When a Canadian is deciding if they should work abroad for a few years, thought should be given to whether or not they want to continue holding ties to Canada and pay Canadian taxes on worldwide income or sever most of their ties with Canada so that their obligations to pay Canadian taxes are limited only to income earned from Canadian sources.
Many taxpayers automatically assume that taxes will be lower if ties to Canada are severed. Although this might be correct, taxpayers should pay close attention to the additional taxes that would be triggered and the tax breaks they would forego by severing ties with Canada.
Selling Your Home?
One key factor to consider: many taxpayers considering working abroad are not considering selling their homes.
Rental income earned as a non-resident is subject to a Part XIII tax at 25% of gross rent as withholding tax. There are also options for non-residents to file a special return where tax is paid on the net rental income and additional procedures that can be undertaken to reduce the 25% withholding tax on gross rent. However, all these special options and additional procedures incur additional accounting fees and failure to file your taxes on time can also mean penalties. The bottom line is this: reporting rental income, as a non-resident, can be expensive.
Capital Gains Tax Exemption
The biggest tax benefit forgone when Canadians sever ties is the principal residence capital gains tax exemption. Many taxpayers are not aware of this but the principal residence exemption calculation is very complex. The exemption amount is determined by the gain on the sale of the home and a multiplier, which takes into account years of residency in the house, and years of ownership of the house. The years the taxpayer chooses to be a non-resident will be taken into account in the calculation, which will effectively reduce the exempt amount of the gain.
Repayment of Balances
Another consideration is the unpaid balances under the home buyer’s and lifelong learning plans. Severing ties with Canada would require the repayment of the balance before the date the tax return for the year of departure is due, or 60 days after becoming a non-resident, whichever date is earlier. Failure to pay will result in income inclusion of the unpaid balance.
Social, Personal & Economic Ties
If after factoring in these considerations a taxpayer finds that severing ties is beneficial, then they must sever all significant ties so that CRA will not find him to be a factual resident. House ownership is a tie but if rented to an arm’s length party in a long-term lease, the CRA will not consider this a residential tie. Similarly all other social, personal and economic ties must be severed.
Disposition Rules & Excluded Property
In addition, deemed disposition rules will apply to all capital property unless specifically excluded. Excluded property includes Canadian real estate, Canadian business property, RRSP, stock options, and interest in some trusts. Mutual funds and stocks held in a trading account will be subject to the deemed disposition rule.
Taxes resulting from deemed dispositions can be deferred until actual sale and security is not required as long as the resulting federal tax on the deemed disposition is $14,500 or less.