CANADIAN TAXATION OF EMIGRANTS

A person who is resident in Canada during a taxation year is subject to Canadian

income tax on his or her worldwide income from all sources. A taxpayer who

emigrates from Canada may be subject to a tax upon ceasing to be resident in

Canada (referred to as departure tax).

Following departure from Canada, a non-Canadian resident may be subject to

Canadian tax on Canadian source income. This may include employment

income earned in Canada, income from carrying on a business in Canada,

taxable capital gains from the disposition of taxable Canadian property and other

Canadian source income such as interest, dividends, royalties, registered plan

withdrawals and Canadian trust distributions. Special rules apply for an

individual who is resident in Canada for only part of a taxation year.

Set forth below are general comments regarding tax consequences that may

apply to an individual ceasing Canadian residence. Special rules, which are not

covered in this Guide, may apply where an entity other than an individual ceases

to be resident in Canada.

CANADIAN RESIDENCE

The term resident is not defined in Canadian income tax legislation. The Courts

have held that an individual is ordinarily resident in Canada for tax purposes if

Canada is the place where the individual, in the settled routine of his or her life,

regularly, normally or customarily lives. In making a determination of residence

status (generally referred to as the factual residence), all of the relevant facts in

each case must be considered, including residential ties with Canada and length

of time, object, intention and continuity with respect to stays in Canada and

abroad.

Apart from the factual residence, an individual may also be deemed to be

resident in Canada or deemed not to be resident in Canada in certain situations.

Factual Residence

 In determining whether or not an individual leaving Canada remains resident or

ceases to be resident in Canada for tax purposes, remaining residential ties with

Canada while he or she is abroad are considered. Unless an individual severs

all significant residential ties with Canada upon leaving Canada, the individual

may continue to be a factual resident of Canada. The residence status of an

individual can only be determined on a case by case basis after taking into

consideration all of the relevant facts.

Useful information regarding various considerations that may be taken into

account by the tax authorities when determining whether or not a taxpayer has

significant residential ties in Canada for the purposes of the factual residency test

can be found in the Canada Revenue Agency (CRA)

Interpretation Bulletin IT-221R3-(Consolidated), entitled Determination of an

Individual’s Residence Status.

According to CRA’s views, primary residential ties for the purposes of

determining residence status of an individual will generally include the following:

-Dwelling place or places (see IT-221R3-(Consolidated), par. 6):

-Where an individual who leaves Canada keeps a dwelling place in

Canada (whether owned or leased), available for his or her

occupation, that dwelling place will be considered to be a significant

residential tie with Canada during the individual’s stay abroad.

However, if an individual leases a dwelling place located in Canada

to a third party on arm’s length terms and conditions, the CRA will

take into account all of the circumstances of the situation (including

the relationship between the individual and the third party, the real

estate market at the time of the individual’s departure from Canada,

and the purpose of the stay abroad), and may not consider the

dwelling place to be a significant residential tie with Canada except

when taken together with other residential ties.

Spouse or common-law partner or dependents (see IT-221R3-(Consolidated),

par. 7):

If an individual who is married or cohabiting with a common-law

partner leaves Canada, but his or her spouse or common-law

partner remains in Canada, then that spouse or common-law

partner will usually be a significant residential tie with Canada

during the individual’s absence from Canada. Similarly, if an

individual with dependents leaves Canada, but his or her

dependants remain behind, then those dependants will usually be

considered to be a significant residential tie with Canada while the

individual is abroad. Where an individual was living separate and

apart from his or her spouse or common-law partner prior to leaving

Canada, by reason of a breakdown of their marriage or commonlaw

partnership, that spouse or common-law partner will not be

considered to be a significant tie with Canada.

Secondary residential ties must be looked at collectively in order to evaluate the

significance of any one such tie, so that a single secondary factor, taken in

isolation, will not be determinative of an individual’s residency in Canada while

abroad. Secondary residential ties that will be taken into account in determining

the residence status of an individual while outside Canada include the following

(see IT-221R3-(Consolidated), par. 8):

–  Personal property in Canada such as furniture, clothing, automobiles and

recreational vehicles;

• Social ties with Canada such as memberships in Canadian recreational and

religious organizations;

– Economic ties with Canada such as employment with a Canadian employer

and active involvement in a Canadian business, and Canadian bank

accounts, retirement savings plans, credit cards, and securities accounts;

– Landed immigrant status or appropriate work permits in Canada;

• Hospitalization and medical insurance coverage from a province or territory of

Canada;

A driver’s license from a province or territory of Canada;

A vehicle registered in a province or territory of Canada;

A seasonal dwelling place in Canada or a leased dwelling place;

A Canadian passport; and

Memberships in Canadian unions or professional organizations.

The above list is not exhaustive, and various other considerations must also be

taken into account. Determination as to the date an individual leaving Canada

becomes a non-resident is a question of fact. Note that an individual who plans

to leave Canada may consider submitting CRA’s Form NR73, Determination of

Residency Status (Leaving Canada), in order to obtain CRA’s opinion on the

individual’s residency status based on the information provided by the individual.

Deemed Residence

A part from the factual residence, an individual may also be deemed, under the

tax legislation, to be resident in Canada in certain situations. This may include

persons sojourning in Canada for a total of 183 days or more in any calendar

year and categories of persons specified in the tax legislation such as members

of the Canadian Forces.

Deemed Non-Resident

 It should be noted that an individual who is a resident of Canada for tax purposes

may also be a resident of another country for tax purposes under the laws of the

other country. In such a case, the tax treaty between Canada and that country

may provide “tie breaker rules” to determine in which country the individual will

be resident for purposes of the other provisions of the treaty. If, at any time, such

“tie breaker rules” apply and it is determined that an individual is a resident of

another country for purposes of a tax treaty between Canada and that country,

then the individual who is otherwise resident in Canada (whether factual or

deemed) will be deemed not to be resident in Canada at that time. Departure tax

may apply in such circumstances where an individual ceases to be resident in

Canada under such deeming provisions.

DEPARTURE TAX

Canadian tax legislation treats a taxpayer that ceases to be resident in Canada

as having disposed of his or her property for proceeds equal to fair market value.

For individuals who emigrate from Canada after October 1, 1996, the departure

tax applies to all property, other than:

Real property situated in Canada, a Canadian resource property or a timber

resource property;

Property of a business carried on by the taxpayer, at the emigration time,

through a permanent establishment in Canada;

Property of a returning former resident who has elected to unwind the

deemed disposition on departure; and

An excluded right or interest (as defined below) of the taxpayer.

An excluded right or interest (excluded from the deemed disposition by

individuals) is defined to include:

Rights under or an interest in a trust governed by a registered plan and other

plans providing specified pension and similar payments (including for

example, RPPs, IPPs, RRSPs, RRIFs, RESPs, DPSPs, and RCAs.);

Certain rights under an employee benefit plan;

Stock option rights for shares of the employer corporation (or a related

corporation) or units of a mutual fund trust;

A retiring allowance;

Rights under certain trusts such as an employee trust, an amateur athlete

trust and an eligible funeral arrangement;

Rights to benefits under the Canada Pension Plan, the Quebec Pension Plan,

the Old Age Security Act and the Saskatchewan Pension Plan and benefits

under foreign social security arrangements;

Interests in certain personal trusts resident in Canada;

Interest in certain non-resident testamentary trusts; and

Interests in life insurance policies in Canada, other than certain interests in

segregated fund policies.

The departure tax will, therefore, apply to the following assets upon departure

from Canada (this list is not intended to be exhaustive):

Real estate outside Canada;

Unincorporated businesses outside of Canada;

Private or public company shares in Canada or outside Canada;

Mutual funds units in Canada or outside Canada;

Partnership interests;

Interests in non-resident inter vivos trusts;

Other portfolio investments; and

Personal use property as well as listed personal property (such as works of

art, jewelry, stamps, coins, and rare manuscripts).

SECURITY FOR DEPARTURE TAX

Departure tax could potentially pose a severe hardship to an individual, where

there is a deemed sale but no actual sale proceeds in connection with the assets

subject to departure tax. An individual is allowed to elect, on giving security

acceptable to the tax authorities, to defer payment of departure tax that is owing

as a result of the deemed disposition of a particular property until the property is

actually disposed of. If such an election is made, interest does not start to

accrue on the amount secured until such time as the amount becomes

unsecured and relief is provided from penalties as they relate to the unpaid tax.

The election has to be made in a prescribed manner to defer the amount of the

tax owing. The tax authorities will review the amount of security on an annual

basis and determine whether it continues to be adequate.

An individual is not required to furnish acceptable security for the first $100,000

of capital gains as an individual is deemed to have furnished acceptable security

for the tax on up to $50,000 of taxable capital gains in the top tax bracket.

INFORMATION REPORTING

An individual who ceases Canadian residency must file with the tax authorities, in

prescribed form, a list of all the reportable properties that the individual owned at

emigration time. This reporting requirement only applies where an individual

owns reportable properties at emigration time having a fair market value greater

than $25,000. Reportable property of an individual includes most property other

than:

Money that is legal tender in Canada and deposits of such money;

Most (but not all) property that is an excluded right or interest defined above;

and

Any item of personal-use property the fair market value of which is less than

$10,000.

PLANNING FOR THE DEPARTURE TAX

Potential departure tax exposure has to be determined at the appropriate time in

light of all of the facts. Planning strategies may be considered in certain

circumstances prior to departure from Canada. As well, planning strategies may

be considered following departure from Canada. For example, post-departure

losses may, in certain circumstances, be carried back against deemed gains

from the date of emigration. Qualified professional assistance is highly advisable

when departure from Canada is considered.

IMPACT ON CANADIAN PLANNING STRATEGIES

Various tax planning strategies may be implemented in order to provide benefits

to Canadian resident taxpayers from a Canadian tax perspective. When a

Canadian resident taxpayer is considering ceasing Canadian residence in the

future, Canadian departure tax considerations as well as tax considerations in

the new taxing jurisdiction after departure may significantly impact on the

advisability of implementing such planning strategies. Therefore, the opportunity

to implement Canadian tax planning strategies must be reviewed in light of an

individual’s specific future plans with respect to Canadian residency.

Due to the general nature of the bulletin, it should not be relied upon as legal or tax advice.

Additional information

Resident of Canada

Relevant Law

Section 2, Section 3, Subsection 250(5), Article IV of the Canada-Us Income Tax Convention (the Treaty).

Pursuant to sections 2 and 3 of the Canadian Income tax Act (Act), a person who is resident in Canada during a taxation year is subject to Canadian income tax on his or her worldwide income from all sources. However, the term resident is not defined in the Act.

The concept of residency has been the subject of much jurisprudence, from which some general principles have been derived. Canada Revenue Agency (CRA) has adopted many of these principles and they are outlined in IT-221R3.

In paragraphs 2, 4, and 5 of IT-221R3, CRA states

… the Courts have held residence to be a matter of the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living with its accessories in social relations, interests and conveniences at or in the place in question.

The most important factor to be considered in determining whether or not an individual leaving Canada remains resident in Canada for tax purposes is whether or not the individual maintains residential ties with Canada while he or she is abroad.

The residential ties of an individual that will almost always be significant residential ties for the purpose of determining residence status are the individual’s

dwelling place (or places),

spouse or common-law partner, and

(c) dependents.

As stated in paragraph 8 of IT-221R3 these secondary ties must be looked at collectively and not in isolation.

Dual Resident

A person shall be deemed to be resident in

The jurisdiction in which the taxpayer has a permanent home;

If the taxpayer has a home in both jurisdictions or in neither, where the taxpayer’s center of vital interests lie  (economic and personal relations);

If the center of vital interests cannot be determined, where the taxpayer has an habitual abode, or if the taxpayer has a habitual abode in both jurisdictions or in neither, the taxpayer’s citizenship; and (Refer to Allchin vs. The Queen)

If the taxpayer is a citizen of both countries or neither county, the matter shall be settled by agreement between the competent authorities of both countries.

Permanent Home

CRA position with respect to permanent home is outlined in paragraph 26 of IT-221R3:

A permanent home (as that term is used in income tax treaties) may be any kind of dwelling place that the individual retains for his or her permanent (as opposed to occasional) use, whether that dwelling place is rented or purchased or otherwise occupied on a permanent basis. Therefore, an individual may have two permanent homes while living outside Canada (for example, a dwelling place rented by the individual abroad and a property owned by the individual in Canada that continues to be available for his or her use, such as a home that is not leased to a third party on arm’s length terms and conditions as described in ¶6) and the permanent home test will not result in a residency determination

Center of Vital Interests

CRA’s position with respect to the center of vital interests test is also found in paragraph 26 of IT-221 R3.

The center of vital interests test requires a close examination of the individual’s personal and economic ties with each country in question, in order to determine with which country those ties are closer. The personal and economic ties to be examined are similar to those used in determining factual residence for purposes of Canadian income tax (see especially ¶s 4 to 9). There are other tests that will apply if the center of vital interests test is inconclusive.

As stated above, the interests to be examined are similar to those used to determine residency.

In paragraph 10 of IT-221R3 CRA states:

Where an individual has not severed all of his or her residential ties with Canada, but is physically absent from Canada for a considerable period of time (that is, for a period of time extending over several months or years), the Courts have generally focused on the term ordinarily resident in determining the individual’s residence status while abroad. The strong trend in decisions of the Courts on this issue is to regard temporary absence from Canada, even on an extended basis, as insufficient to avoid Canadian residence for tax purposes. Accordingly, where an individual maintains residential ties with Canada while abroad, the following factors will be taken into account in evaluating the significance of those ties:

• evidence of intention to permanently sever residential ties with Canada,
• regularity and length of visits to Canada, and residential ties outside Canada.

For greater certainty, the CRA does not consider that intention to return to Canada, in and of itself and in the absence of any residential ties, is a factor whose presence is sufficient to lead to a determination that an individual is resident in Canada while abroad.

Departure Date

CRA recently addressed a similar fact pattern in Technical Interpretation 2003-0042855 in respect of a couple moving to Australia to commence an overseas assignment.  (The Canada-Australia Income Tax Convention also has residency tiebreaker rules similar to those outlined above).  In this interpretation CRA states:

If your clients have leased their only home in Canada to unrelated third parties … under arm’s length terms and conditions, then it is quite possible that the first tie-breaker rule (i.e. the permanent home rule) will settle the tie in favour of Australia. In this regard, the dwelling (whether owned or leased) that your clients live in while in Australia will generally constitute a permanent home available to them in Australia for purposes of paragraph 3(a) of Article 4 of the Convention. Therefore, you may wish to consult paragraph 24 of IT-221R3, as subsection 250(5) of the Income Tax Act may apply and deem your clients not to be resident of Canada after they move to Australia. If subsection 250(5) applies, your clients will be considered to be a non-resident of Canada from the earliest date that it applies.

Subsection 250(5) states:

Notwithstanding any other provision of this Act (other than paragraph 126(1.1)(a)), a person is deemed not to be resident in Canada at a time if, at that time, the person would, but for this subsection and any tax treaty, be resident in Canada for the purposes of this Act but is, under a tax treaty with another country, resident in the other country and not resident in Canada.

Due to the general nature of the bulletin, it should not be relied upon as legal or tax advice.