One of the biggest issues that come up is clients not seeking advice on the move well in advance and missing important deadlines, including the election to defer the departure tax.NATHANAEL KIEFER/iStockPhoto / Getty Images
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Leaving Canada to live or work in another country is a major personal and financial decision – one that advisors need to review carefully with clients to ensure they understand the various tax implications and critical document-filing deadlines.
Ottawa imposes various rules on Canadians who emigrate to another country and become a non-resident for income tax purposes. For example, banks need to be notified and tax returns filed.
Canadians who sever ties with the country are also automatically considered to have sold certain types of property such as shares, valuable artwork and foreign property, even if they haven’t actually been sold, based on fair market value. The Canada Revenue Agency (CRA) considers it a deemed disposition, and Canadian emigrants may also have to report a capital gain, known as a departure tax.
Exceptions include pensions and registered investments, such as a registered retirement savings plan (RRSP) or tax-free savings account (TFSA), and Canadian property that remains in Canada, including a business and its inventory, with some exceptions. Items worth less than $10,000 such as clothing, household goods and cars are exempt, according to the CRA.
For advisors helping Canadians leave the country, the biggest issues that come up are clients not seeking advice on the move well in advance and missing important deadlines, including the election to defer the departure tax.
Unlike other tax deadlines that offer some solutions if missed, there’s no grace with the deferral of the departure tax, says Stefanie Keller, chief executive officer and certified financial planner at Stellar Wealth and Tax Solutions in Winnipeg.
She stresses that the deferral must be made in writing to the CRA before April 30 of the year after the person emigrated.
“Once you’ve missed that deadline, that’s it. That’s taxes payable that are due, and you must pay them,” Ms. Keller says. “It can be very costly.”
If the deferral is made by the deadline, it’s interest-free regardless of the amount.
However, the CRA does require people who emigrate to provide “adequate security” to cover any amount of the federal departure tax owing valued at more than $16,500 (or more than $13,777.50 for former residents of Quebec). The CRA notes emigrants may also be required to provide security to cover any applicable provincial or territorial tax payable.
Ms. Keller notes there’s a very involved process behind emigration. “It can be very complicated,” she says, adding that emigrants who defer departure taxes also need to provide the CRA with annual updates that the security is in place.
Advisors experienced in dealing with matters related to emigration like Ms. Keller can also help clients ensure they’ve filled out all of the required forms and filed their taxes properly.
For example, she notes the NR73 Determination of Residence Status document has several questions the CRA needs to be answered to determine someone’s non-resident status.
“It’s important people work with advisors so they’re aware of what they need to be disclosing,” she says, especially if the CRA does a review that could have wide-sweeping tax implications at a later date, including a potential audit.
How real estate is considered a deemed disposition
Denise Batac, tax partner at Crowe Soberman LLP in Toronto, says there are many nuances with the rules.
For instance, emigrants could elect to have their Canadian-owned real estate considered a deemed disposition when they leave the country. She says someone might do this if there’s a loss on the real estate to offset gains on other assets subject to departure tax.
“Obviously, that hasn’t been an experience we’ve had lately with the increased market value” of real estate, she says, but it’s a planning tool advisors should be aware of.
If the non-resident sells the Canadian-owned property, they will need to file a certificate of compliance with the CRA to notify them of the disposition, generally speaking, before or within 10 days of the disposition, she says.
Also, the purchaser must withhold 25 per cent (or 50 per cent where the real estate is depreciable property) of the gross proceeds on the sale, Ms. Batac adds.
“The CRA can levy significant interest and penalties with respect to failed withholdings and failure to file a clearance certificate,” she says. “So, it’s important your Canadian real estate lawyer is aware of your non-resident status to ensure compliance in this regard.”
More moving abroad with remote work
Jason Pereira, partner and senior financial consultant at Woodgate Financial Inc., a financial planning firm under the IPC Securities Corp. umbrella in Toronto, says he’s had more inquiries about people leaving Canada in the past six months than he’s had during the past decade, driven in part by the remote work trend.
He says many Canadians don’t understand the tax implications of becoming a non-resident.
“Some people think that just because they can vacation in that other country, they can stay there,” he says. “The reality is, if you’re going to forego your residency and be a resident somewhere else, then essentially you’re leaving the country.”
He says the rules apply to people who retain Canadian citizenship in other countries.
“It’s not about renunciation; it’s about residency,” he says. It can also apply potentially to snowbirds if they overextend their time in the U.S. based on the CRA’s 183-day rule.
Canadians who move to other countries also need to understand the tax and property rules in those jurisdictions, Mr. Pereira says. For instance, it’s legal to seize personal property in some countries, which can be surprising to many Canadians.
“There are also plenty of countries that Canada does not have a tax treaty with, as it does with the U.S., for example,” he says. “Worst-case scenario is you could be subject to double taxation.”
Editor’s note: An earlier version of this story referred to a filing with the CRA as a clearance certificate. This has been changed to the correct document name, which is a certificate of compliance.
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