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Becoming a non-resident of Canada

Whenever people leave Canada to permanently move to another country or take up employment in another country there is a lot of confusion surrounding what needs to be done.

Before I get into the tax benefits and implications, I would like to start talking about residency status. To Determine someone’s residency status the CRA looks at what ties they have with Canada. There two types ties someone can have with Canada primary ties or secondary ties.

Primary ties consist of the taxpayer having a spouse in Canada, having depends in Canada and having a home that is vacant or leased to a non-arms length party or the terms of the lease are similar to that which would be signed with someone who is non-arms length.

*a non-arms length person is normally someone who is related by blood, marriage, common law or adoption. Aunties, uncles and cousins are not considered to be blood relationship.

If a person has any primary ties with Canada, they are deemed to be a Canadian resident. Anyone deemed to be a resident is taxed on their world-wide income.

Secondary ties include having personal property in Canada such as furniture, clothing or a car. Maintaining social ties in Canada such as a club membership. Maintaining economic ties with Canada such employment with a Canadian employer, Canadian business, bank accounts and credit cards in Canada and maintaining investments in Canada. Please note that are many secondary ties which exist however I have briefly only described a few.

Having secondary ties with Canada are not indicators of residency. However, if someone does not have any primary and has a significant number of secondary ties with Canada the CRA in very rare circumstances use that to say that this indicates that an individual is still a deemed resident of Canada.

A second way to become a deemed resident of Canada is to live in Canada for more then 183 days. Anyone who lives in Canada for more then a 183 days during the year is deemed to be a resident and would be taxed on their worldwide income.

Tax implications

Once an individual assesses their residency status and determines that yes, I am non-resident! their still exists a lot of confusion regarding what should be done next and what the tax implications of becoming a non-resident are.

To start of a person must determine the date they cease to a resident of Canada

The date of becoming a non-resident is the latest of 3 dates

  1. The date the individual leaves Canada
  2. The date the spouse and dependents leave Canada
  3. The date the individual becomes a resident of the new country

Upon departure from Canada an individual is deemed to have disposed of all assets owned at their fair market value and a gain or loss on the deemed disposition must be recorded in income. The exceptions to this rule are as follows

  1. Real or immovable property in Canada
  2. Business property in Canada
  3. Tax sheltered investments such as a Registered Pension Plan (RPP), Registered Retirement Savings Plan (RRSP) and the Tax Free Savings Account (TFSA).

Based on the exemptions to the deemed disposition rules the most likely occurrence is usually a capital gain or loss on the sale of non-registered investments at the time of departure.

At the time of departure all assets valued over $25,000 must be declared to the CRA except for the following

  1. Cash
  2. Registered investments
  3. Any personal use property that has a market value of less then $10,000.

Benefits of becoming a non-resident

One of the best benefits of becoming a non-resident of Canada is that non-residents are not taxed on their worldwide income This means that if someone moves to an area such as the middle east which is mostly tax free, they do not have to pay any taxes in Canada on their worldwide income during the entire period of non-residency.

Non-residents are only taxed on their Canadian sourced income such as Canadian employment income, Canadian business income, investment income and rental income. For Canadian employment income to be taxable it must be physically earned in Canada.

For investment and pension income there is normally a 25% part 13 withholding and there is no requirement to file a return.

For rental income the tax payer is required to withhold 25% and remit to the CRA, this a more complicated topic and I will talk about it in an another article.

Disclaimer

The information provided on this page is intended to provide general information.

Featured

Sale of a property by a non-resident

A lot of time when a non-resident sells their Canadian property they are in for a shock when they learn that their lawyer will be withholding 25% of the gross selling price to remit to the CRA.

Whenever somebody sells property in Canada the buyer’s lawyer is responsible for doing enough due diligence to determine whether the seller is a non-resident. In the case the seller the CRA requires that the lawyer withhold 25% of the gross selling price and remit it to the CRA by the end of the following month, in the situation that this is not done then the buyer becomes personally responsible for the withholding tax.

What can be done to reduce the withholding tax is to apply for a certificate of compliance (T2062). The certificate of compliances reduces the required withholding on the sale to 25% of the capita gain rather then 25% of the gross selling price. To apply for a certificate of compliance we must provide document to the CRA to support our original purchase price as well as attach a cheque for 25% of the capital gain.  This application should be filed no later then 10 business days after the closing, upon receiving the application the CRA normally issues what is known as a comfort letter asking that the lawyer hold amount withheld in trust until the application is approved.

The amount withheld is an advance tax on the final tax liability. This is done by the CRA to ensure that they receive their share of taxes on the capital gains.

Afterwards the taxpayer must file a section 116 tax return this is done to calculate the final tax liability. In the section 116 return the payer reports their capital gains and claims a deduction for selling expenses such as real estate commission and lawyer fees. The benefit of filing the section 116 return is that the tax payer gets taxed at the incremental tax rate which is usually lower then the 25% advance tax which was originally paid to the CRA. In 2018 the tax rate for non-residents was 15% plus a 48% surtax

Just to illustrate John and Susan are non-residents and they decide to sell their vacation home in Canada for $300,000 prior to selling they had purchased the home for a $150,000. Upon closing their lawyer withholds $75,000 since they are non-residents. They then proceed to apply for a certificate of compliance and they then each pay the CRA $18,750 as withholding tax which is 25% of the capital gain (since the capital gain for each of them is $75,000).  Upon receiving the certificate of compliance the lawyer then releases the $75,000 which was originally held back to them. Then in the following year before the April 30th year they then file a section 116 return and they claim the $10,000 which they paid their real estate agent and their lawyer as an expense. This reduces the capital gain for each of them to $70,000, their final tax liability would be $15,540 and they would each get a refund of $3,210 as they had previously submitted $18,750 as withholding tax to the CRA.

Disclaimer

The information provided on this page is intended to provide general information.

Section 85 Rollover: What is it and why is it required

As per Section 69 of the Income Tax Act, when a taxpayer transfers a property to a person with whom they are not dealing with at arms length, the taxpayer is deemed to have disposed of the property at fair market value.

A corporation is a person under the Income Tax Act. Related individuals are deemed to be operating at non-arm’s length. An individual and a corporation are related if the individual controls the corporation.

Therefore, if a person transfers property to their corporation, it is deemed to have been disposed of at fair market value. Similarly, if a taxpayer owns multiple corporations and transfers assets between them, it also considered a non-arm’s length transaction.

A Section 85 rollover allows a person to transfer property to a corporation at any price between cost and fair market value, provided they also take back share consideration.

In most cases, a Section 85 rollover must be completed to avoid a disposition at fair market value.

It is important to note that if a taxpayer previously operated a sole proprietorship and then incorporated without transferring any physical assets, they may still have to do a Section 85 rollover. In such situations, the taxpayer likely generated Goodwill from their business, which is deemed to have been transferred upon incorporation. Failure to complete the rollover could result in the deemed transfer of Goodwill at fair market value creating an unintentional capital gain.

Disclaimer

The information provided on this page is intended to provide general information.

Section 216 return: Rental income earned by a non-resident

Non-residents are required to pay taxes in Canada on all Canadian sourced income. However, for non-residents they can skip paying taxes on that income since they no longer live in Canada. To counter that the CRA requires that for all payments that are made to non-residents 25% of the gross amount be withheld and remitted to the CRA and an NR4 slip be issued to the non-resident detailing the gross income earned and the tax withheld.

For non-residents earning rental income in Canada they are required to remit 25% of their gross rent monthly either themselves or using the services of an agent. An agent can be anyone who is a resident of Canada, if the non-resident fails to remit the required tax to the CRA the agent is held responsible for the remittance. If the individual chooses to make the 25% remittance themselves then they are required to register for an NR number with Part 13 withholding and make a remittance of 25% of the gross rent. Before March 31st, of the following year the Non-resident is required to send the CRA details of the rent collected and the tax paid and ask the CRA to issue an NR4. If the non-resident’s agent has more than 1 account that they make the remittance for then the agent themselves can issue an NR4 rather asking the CRA to issue it.

Withholding 25% of gross rent creates cash flow issues for individuals the CRA allows non-residents to apply for an NR6 waiver which allows the non-resident to make remittance on 25% of net income rather then gross income. For the tax remitted on the NR6 an individual must also apply for an NR4.

The filing deadline for individuals who have an approved NR6 the filing deadline is June 30th of the following year whereas individuals who do not have an approved NR6 the filing deadline is 2 years from the end of the year in which the rent was collected.

Disclaimer

The information provided on this page is intended to provide general information.

Accelerated Investment Incentive

Accelerated investment incentive what is it and how does it work. To encourage Canadian business to invest the Canadian government has increased the depreciation that businesses can claim in the first year that they purchased the asset. The accelerated investment incentive replaces the half year rules which previously reduced the depreciation that businesses could claim in the first year that they purchased assets.

How does it work

The accelerated investment incentive can be claimed for all property eligible for the half year rule that is purchased after November 20, 2018. When factoring in the half year rule businesses claim depreciation on a cost base that is three times what is normally allowed in the first year. What this means is that they take 3 times the cost of half of the property in the first year.

To demonstrate ABC Inc. purchased new computers for $1,000 which are eligible to be depreciated at 55% under class 50. ABC Inc. would claim a 55% depreciation on a cost base of $1,500 ($1,000 x .5 x 3). The depreciation which would be claimed is $825 ($1,500 x 0.55).

The total depreciation that can be claimed over the life of the asset does not change however, businesses benefit by maximizing their depreciation claim in the first year of purchase.

Restrictions

Some of the restrictions that apply to the accelerated investment incentive

  1. The property cannot have been previously owned by you or a non-arms length person
  2. The property cannot be transferred on a tax deferred rollover basis

*Please note that is not the full list of restrictions that apply there are other restrictions that exist which are not mentioned

Disclaimer

The information provided on this page is intended to provide general information.

Shareholder loan

Shareholder Loan

What is it and how does it work? When a share holder loans money to the corporation or withdraws money from the corporation a shareholder loan is created, there are two types of share holder loans which are due from shareholder or due to shareholder. I will be writing about both types of shareholder loans.

Due to shareholder

Due to shareholder is a liability for the corporation, is created when the shareholder either personally loans the corporation money to finance its operations or incurs expenses on a personal level on behalf of the corporations. Since this was the shareholders money that they loaned the corporation they can withdraw it without any tax consequences and there is no CRA reporting required.

Due from shareholder

Due from shareholder is an asset for the corporation, it gets created when the shareholder either withdraws money that they had not previously invested into the corporation or if the corporation is making personal expenses on behalf of the shareholder.

Repayment rules

This loan is required to be repaid by the shareholder within one year after the year end of the corporation if not the loan will be added to shareholders income in the year in which the loan was made.

Shareholders can also reduce the shareholders loan account by either declaring a salary or dividend. What happens in such a scenario is that instead of taking money from the corporation the amount of the salary or dividend declared is credited from the shareholders loan and the shareholder adds the T4 or T5 to their personal income.

Exceptions

Exceptions to the one year ruled mentioned above are:

  1. The corporation is in the business of lending money and lends money with a bona fide repayment arrangement under which the loan is to be repaid within a reasonable time period to shareholders who are not specified shareholders.
  2. For a shareholder who owns more then 10% of a corporation and who is also an employee of the corporation they must meet the criteria in what is known as the ESPB test to withdraw the loan without tax consequences.
    1. Employment reason: For this test to be met, all employees who are on the same or similar level must be entitled to such or similar loans.
    1. Specified employment purpose test: for employees who are specified employees (own more then 10% of the shares of the corporation) to meet this test are allowed to only use the loan to purchase a house, acquire treasury shares (company shares) and acquire a motor vehicle for employment use.
    1. Bona fide arrangement for repayment: to meet this test there must be an arrangement put in place that follows normal commercial practice and is properly documented and agreement is for the loan to be repaid within a reasonable time.

*Shareholders/ employees who meet the exemptions in the 3 tests outlined above do not have to repay the loan within one year of the year end of the corporation.

Disclaimer

The information provided on this page is intended to provide general information.

Residency status of a corporation and tax on non-resident corporations

The residency status of a corporation is very different when compared to residency status for individuals. For individuals residency status is based on ties to Canada, for corporations any corporation incorporated in Canada after April 26, 1965 is deemed to be a resident of Canada.

Since residents of Canada are taxed on their worldwide income all corporations incorporate in Canada after 1965 must pay taxed on their worldwide income.

For corporations that were not incorporated in Canada, under common law rules they can still be considered a resident of Canada if its central management control is in Canada.

A corporation is considered to have central management control in Canada if the board of director meets in Canada then the corporation is deemed to be a resident of Canada.

Non-resident corporations

 Non-resident corporations doing business in Canada are taxed on their Canadian sourced income. However, corporations that are residents of countries which have a tax treaty with Canada, under most tax treaties they only have to pay tax on their Canadian sourced income if they have a permanent establishment in Canada.

A foreign corporation is considered to have a permanent establishment in Canada if it has an office or branch in Canada or if the corporation has employee (not a sub-contractor) who has and authorizes the authority to conclude contracts (finalizing contracts) on behalf of the corporation.

For foreign corporations that do not have a permanent establishment in Canada file a treaty based return, which refunds the 25% withholding tax which is withheld when normally conducting business with a non-resident corporation.  

Disclaimer

The information provided on this page is intended to provide general information.

Investment income earned inside a corporation

Investment income earned inside a corporation is called aggregate investment income and is taxed an additional 10.67% to the standard corporate tax. Aggregate investment income consists of interest, rent, royalties and taxable capital gain.  The total tax on investment income is 19.5% combined federal and provincial rate.

The breakdown of the tax on investment income is as follows:

General Corporate tax              38%

Abatement                                   (10%)

Additional refundable tax        10.67%

RDTOH                                           (30.67%)*

Total federal rate                             8%   

Provincial tax rate                       11.5% 

Total Tax                                        19.5%

*The CRA refunds 30.67% of the aggregate investment income as part of the refundable dividend tax on hand when the dividend related to the investment income is paid out. This effectively lowers the corporate tax rate on investment income earned inside a corporation. This is done to discourage people from keeping income earned from investments inside of the corporation, to take advantage of the lower corporate tax rate.

Capital gains

Only 50% of capital gains earned in a corporation are taxable and the other 50% of the capital gains can be distributed to the shareholder tax free as capital dividends. As a result, the tax on capital gains would 19.5% on the taxable portion. This is normally much lower then the capital gain earned at a personal level where 50% of the capital gains is included taxable income, however, at the incremental tax rate. This means anyone earning more then the lowest tax bracket at an individual level will end up paying more in taxes on capital gains then they would pay inside a corporation. 

Disclaimer

The information provided on this page is intended to provide general information.

RRSP Contributions and Withdrawal

RRSP contribution room is calculated based on Prior years earned income. RRSP contribution room is limited to the lower of 18% of prior years earned income for RRSP and $26,230 for 2018.

Earned income for RRSP consists of:

  1. Income from office or employment including all taxable benefits without any deductions.
  2. Income from a business (T2125)
  3. Income from the rent of real property
  4. Royalty income received
  5. Support payments received
  6. Research grants received
  7. Disability benefits received from either the CRA or the Quebec Pension Plan

*loss from business, property and spousal support deductions reduce the RRSP contribution room

Interest and dividends are not included in the calculation of earned income for RRSP this means that business owners who withdraw dividends rather then salary from their corporations are not able to make RRSP contributions.

Pension adjustment

Is a reduction in the RRSP contribution room as a result of an employer contribution to a deferred profit sharing plan (DPSP) and a registered pension plan (RPP) both for defined benefits and defined contribution plans. The deduction room is reduced since individuals can already deduct RPP and DPSP

Pension adjustment is calculated as follows

  • For a DPSP = employer contributions
  • For a defined contribution plan = Employer + Employee contributions
  • For a defined benefit plan = ((9 x amount of benefit earned in the RPP)-600)

Please note that the pension adjustment for individuals who are members of a defined benefit plan can either increase or decrease depending on whether their plan vests or if they receive past service benefits.

RRSP Over contribution

RRSP over contribution is taxed at 1% of the total over contribution per month.

RRSP Withdrawal

When an RRSP is withdrawn if the withdrawal was previously deducted then it is added to the tax payers income and taxed on the incremental tax rate. When the RRSP is withdrawn there is also a withholding tax. The withholding tax is as follows

0-5000 10%
5,001-15,000 20%
15,000 and above 30%

RRSP contributions ca be withdrawn as part of a home buyers or a life long learners plan.

Home buyers plan

As of 2019 a maximum $35,000 can be withdrawn from a home buyers plan to fund the purchase of a home. The Home buyers plan must be repaid within 15 years. The home buyers plan can either be repaid each year, RRSP contributions can be designated towards repayment or it is added as taxable income.

To qualify for the home buyer’s withdrawal the tax payer must meet the following criteria.

  • The withdrawal must be for a home that will be the taxpayer’s residence
  • The taxpayer cannot have owned a home in the past 4 Calendar years

Life long learner plan

RRSP can withdrawal under the life long learner plan to fund education. The withdrawal period for the life long learner plan is limited to a maximum of $10,000 in a calendar year and $20,000 during the withdrawal period. The life long learner plan must be repaid within 10 years, the life long learners plan can either be repaid each year, RRSP contributions can be designated towards repayment or it is added as taxable income.

To qualify for the life long learner plan the tax payer must meet the following criteria.

Be enrolled or receive an offer to enrol before March of the following year on a full time basis at a designated educational institution.

Disclaimer

The information provided on this page is intended to provide general information.