“The tax cost plus interest and penalties for non-reporting can be horrendous,.”
When a Canadian resident (“Ms. Leaver”) leaves Canada permanently, it is important to ensure that the Canada Revenue Agency (CRA) will accept that she is a non-resident of Canada for tax purposes thereafter.
The consequences to Ms. Leaver of a subsequent investigation by the CRA, followed by a determination that she remained resident here for tax purposes, can be catastrophic. The CRA may assess her for Canadian tax on her worldwide income for the entire period that she claimed to be a non-resident of Canada. The tax cost plus interest and penalties for non-reporting can be horrendous, even after taking foreign tax credits into account. An appeal against the assessment to the Tax Court of Canada will be expensive and the outcome uncertain.
Note that if Ms. Leaver ends up with a Canadian tax debt, that debt can usually be collected by the revenue authorities of the country she has moved to, if it is the U.S., Germany, the Netherlands or Norway (under Canada’s tax treaties with those countries). It can also be enforced against any assets she leaves in Canada or in Canadian financial institutions, and collected from any relatives in Canada to whom she gives money or property before or after she leaves Canada (including on her death).
The key factor in determining residence is whether Ms. Leaver relocates to a jurisdiction which has a tax treaty with Canada. Currently, Canada has tax treaties in force with about 90 different jurisdictions. If her move is to a tax treaty jurisdiction, the tax consequences will be governed by the terms of the relevant tax treaty.
Article 4 of almost all of Canada’s tax treaties provides a fairly simple solution to the question of Ms. Leaver’s residence. If, after the move, she has a permanent home available to her in her new country of residence and does not have one in Canada, the tax treaty will deem her to be a resident of her new jurisdiction and to be a non-resident of Canada. Should Ms. Leaver retain a permanent home in Canada, other factors have to be taken into account. Sequentially, they are her “centre of vital interests,” her habitual abode and her nationality. (The tax treaties vary slightly with respect to these factors.)
Even if she has only one permanent home (outside Canada) after the move, the CRA has been known to assert that the departing resident does not really reside in the other jurisdiction, so the relevant tax treaty does not apply to her situation (tax treaties apply only to dual residents). Accordingly, Ms. Leaver must take other steps to ensure that she is clearly resident in the new jurisdiction. This would include obtaining a residence visa or permit, registering with the local tax authorities, filing annual tax returns and fulfilling whatever other requirements will help prove her non-Canadian residence. Frequent or lengthy return visits to Canada after she leaves may be viewed by the CRA as evidence that she is still a Canadian resident.
Should Ms. Leaver move to a country that does not have a tax treaty with Canada, the question of her residence is far more complex than can be dealt with here. For an idea of the factors that the CRA takes into consideration, see Form NR-73E “Determination of Residency Status (Leaving Canada)”, available from www.cra.gc.ca. This indicates the CRA’s views concerning many factors which the CRA believes are important and relevant when determining an individual’s residence. Form NR-73E is a voluntary form. Unless the CRA specifically demands that it be completed, it should never be filed with the CRA unless under the advice of a qualified tax professional. Another useful source of information is CRA Interpretation Bulletin IT-221R3 “Determination of an Individual’s Residence Status.”
Ceasing to be a Canadian resident for tax purposes can be a very complicated undertaking. With skilled professional advice in advance of leaving, one’s chances of avoiding subsequent problems are very much reduced.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.