

My International Tax Guide for Canadians is broken down into the following topics:

  1. Non-resident corporations doing business in Canada
  2. Canadian corporations expanding outside of Canada into international markets
  3. Non-residents selling Canadian real estate
  4. Non-residents working in Canada
  5. Canadians working in the United States and Overseas

1. Doing Business in Canada – International Tax Accountant in Canada

Foreign companies that plan on doing business in Canada may have to pay Canadian income tax and Canadian sales tax. They must also file a Canadian tax return.

Canadian Income Tax for Foreign Corporations

Foreign corporations that carry on business in Canada are liable for Canadian income tax on the profits derived from Canada. The term ‘profits’ is not defined in the Income Tax Act, but is computed in accordance with Generally Accepted Accounting Principles.

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The term ‘carrying on business’ is extremely broad, and even includes sales made in a foreign country to Canadians. For example, assume that you have a call center in New York. The New York Call Center makes sales to Canadians in the amount of $800,000 annually, and has expenses of $300,000. The New York Call Center does not have a physical presence in Canada, nor does it have any Canadian employees. All sales are concluded in New York. The products sold are picked-up from a warehouse in Buffalo and transported by truck for delivery to Canadian customers across Canada.

The New York Call Center is certainly carrying on business in Canada, and as such, will be liable for Canadian income taxes on the profits it earned in Canada, i.e. $500,000. The tax rate applicable on these profits is approximately 30%.

As you can see, it would create an administrative headache and an unfair tax burden if every company across the world had to pay Canadian income taxes just because it sold products to Canadians. Fortunately, Canada has entered into bilateral treaties with most countries across the world. The Canadian tax treaties normally stipulate that a foreign corporation is only liable for Canadian income tax on business profits, if those profits were derived from a Canadian Permanent Establishment. The term ‘permanent establishment’ means a fixed place of business, like an office or construction site. It specifically excludes a public warehouse situated in Canada. [For more information see Permanent Establishment in Canada]

Based on the facts above, the New York Call Center would not be liable for Canadian income tax because it does not have a permanent establishment in Canada.

Canadian Tax Return

internationaltaxesForeign corporations that carry on business in Canada must furnish a Canadian income tax return. In the case where a foreign corporation has a permanent establishment in Canada, it will have to file a Canadian corporate tax return and pay Canadian income taxes (at a rate of 30%) on the Canadian branch profits. The foreign corporation will also have to pay a special branch tax, which can be as high as 25%.

Foreign corporations that carry on business in Canada, but do not have a permanent establishment in Canada, will have to file a Treaty-based tax return. This is an information return that accomplishes two objectives:

• It discloses certain financial information about the foreign corporation to the Canada Revenue Agency, as required, and
• Includes a statement that the corporation is not liable for Canadian income tax because it has no permanent establishment in Canada.

If a Treaty-based tax return is not filed, the Canada Revenue Agency has the power to levy income taxes on the gross Canadian sales made by the foreign corporation. This is a very harsh penalty.

As an International Tax Accountant in Canada, I can file your company’s Canadian Treaty-based tax return or Canadian corporate tax return.

Canadian Sales Taxes

Foreign corporations that sell to Canadian customers must collect and remit sales taxes or ‘value-added-tax’. Each Canadian province has a different sales tax rate, ranging from a low of 5% to a high of 14%. Failure to collect sales taxes from Canadian customers means that the collector (i.e. foreign corporation) becomes liable for paying the uncollected Canadian sales tax to the Canada Revenue Agency.

For more information on Canadian sales tax, please see Cross Border Taxes – Tips on Doing Online Business in Canada

2. Canadian Corporations Expanding Outside of Canada

Before expanding your business into the Canadian marketplace, it’s very important that you read this International tax guide for Canada, or seek the advice of an experienced, International Tax Accountant for Canadians.
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Business Expansion to the United States

The first international destination that Canadian entrepreneurs normally expand to is the Unites States of America. Below, I will briefly describe the tax structures that Canadians can use to expand to the United States.

LLCs

Limited Liability Corporations (LLCs) are very advantageous for Americans. LLCs do not pay tax, but rather the individual members (or shareholders) are liable for taxes on the profits earned by a LLC. This avoids double taxation for Americans, since there is only one layer of tax – i.e. personal income tax.

Additionally, LLCs provide limited liability protection to their members. Since the US is a very litigious country, LLCs provide peace of mind to business owners.

However, LLCs cause double taxation for Canadians. This is because LLCs are not recognized as flow-through entities by the Canada Revenue Agency.

  1. The first incidence of taxes occurs when the Canadian shareholders of the LLC pay personal income taxes in the US on their share of the LLCs` profits.
  2. The second incidence of tax occurs when the profits of the LLC are paid to Canadian investors. The Canada Revenue Agency treats the distributions made as taxable dividends, and does not provide any tax relief for the US taxes paid.

For more information on the tax implications of LLCs owned by Canadians, please see Demystifying LLCs for Canadians

What is the alternative, if LLCs are not appropriate for Canadians? This leads me to my next point in my international tax guide for Canadians.

LLPs and US C-Corporations

A LLP, also known as a limited liability partnership, does not cause double taxation for Canadians. The mechanics of the LLP are as follows:

  1. Each limited partner pays US personal income tax on his/her share of the LLPs’ profits
  2. Each Canadian limited partner reports his/her share of the LLPs profits on his/her Canadian personal tax return and pays Canadian income taxes accordingly
  3. Canadian limited partners will claim a foreign tax credit for the US taxes they paid, thereby eliminating double taxation
  4. The LLP does not pay income tax in the US or Canada
  5. The general partner is usually a US C-Corporation and owns 1% of the LLP. The general partner bares most of the risk, but receives only 1% of the LLPs’ profits.
  6. Cash earned by a LLP can be paid to Canadians without any income tax being charged on the payment
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As you can see, the LLP structure not only eliminates double taxation, but also provides Canadians with limited liability protection.

US C-Corporations

US C-Corporations are similar to Canadian corporations in that they are separate legal entities and are distinct from their individual shareholders. US C-Corporations pay US income taxes on the profits they earn at both the State and Federal levels. Generally speaking, the combined federal and state income tax rate for US C-Corporations is 30%. The rate of tax varies from state to state.
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Distributions paid by a US C-Corporation to its shareholders are called dividends. Canadian investors in a US C Corporation must included dividends received in their personal Canadian tax return and pay Canadian income tax on those dividends at their marginal tax rate. Unlike Canadian dividends, Canadian shareholders cannot claim a dividend tax credit in respect of foreign dividends they receive.

Note that dividends paid to Canadian shareholders are subject to US withholding taxes. The withholding tax rate pursuant to the Canada-US tax treaty is 5% on dividends paid to corporate shareholders and 15% on dividends paid to individual shareholders. Both Canadian individual and corporate shareholders can claim a foreign tax credit for the withholding taxes paid to the IRS.

Many Canadian entrepreneurs prefer the US C-Corporation structure because of its similarity to Canadian corporations.

Tax Entity Creation in the US

As an International Tax Accountant in Canada, I can develop an effective tax structure such that your business pays the least amount of worldwide income tax.

3. Taxation for Non-Resident Real Estate Investors

If you are a non-resident individual that has sold real estate in Canada, you must file a “Request for a Clearance Certificate” with the Canada Revenue Agency. By doing so, the amount of tax withheld on the sale of your real estate in Canada will be significantly reduced. The withholding tax rate will be reduced from 25% of the sale proceeds to only 25% of the capital gain.

Example of Non Resident Taxes on Sale of Canadian Real Estate

For example, assume that you purchased a rental property in Canada for $500,000 in 2004. Further assume that you left Canada in 2013 and sold the property in 2014 for $800,000.

If you do not obtain a Clearance Certificate from the Canada Revenue Agency, then the buyer’s lawyer will withhold $200,000 from the sales proceeds; this represents 25% of the selling price. If you obtain a Clearance Certificate, then the buyer will not withhold any taxes whatsoever.

Taxes Paid with Clearance Certificate Application

When you file an application of for a Clearance Certificate, you must attach a cheque or bank draft (in Canadian dollars) for 25% of the capital gain. In the example above, the withholding taxes will amount to $75,000 (i.e. $300,000 x 25%).

Section 116 Non Resident Tax Return to Report Sale

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You will also need to file a Non-Resident Income Tax Return to report the gain or loss on the sale of your Canadian real estate. In the example above, you would report half of the capital gain on your personal tax return or $150,000 [($800,000 – $500,000) x 50%]. You only report half, because the Canadian tax code exempts 50% of the capital gain from tax.

What happens to the withholding tax of 25% of the capital gain (e.g. $75,000) that you submitted with your Application for a Clearance Certificate? Is this tax credited to you when you file a Non Resident Income Tax Return? The answer is ‘Yes’. The withholding tax paid will be credited to you when you file your Non Resident Income Tax Return.

Should the income taxes payable as shown on your Non Resident Income Tax Return be greater than the withholding taxes paid, you will be responsible for paying the difference in taxes to the Canada Revenue Agency. Likewise, should the Canadian income taxes be less than the withholding taxes paid, then the Canada Revenue Agency will refund the difference in taxes to you.

For additional information on Non Resident Taxes pertaining to the sale of Canadian real estate, please see the article called Do Non Residents of Canada Pay Capital Gains Tax?

Part of my international tax services for Canadians includes preparing Clearance Certificate Applications and Non Resident Tax Returns.

4. Americans and Other Non Residents Working in Canada

Non residents, including Americans, working in Canada must file a Canadian personal tax return and pay Canadian income taxes on their Canadian employment income. The rate of tax paid varies according to the amount of employment income in Canada that you earn. Generally speaking, the rate of tax increases as your employment income increases.

For a complete listing of Canadian personal tax rates, please see Personal Income Tax Rates Canada

In order to avoid double taxation, Canada has entered into tax treaties with most countries. As a temporary worker in Canada, you will most likely:
internationalpayingtaxes

  1. Be responsible for paying personal income taxes in your home country.
  2. Receive a foreign tax credit in your home country for Canadian income taxes paid, thereby avoiding double taxation.

Note that non-residents working in Canada are also liable for Canadian social security taxes:

  1. Canada Pension Plan premiums
  2. Employment Insurance premiums

You may be able to obtain a ‘certificate of coverage’ from your employer so that you do not have to pay Canadian social security taxes.

For more information see my blog post on Canadian taxes for non residents employed in Canada

5. Canadians working in the United States & Overseas

Canadians working in the United States or other foreign countries overseas have to deal with a multitude of tax issues, including:

  1. Impact on Canadian residency status
  2. Departure return and departure tax
  3. Tax filing requirements for non residents

Impact on Canadian Residency Status

Canadians that permanently leave Canada to work abroad and sever their ties with Canada will effectively become non-residents of Canada. Non residents of Canada do not pay income tax on income earned abroad.

are-you-acanadian-citizen1
When determining your residency status in Canada look for theses key indications

Ties to Canada include:

  1. Home in Canada
  2. Spouse in Canada
  3. Dependent children in Canada
  4. Canadian driver’s license
  5. Personal possessions in Canada
  6. Memberships in professional organizations and clubs
  7. Canadian bank accounts
  8. Canadian investment accounts, including RRSPs, TFSAs and RRIFs
  9. Canadian health card or health insurance

If the above ties are broken, then you will become a non resident of Canada. However, if you maintain some or all of the above ties, then you will continue to be a resident of Canada. Residents of Canada pay tax on their world wide income. This includes income earned overseas / abroad.

As a Canadian accountant specializing in international taxes, I can help you plan for your departure from Canada, so that you do not remain a tax resident of Canada. Relinquishing your Canadian ties can be very advantageous if you are earning (or plan on earning) significant sums of money aboard.

Departure Tax

When you sever your ties to Canada and depart from Canada, you are deemed to dispose of all of your assets at their fair market value as of the date of departure. This can trigger capital gains if the value of your property is more than the cost of your property. Half of the capital gains are taxable and the taxable portion is included in your income in the year of departure.

Certain types of property are exempt from departure tax. Also, in the year of departure from Canada, you are required to file a departure tax return. On this return you have to disclose all of the assets that you continue to hold in Canada. Failure to file can result in significant penalties.

Tax Filing Requirements for Non Residents

Non residents of Canada are only required to file a non-resident tax return in Canada if they:

  1. Worked in Canada
  2. Sold Canadian real estate
  3. Received rental income from a Canadian property
  4. Carried on a business in Canada

If the 4 scenarios described above to not apply to you, then DO NOT file a Canadian tax return.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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Comments 31

  1. I work and live in Japan. CRA has really screwed me by lying to me and saying I had to pay a tremendous amount of tax. When pushed and questioned they amde it clear this 10,000 is what I would have to pay. If I simply signed an NR-73 form (I believe) all would be well.

    Foolish..I did…then they said ok oyu pay 1,200 of which was almost 300 in Arrears!!! But they took 8 months. I have been back and forth questioning this decision and yet NO ONE HAS SENT A LETTER CLEARLY STATING MY ACTUAL TAX “STATUS” CAN YOU HELP ME FILE AS A “DEEMED RESIDENT OF CANADA.

    Victor

    1. Hi Victor,

      We can certainly help as we have assisted many individuals in similar case as you. I think the best way is for your to contact me directly so we can discuss your situation in more depth. Please give me a call at (905) 268-0150 or email me at amadan@madanca.com

      Thank you,

      – Allan

    1. Hi Sarah,

      Welcome to Canada. Personal Tax must be filed for April 30, 2014 this coming year. We would be more than willing to assist you if you need preparation help or any additional questions.

    1. Yes but there should be a form of foreign tax credit to refund you for part of the tax paid to your permant country. If you are from the United States and work in Canada then you will pay both US and Canadian taxes. You will get a tax credit on your US return for the tax paid to Canada.

  2. I’m thinking about setting up a new subsidiary of my corporation in Canada. I am doing some research on corporate tax rates. I was just wondering which province has the lowest corporate tax rate?

  3. Hi there Allan. I have an international tax question. I am leaving for a job in the United States. I have no clue when i will be returning to Canada. I currently have RRSP’s that makes up a substantial part of my retirement saving fund. I cannot afford to lose or withdraw the money I have saved via my RRSP. Which brings me to my question, when I leave Canada can I keep my RRSP? and if so what are the tax implications?

    Thanks

  4. Hi Allan,

    My question relates to international money transfers to Canada. My Uncle inherited money in Germany which he wishes to transfer to me in Canada. He is not a resident of Canada – neither a permanent resident or Canadian citizen. He will be transferring the money from Germany (where he inherited this) to my bank account here in Canada. He will be paying the necessary tax that needs to be paid to the government of Germany.

    When I receive the money in Canada, will there be any Canadian tax implications? I have heard any amount over $100,000 is reported to the CRA.

    1. Hi Mr. X,

      Thanks for your question. International money transfers made to residents of Canada are not taxable in Canada, so long as the money received is a gift.

      Your uncle should keep all documents relating to the source of the funds, should the Canada Revenue Agency ask to see them.

      Thanks,

      Allan Madan, CPA, CA
      Tel: 905-268-0150

  5. Hello Allan,

    I have a job opportunity in Asia this year. I’m wondering what the tax implications are for my house (which I intend to sell – the house went up in value since I bought it), and my RRSPs (If left in Canada).

    If I sell my house and invest the house money in a Canadian savings account/RRSP or Mutual fund. What will be the tax I have to pay on this investment if I am a non-tax resident of Canada?

    Do I have to pay capital gains tax on the profit I made on my house?

    Thanks!

    1. Hi Jack,

      Thanks for contacting me. When you leave Canada and become a non resident for tax purposes, you are deemed to dispose of all of your assets (with certain exceptions) at their fair market value, thereby resulting in taxable capital gains. This is know as departure tax. Fortunately, your principal residence and RRSPs are not subject to departure tax.

      If you sell your house prior to leaving Canada, and if your house was your principal residence for all of the years you owned it, then you will not be subject to capital gains tax on the sale. If you sell your house while you are a non resident, the buyer will be obligated to withhold 25% of the selling price in the form of withholding tax. To avoid this financial disaster, you should obtain a Clearance Certificate from the CRA, which will reduce the withholding tax to 25% of the taxable capital gain.

      Contributing to your RRSPs to reduce the tax impact on the sale of your house, only makes sense if your house was not your principal residence for all of the years that you owned it.

      Thanks,

      Allan Madan, CPA, CA
      Tel: 905-268-0150

  6. Hi Allan,
    I am an international graduate student studying at the University of Toronto and this is my first year. Since I am a student and not working, I did not have a SIN. I was told to apply for an ITN which I did and have received it today by mail. The tax clinics that they had at university have closed. I do not know how to file my returns (fill the various forms). I would like some help in the regard as the deadline is approaching and I want to do it as soon as possible.
    Thanks

  7. I returned to Canada in September 2014, from Saudi. I have not returned to employment as yet. What will my tax status consist of?
    Thank you for your kind assistance.

    1. Hi Peachy,

      Residence for Tax

      As you mentioned that you have “returned” to Canada, please note that if you were a resident of Canada in an earlier year, and you are now a non-resident, you will be considered a Canadian resident for income tax purposes when you move back to Canada and re-establish significant residential ties.

      The following CRA bulletin discusses residential ties in more depth:

      http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/rsdncy-eng.html

      The most significant residential ties considered by the CRA are as follows:
      • a home in Canada;
      • a spouse or common-law partner in Canada; and
      • dependants in Canada;

      To the extent that you have established the above residential ties in Canada, you would be considered a Canadian resident for tax purposes. Your date of entry in Canada will be considered the date you became a resident of Canada for tax purposes. Please note that Canada does not currently have a tax treaty in place with Saudi Arabia, so the only guidance applicable in your case is with respect to Canadian legislation.

      Review of the following CRA link, addressing tax issues for newcomers to Canada, may also be a useful starting point for you:

      http://www.cra-arc.gc.ca/newcomers/

      Filing a Tax Return

      Should you be considered a Canadian resident for tax, you should file a return for fiscal 2014, even if you have no employment income to report. Filing a return in this case may be beneficial to you as you may be entitled to claim benefits, and CRA will determine whether you are eligible for the GST/HST credit and the Canada child tax benefit.

      Please let us know if you have any further questions, and we would be happy to help!

  8. Hello Allan,
    I am from Britain and have Canadian citizenship and lived in Canada for 17 years. I left in 1992. I kept a Canadian non-resident Bank account but no other significant ties. I now plan to return. I have a substantial amount of funds from house sales in the UK over the years. These are presently in a UK off-shore bank in Guernsey. I assume these are not taxable in Canada., UK tax has been paid. How can I transfer them back to Canada ? Must I do this before I return or can I wait. I’ve been told I could be taxed on them if I wait until I return but to do so before hand would be very complicated. Also, as I’m returning after 20 years (only one or two holidays in the interim) are there any forms I would have to fill in immediately upon my return ?

    1. Hi Lisa,

      When you return to Canada, you will need to file a part-year resident return. You may also have to file form T1135, foreign income verification statement.

      The capital you accumulated while you were a non resident of Canada, is not taxable to you when you bring it back to Canada. However, any income that you earn on your overseas savings while you are a resident of Canada, will be taxable to you.

      When you return, please contact me so that I can help you with your Canadian tax filings.

      Allan Madan, CPA, CA

  9. Hi Alan (et al),
    We are Canadian citizens moving to Spain in a few weeks. He own a home (mortgaged) in Toronto which we will be renting out while we are overseas. We are a family of five with three school aged kids. We are applying for a non-lucrative visa which will allow us to remain in Spain beyond 90 days without requiring sponsorship for EU employment status, which is very difficult. We are in the process of purchasing an apartment in Valencia with a value of €78,000. My wife and I are English language instructors with highly accredited (CELTA) certification. We have offers to teach online through American companies that provide ESL services for Chinese students. The positions pay in US dollars. We will also have surplus income, after expenses, from the afore mentioned rental property.
    We are looking for guidance and help with our financial and taxation status. Based on the info on your site, we are definitely going to remain Canadian residents, but we would like advice to avoid any double-tax scenarios with the Spanish tax office. We both also have our NIEs in Spain, which are needed for pretty well every process we’ll encounter. We have Canadian bank account and will open a Spanish account soon too. We have retained a lawyer in Valencia to help with our real estate processes as well.
    Thank you for any help,
    Steve and Natasha

    1. Hi Steve,

      If you feel that you will remain factual residents of Canada, then you will be taxed in Canada on your worldwide income. You can claim a foreign tax credit on your Canadian tax return for part or all of the taxes paid in Spain or another country where you worked. To support the FTC claim, you should file a tax return in the country where you work & live.

  10. Hi Allan, it’s great to see all the advice you’re giving.
    My wife and I are Permanent Residents in Canada and have a property we rent out in the UK. We expect to pay UK Capital Gains Tax on it when we sell it but are concerned we will be stung for Canadian tax when we transfer the money over here.
    Any advice on how to reduce Canadian tax on the transfer?
    Many thanks
    Paul

    1. Hi Paul,

      You can claim a foreign tax credit on your Canadian tax return for part or all of the UK capital gains taxes paid. You should file a tax return in the UK to support the foreign tax credit claimed in Canada. Note that if you acquired the UK property prior to becoming a tax resident of Canada, then the cost basis for Canadian tax purposes of the UK property is equal to the fair market value of the property on the date you became a tax resident of Canada.

  11. I am American citizen and live and work in Canada as a permanent resident. I pay taxes in Canada and the USA. I am told if I make more than 100,000.00 yr I am going to be taxed even harder in the US. I am being told to become a citizen so I bypass the extra tax. I don’t want to become a Canadian citizen just to beat the tax man. Do I qualify for foreign tax credit or am I stuck getting a raise that puts me in a tax bracket that I have less take home a week from both countries.
    Let me know.

    1. hi John,

      Becoming a citizen of Canada will not help you save tax. Since Canada’s tax rates are generally higher than the US, you likely won’t owe any tax in the US. You will claim a foreign tax credit on your US return for the Canadian taxes paid.

  12. Hi Madan

    My husband will be move to India to take up a new job there in May of this year. I plan to stay in Canada till mid next year before moving back to India. We plan to sell our principle residence next year before I move back to India

    1) Would he be considered non-resident for Canadian Income tax purposes when he leaves Canada this year (less than 183 days this year in Canada) or would he be deemed resident till I stay in Canada?
    – He is a Indian citizen and Canadian PR now
    – He lived in India until 2007 before coming to Canada
    – He doesnot own any house in India

    2) In case he is considered non-resident from this May, would he have to pay taxes on capital gain when we sell our principle residence?
    – Property is in both our names (first name is mine)
    – All mortgage payments till date have been made by me.

    1. Hi Binkavi,

      Both of you will be considered as residents of Canada until you both move to India and sell / rent out your house in Canada. Your husband will be responsible for reporting his Indian income on his Canadian personal tax return up to the point in time that he becomes a non-resident of Canada. He can claim a foreign tax credit on his Canadian personal tax return to reduce / prevent double taxation.

      Neither you nor your spouse will have to pay capital gains tax on the sale of your home so long as it was your principal residence for all of the years you owned it.

  13. Thanks for the response above. I found this exception 1.23 in income tax folio S5-F1-C1:
    ” An exception to this will occur where the individual was resident in another country prior to entering Canada and is leaving to re-establish his or her residence in that country. In this case, the individual will generally become a non-resident on the date he or she leaves Canada, even if, for example, the individual’s spouse or common law partner remains temporarily behind in Canada to dispose of their dwelling place in Canada or so that their dependants may complete a school year already in progress”

    Since my husband was a resident of India before coming to Canada would the above exception apply to him? He would visit Canada next year at the time of selling the house though.

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