Volume 2, Number 1
The information in Tax Perspectives is prepared for general interest only. Every effort has been made to ensure that the contents are accurate. However, professional advice should always be obtained before acting on the information herein.
By Allan Cruikshank, CA
Cruikshank Associates (Montreal)
It is common knowledge that the Canada Customs and Revenue Agency (the "CCRA") takes an aggressive view of who is a Canadian resident. If a person has ties to Canada, then that person may be considered resident, even though they may also have a tax residence in another country.
As an extension of this, persons who become non-residents, but who continue to keep certain ties to Canada, may also be considered resident. Therefore, it is hard to become a non-resident. Right? Wrong!
Several years ago, a special rule was introduced for persons who are residents of countries with which Canada has an international tax treaty. If a person is resident in a treaty country, then that person will be deemed to be a non-resident of Canada. This is best illustrated by an example.
Several years ago, John and Mary bought a condominium in Florida and have been spending more and more time in the U.S. Last year, they applied for a visa to allow them to live in the U.S. on a full year basis. However, John still has a business in Canada in which he is actively involved. While the business has now been passed to his children, they still require his guidance on an on-going basis with important business decisions.
John and Mary know that the tax rates in the U.S. are significantly lower than the tax rates in Canada, provided appropriate planning is carried out. They would like to become non-residents, but are concerned about their ongoing ties to Canada.
Under the Canada-U.S. Treaty, if a person would otherwise be a dual resident (i.e., a resident of Canada and the U.S.), then that person's residency is determined by the so-called tie-breaker test. Under this test, the person will be deemed to be resident where they have a permanent home available. However, if they have a permanent home available in both countries (or in neither country), then they are considered to be resident where they have their centre of vital interests.
If John and Mary cease to have a permanent home available to them in Canada (which may include a property owned or rented), then they will be categorically considered U.S. residents under the tie-breaker test. However, if they retain a home in Canada (which could include a seasonal residence such as a cottage), then one must consider their centre of vital interests. This is basically a measure of their economic and social relationships with the U.S., as compared to their relationships with Canada. While this is quite subjective, there is a substantial risk that they could be considered Canadian resident under this test.
Until recently, there was always the worry that Canada could consider John and Mary to be ongoing Canadian residents, even though they would be considered U.S. residents under the Canada-U.S. Treaty. There is also the issue of time spent in Canada. For example, if John spends over 183 days in Canada, then he would be deemed to be Canadian resident.
A change to Canadian law now overrides these concerns. If resident in the U.S. under the Canada-U.S. Treaty, then John and Mary are deemed non-residents of Canada regardless of their ties to Canada or time spent in Canada.
This rule provides for greater certainty in planning a person's residency status. Since Canada has international tax treaties with over 50 countries in the world (Hong Kong and Taiwan being the main exceptions), extensive use can be made of this planning. In other words, becoming a non-resident is a more feasible strategy than ever before.
In considering such a strategy, it is important to obtain qualified professional advice on issues related to leaving Canada, and the tax position in the country to which the person is going. Depending on the assets involved, this may be relatively simple, or extremely complex. These considerations include departure tax on leaving Canada (deemed capital gains on assets which have appreciated), how to deal with retirement plans, and the tax position of ongoing Canadian investments and businesses. Of course, advice must also be obtained in the country to which the person is going, and this advice must be coordinated with the Canadian structuring, in order to maximize the international opportunities.