Taxation

Regardless of where you live, financial activity is part of life. Taxation, income and commercial activity are areas of concern for all expatriates. All Canadian living overseas have an obligation to comply with Canadian tax law. Simply moving out of the country does not absolve a citizen of this requirement.

Canadian tax laws are complex and can be difficult to understand. Canadians pay income tax to both the Government of Canada and to the government of the province or territory in which they reside. In an effort to simplify the process, the Government of Canada acts as the sole collector of taxes for both levels of government.

The Canadian Revenue Agency or CRA is the government agency that assesses the tax obligations of Canadians. If you are planning to relocate outside of Canada, it is necessary that you inform the agency in advance. It is strongly recommended that you determine your status with the agency before you leave Canada.

For the purposes of assessing the tax obligations of Canadians living abroad, the CRA uses “residency status” as the criteria. Your residency status attempts to measure not only where you live but also what connection you have to Canada.

It should be noted that assessing ones residency status has no bearing on citizenship, emigration or immigration. It is simply a means to establish a status for tax purposes.

Expatriate Canadians will fall into one of the following four categories:

Factual Resident

A factual resident is one who maintains residential ties in Canada while living or working abroad. Residential ties are considered things such as;

  • a home in Canada
  • a spouse or common law spouse and/or children who remain in Canada
  • personal property, such as furniture or an automobile
  • social ties in Canada

As a factual resident, your income is taxed as if you never left Canada and you must report your worldwide income.

Deemed Resident

A deemed resident is a classification or person who does not maintain residential ties to Canada but still files a yearly Canadian tax return. An example of such a person would be

  • members of the Canadian Forces
  • government employees living abroad
  • persons employed by the Canadian International Development Agency
  • servants of Canada working abroad

Deemed residents pay the same tax on income as a factual resident and must report their worldwide income.

Non-Resident

A non-resident is a person who has severed almost all of their residential ties to Canada and has established some permanence to living abroad. As a non-resident citizen, you are only required to report income from Canadian sources. These would be sources such as

  • income from Canadian employment
  • proceeds from a business carrier on in Canada
  • taxable capital gains from disposing of Canadian property
  • Canadian funded educational scholarships, grants or bursaries

Deemed Non-Resident

A deemed non-resident of Canada is a person who has become resident in another country with which Canada has a tax treaty and who’s’ ties are such that they would be considered a resident of that country.

This individual falls under the same rules as a non-resident.

Your tax obligations are determined by which category you fall into with the Canadian Revenue Agency being the final arbitrator. If you are unsure of your residency status, you should contact the CRA. You can complete a “Determination of Residency Status (Leaving Canada)” Form NR73 available on the agency website.

In addition, Canada has tax covenants or tax agreements, as they are commonly called, with more than 80 countries worldwide. The objective of establishing tax agreements with foreign countries is to insure that the tax collection is fare and to limit the amount of double taxation incurred by Canadians living abroad. A complete list of countries with which Canada has tax agreements can be obtained from the Department of Finance, Canada.

Income

Income, especially Canadian source income, is an area closely related to taxation.

If you live outside of Canada but still have income from Canadian sources, you may be subject to a tax liability. The most common types of income are,

  • rental income from Canadian property
  • income from Canadian resource property
  • business income from a Canadian source
  • interest and dividend payments
  • pension income

For most Canadians the most common problem with relocating is the disposition of property such as a home and/or recreation property. Canadians are allowed a “principle resident exemption” from capital gains tax when selling their home. A residence can be classified as any of the following;

  • a house
  • apartment or duplex
  • a cottage
  • mobile home
  • trailer
  • houseboat

in addition, it can be described as a housing unit and land, ordinary inhabited by the taxpayer and/or family, not used to create or gain income. The land on which the housing unit sits may not exceed one-half hectare unless it can be demonstrated additional land is required for the use and enjoyment of the housing unit as a residence.

Canadians are only permitted to designate one residence as a “principle residence” for tax purposes. Therefore, if you own both a home and a recreational property and sell both when leaving the country, you may be subject to capital gains taxation on the second property. It should be noted that the “personal residence exemption” only applies to Canadian residents and this status is only valid for one year after you have relocated. For example, if you leave Canada and after a year abroad decide to sell you home in Canada, you may be subject to capital gains tax.

If you are a farmer and your principle residence is part of the farm property you may choose to separate the land into commercial and residential parcels or combine both and use tax deductions commonly associated with business activities. You should consult the CRA for details.

If you choose to rent out your home or property while living abroad, you will be deemed to have an income from a Canadian source and will be subjected to taxation. The current withholding tax on income from Canadian sources is 25%, unless it is reduced or altered by a tax treaty. You should consult CRA for details.

Relocating to a new country will require you to establish new financial relationships. Despite the advance of online or internet banking you may still have to establish a relationship with a new bank and banking system. It is important that you carefully pre – plan. Many countries have currency controls and regulations regarding the import and export of currency and these could effect you ability to withdraw your funds should decide to move. Seek assistance and advice from you Canadian financial institution; they even may be able to recommend a bank in your new location. You should also consider the time lag to establish yourself with a new bank and have another method to access your funds. A money transfer company or foreign exchange company may help to transfer fund between countries.

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