“Residency is based on common law and case law.”
Many Canadians retire outside Canada, often seeking a warmer climate. Some consider the personal tax aspects of their move; others do not.
When an individual leaves Canada permanently, it is essential that, when the CRA reviews the situation later, it accepts that he or she is no longer a resident of Canada for tax purposes. Otherwise, the retiree will remain liable to Canadian tax on world-wide income. Even after the retiree becomes a bona fide resident of another country that has no tax treaty with Canada, the CRA may assert that the retiree remained a tax resident of Canada – a dual resident in the eyes of the CRA. Fighting such an assertion is time-consuming and expensive.
Retirement to a jurisdiction that has a comprehensive tax treaty with Canada will normally avoid the risk of dual residence. Canada’s tax treaties prohibit dual residence by a series of “tie-breaker” tests to resolve the residence question. The problem arises when the relocation is to a jurisdiction that has no comprehensive tax treaty with Canada. Retirement jurisdictions in this category include Belize, most of the smaller Caribbean islands, Costa Rica, Gibraltar, Hong Kong, Monaco and Panama. There are “colonies” of Canadian retirees in all of these jurisdictions.
The CRA has won Tax Court cases where the retiree moved to a non-treaty jurisdiction, particularly when he or she spent a fair amount of time claiming to be visiting Canada after leaving permanently, stayed with family members in Canada during visits and did not cut all ties with Canada after the move (see below).
There is no legislated definition of residence for individuals. Residency is based on common law and case law from the courts – of which there is a great deal. Important factors in court decisions include whether the retiree retains accommodation available for use in Canada, the frequency of “visits” and whether personal assets such as a car, furniture, a safe deposit box, Canadian bank accounts and Canadian credit cards have been left behind. These have been important factors in the decisions. For example, the Tax Court has held that storing furniture in Canada indicates that the move was not intended to be permanent, so the retiree was held to be still resident here.
Can the danger of the CRA deeming an individual to be still tax resident in Canada after leaving permanently be avoided? We believe so.
The solution is to make an initial move (for two to three years) to a jurisdiction having a comprehensive tax treaty with Canada, and then a second move to the ultimate retirement destination. Countries with tax treaties with Canada where a first move may be appropriate include Barbados, Cyprus, the Republic of Ireland, Israel, Singapore and Switzerland. All have tax systems that can reduce personal taxation to well below the Canadian tax level.
The second move is unlikely to attract the attention of the CRA. Even if it does, the burden of proving that a later move (for example, from Barbados to Costa Rica or from Ireland to Monaco) resulted in the individual having resumed Canadian residence would be difficult for the CRA.
Two very important points when considering a permanent move from Canada are to seek specialized tax advice and – even more important! – to follow that advice. A “do-it-yourself” move can have surprising and unexpected tax consequences.
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.