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Know Non-Resident Tax Rules Before You Retire

Farmers who want to retire outside the country have to follow certain rules, including severing most ties to Canada, before they can escape the reach of Canadian income taxes.

Farmers who want to retire outside the country have to follow certain rules, including severing most ties to Canada, before they can escape the reach of Canadian income taxes.

Many of Canada’s farm operators are at the age when they are starting to plan for retirement. Some of you may want to spend the next stage of your life in a distant spot with year-round sun and warm temperatures. Others might be seeking a lower cost of living and freedom from Canadian taxes.

If you are a farmer contemplating retirement opportunities abroad, you will want to consult with cross-border tax specialists on Canadian residency, tax treaties and the taxation system in your new country of residence. Understanding the definition of “non-resident” for income tax purposes is key.

In Canada, individuals are liable for Canadian taxation on income earned anywhere in the world based on residency, not citizenship. “Residency” exists if you have enough economic and social ties to the country – even if you have been away from the country for an entire year or more. To guarantee that CRA considers you a non-resident when you leave the country to live elsewhere, you need to arrange your affairs by severing all significant residential ties with Canada. These include economic, social and family ties.

Severing primary residential ties likely will require that:

  • You give up your home (and perhaps your family cottage) in Canada and establish a permanent home in the country to which you move,
  • Your spouse/common-law partner and dependants leave Canada as well, and
  • You dispose of personal property and break social ties in Canada and acquire them in your new country of residence. Other secondary ties you may also need to sever include your Canadian driver’s licence and vehicle, Canadian bank accounts or credit cards, memberships, and health insurance with a Canadian province or territory.

When you leave Canada to settle in another country, you usually become a non-resident of Canada for income tax purposes on the latest of the date you leave Canada, the date your spouse or common-law partner and dependents leave Canada, or the date you become a resident of the country to which you’re moving.

In the year you emigrate, your Canadian tax return must report income from Canadian and non-Canadian sources for the part of the tax year that you’re still a resident of Canada. Thereafter, as a non-resident, you will need to pay tax to Canada only on income you receive from sources in Canada.

In addition, although it may be to your advantage in some cases to do so, you may never need to file a Canadian tax return again. That will depend on the type of Canadian income you continue to receive.

For example, in most cases you will not need to file a tax return to report income of the following types: interest and dividends; rental and royalty payments; pension payments; Old Age Security (OAS) pension; Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) benefits; retiring allowances; registered retirement savings plan (RRSP) payments; registered retirement income fund (RRIF) payments; annuity payments and management fees.

You will need to advise whomever makes these payments that you have become a non-resident so the appropriate withholding tax can be deducted from the payments.

There are other types of income for which you may still have to file a Canadian tax return – even if the payer deducts a withholding tax. These types of income include the following:

  • Income from employment in Canada,
  • Income from a business carried on in Canada, and
  • Taxable capital gains resulting from dispositions of taxable Canadian property.

A tax specialist can advise you on whether or not you will have to file a return if you have these types of income. In addition, the specialist can help you complete your required final departure tax return. There are various tax implications that can arise from the departure return, particularly with respect to the deemed disposition, based on fair market value, of certain assets referred to as “taxable Canadian property” (TCP). These assets include corporate securities, such as shares in both public and private corporations, bonds, and units of a mutual fund trust, and personal-use property such as automobiles, boats, furniture and artwork.

Fortunately for active or retired farmers who are considering emigration and continue to own farm assets, the deemed disposition rules do not apply to TCP such as:

  • Canadian real estate,
  • Capital property or inventory that is used to carry on business in Canada, and
  • RRSPs, RRIFs and certain pensions.

These assets are excluded from the deemed disposition rules because Canada maintains the right to tax gains on the assets or income whether or not the individual is a resident of Canada. A farmer who emigrates from Canada to Florida but continues to own farmland in Canada (that is maintained for rental purposes) would be subject to 25% Canadian withholding tax on the rental income payments made by the tenants. The non-resident also has the option of filing a Canadian rental return and reporting the rental income on a net basis (i.e. after expenses) to recover the previously withheld tax.

Most tax advisors recommend that it is best not to collapse your RRSP before you leave Canada. If you collapse it before you leave, the funds could be taxed at your marginal rate, which could be as high as 48.6% depending on your province of residence. If you wait until after you depart, however, you will pay a maximum of only 25% withholding tax. And, if you are moving to the U.S., the treaty between Canada and the U.S. allows for a maximum of only 15%. Canada has tax treaties with many foreign countries, but not all.

CRA has denied non-resident status to many Canadians who have taken up residence elsewhere. Some of these taxpayers have taken their cases to court, most often without success. There was an exception in 2006 when the Tax Court of Canada denied CRA’s arguments and ruled in favour of an Air Canada pilot who had been denied non-resident status.

The pilot, J.M. Laurin, had shared ownership of his home in Quebec with his girlfriend. When they split up in 1993, he sold his half of the home and furnishings to her. Mr. Laurin also sold his car, closed his Canadian bank accounts except for the ones needed for Air Canada to pay him, and cancelled his health and car insurance and moved first to Belize in 1993 and then to the Turks and Caicos Islands in 1996.

For 1993 through 1996, CRA assessed Mr. Laurin as a non-resident. For the years 1996 through 2000, however, CRA assessed him as a Canadian resident. During those years, he had spent more time in Canada, because he had postings in Vancouver and Winnipeg and spent time near Montreal where he had friends and family. CRA argued that the pilot was a resident of Canada because of his frequent visits to Canada, his employment with a Canadian airline, and the presence of friends and family in Canada. In its ruling in favour of Mr. Laurin, the Tax Court of Canada said that his residual friendships and employment connection in Canada did not in themselves create residence.

While this ruling provides some hope for Canadians trying to arrange their affairs to establish non-residency status, every taxpayer’s situation is unique. Tax residency rules are complex, so if you’re thinking of retiring outside Canada you would be wise to consult a tax expert long before you are ready to make the move.