I was visiting last weekend with my good friends Jamie and Laura, who have been planning a move overseas since Jamie accepted a job in Europe. Laura has been preparing for the move by packing, selling things, and giving furniture away.
As it turns out, she was in pain when we visited after pulling a muscle in her lower back after hauling the couch in their basement upstairs by herself.
"Why didn't you wait until Jamie got home to move that couch?" I asked.
"It's a lot easier to move if he's not on it," she replied.
I asked them whether they had thought about how to avoid Canadian taxation after they leave the country.
"I just assumed we would no longer have to pay tax here after we're gone," Jamie replied.
"Not necessarily," I said.
The fact is, avoiding the Canadian tax net takes careful planning if you're leaving the country. Let me explain.
The Canadian government generally taxes its residents on their worldwide income. As a non-resident, you'll generally face tax in Canada only on income earned from Canadian sources.
And so, you can see that whether you are considered a resident of Canada for tax purposes makes a huge difference to your potential Canadian tax bill.
Simply leaving Canada will not necessarily mean that you have given up Canadian residency for tax purposes. You might still be considered a Canadian resident for tax purposes if you keep certain ties to Canada. And the most important factor in determining your tax status in Canada are the residential ties that you maintain here.
The primary residential ties that Canada Revenue Agency (CRA) will look at are these: A dwelling place, the residence of your spouse or common-law partner, and the residence of your dependants.
This is not to say that owning real estate in Canada after you leave automatically results in the CRA considering you a resident in Canada and subject to tax here. You could, for example, continue to own and rent out a home here in Canada, but the taxman will look at factors such as whether or not you have the right to occupy the
home on short notice, and whether you're renting the home on arm's-length terms.
Owning a property here may not be considered a significant residential tie to Canada in itself, but it could be when considered together with other residential ties.
As a general rule, you'll have a tough time arguing that you are no longer resident in Canada if your spouse, common-law partner or dependants still reside in Canada. If you're living apart from your spouse at the time of your departure owing to a marriage breakdown, then your spouse won't be considered a significant tie to Canada.
Then, there are secondary residential ties to Canada that CRA may look at. These typically won't make you a resident of Canada on their own, individually.
But the more of these ties that exist, the higher the probability that the taxman will consider you a resident here. These include: personal property in Canada (cars, furniture, clothing, etc.), social ties (memberships in recreational or religious organizations), economic ties (employment with a Canadian employer, active involvement in a Canadian business, investment accounts, bank accounts, credit cards), landed immigrant status or work permits, provincial hospitalization and medical insurance coverage, a Canadian driver's licence, a vehicle registered in a province, a seasonal vacation property, a Canadian passport, memberships in professional or union organizations, and a Canadian mailing address, post office box or safety deposit box.
In addition to residential ties in Canada, CRA will look at your residential ties outside Canada, the frequency and length of your visits back to Canada, and the purpose and permanence of your departure.
By the way, you should be aware of departure taxes that could be payable on giving up Canadian residency. In a nutshell, you will be deemed to have sold some of your assets for fair market value at the time of departure, which could give rise to a departure tax.
Certain assets will be exempt from this deemed disposition, most notably your registered retirement savings plans, registered retirement income funds, and any Canadian real estate. But the rules are complex enough to make your head spin. All the more reason to visit a tax pro before leaving.