Summertime is family time, but it is also the time of year when people prepare for big life changes taking place in the fall. Young adults make plans to work abroad, travel, or go to school, and empty-nesters journey to warmer climates. However, non-residency comes with tax consequences, so a visit to a tax advisor should be part of your travel preparation.
In fact, it can pay handsomely to find a cross-border tax expert who can help you determine with confidence what your filing status is, both before and after you leave. Knowing that will help you comply and avoid costly penalties and interest for failure to file various returns, especially if you are compelled to do so retroactively.
You will also make better decisions about contributing to and withdrawing from Canadian investments left behind, such as TFSAs, RRSPs, RRIFs, taxable Canadian real estate, or business properties.
You should be especially concerned about your tax ties if you are going to a country with which Canada does not have a tax treaty that prevents double taxation. You must be prepared to show that you have severed ties with Canada and have a permanent home elsewhere to avoid attachment to the Canadian tax system. However, taxable assets left in Canada will still have tax consequences for non-residents upon their disposition.
In addition to taxing the worldwide income of residents, the government of Canada imposes income taxes on non-residents who earn income in Canada. Except where there is an international tax agreement restricting the collection of such taxes, anyone in Canada who pays income to a non-resident is required to withhold income taxes from those payments.
In most cases, this is the only tax that the government will get on that income, as the non-resident will generally not be filing a Canadian income tax return. In fact, an expatriate of Canada may find that withholding taxes on Canadian income earned while a non-resident is cheaper than paying taxes in Canada.
Even in cases where there is little or no Canadian income, a non-resident may wish to file a tax return in Canada, in order to attempt a refund of the withholding taxes. There are three opportunities:
* Under Section 216 – Collection of rents and timber royalties. These filings are not eligible for any personal amounts and so are subject to 48% non-resident surtaxes, the same taxes levied to deemed residents.
* Under Section 216.1 – Non-resident actors may file a return in Canada under this section to report net Canadian-source acting income.
* Under Section 217 – Non-residents receiving any of the following sources of income may file a return for amounts that include:
1. Old Age Security pension, Canada Pension Plan or Quebec Pension Plan benefits, most superannuation and pension benefits, deferred profit- sharing plan payments, RRSP or RRIF payments, certain retiring allowances or death benefits.
2. Employment Insurance benefits or registered supplementary unemployment benefit plan payments, or amounts received from a retirement compensation arrangement (RCA), or the purchase price of an interest in a retirement compensation arrangement.
3. Prescribed benefits under a government assistance program.
In these cases, if Canadian-source income is 90% or more of their worldwide income, taxpayers will be allowed to claim full personal amounts. If Canadian-source income is less than 90% of world income, then personal amounts are limited to 15% of eligible income. The 48% non-resident surtax will apply but will be reduced by the factor of eligible income divided by non-eligible world income. Paying the 25% withholding taxes may be simpler and less expensive.
It’s complicated, and that’s why you may need help from a tax professional in making the right filing decisions when your life changes and takes you across the border or overseas.