Cross-Border Tax Specialist Advice for Canadians: Residency Status Tips

Filed in CPA Blog by on January 17, 2015
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More and more residents of Canada are moving to the San Francisco Bay Area. That’s not surprising because the Bay Area is experiencing very strong job growth, and the technology community is truly global. Many folks work in Canada in the tech industry and end up in the states for a temporary stint at a Bay Area company. Not surprisingly, the “cross-border” aspect of our top-rated San Francisco tax service is growing. With a strong international tax practice, we are cross-border tax specialists these days, and in that spirit want to share some tips and advice for Canadians contemplating a move to the United States on the issue of residency

When does One Become a Non-Resident of Canada?

In General, you become a non-resident of Canada on the latest of the following dates:

1) The date you leave Canada;
2) The date your spouse or common-law partner and dependants leave Canada to join you; or
3) The date you become a resident of the USCross-Border Tax Specialist: Canada

Details on Residency for Those Contemplating a Move From Canada to the San Francisco Bay Area

For tax purposes you must be a resident somewhere and you cannot be a resident of two countries at the same time. If it’s determined that you are a resident of Canada and the US at the same time, you will need to use Article IV of the Canada/US tax treaty (tie-breaker rules) to resolve the dispute. Residency is largely determined by your “primary” ties. These include your home, spouse, dependents, employment & social ties.

Since most other countries around the world have lower individual income tax rates than Canada, it may be advantageous to sever your Canadian residency so you will no longer be taxed on your worldwide income in Canada.

Generally speaking, as soon as you take on employment in the US and bring your spouse and dependants with you, you become a non-resident of Canada and a resident of the US. If your spouse or dependents remain behind in Canada temporarily, you will generally retain your Canadian residency status during your absence. If this is not your intention and you would prefer to become a non-resident, you should avoid visiting your spouse or dependants in Canada and instead have them visit you on a regular basis in the US.

If you are single and leave Canada, you will likely be considered a non-resident during your absence; unless you maintain some of your “primary” ties to Canada. For example, you support a dependant in a home you maintain in Canada or keep your home vacant and available for use. You can avoid this by renting your home to a non-arm’s length individual for a minimum of 3 months. However, if you do decide to rent out a property as a non-resident, there are very specific guidelines that must be followed. The most important is your requirement to hire a Canadian Agent to withhold and remit 25% of the rents to CRA on a monthly basis. Professional advice is strongly recommended before deciding to rent a property as a non-resident.

Regularity and length of return visits to Canada will help determine your residency status. If you leave Canada with your spouse and dependants and claim to become a non-resident, your tax status as a non-resident will generally not be affected by occasional return visits to Canada. However, if these visits are more than occasional and occur on a regular basis, your non-residency status may be called into question. This factor together with other remaining ties will need to be examined to determine whether they are significant enough in total to deem you to be a “factual” resident of Canada. It’s very important that the steps you take to prove your intention to become a non-resident are followed carefully.

In order for an individual to become a non-resident of Canada, there must be a degree of permanence to your stay abroad. In general, if you are absent from Canada for less than 2 years, you will be presumed to have retained your residency status while abroad; unless you can clearly establish that you severed all of your residential ties. If you were to leave Canada for 9 months and then come back, it would look very suspicious, and CRA may conclude that your intention was always to return. The less time you are gone, the more likely CRA will scrutinize your non-resident status. If there is evidence that your return to Canada was foreseen at the time of your departure (e.g. a contract for employment upon return to Canada), CRA will likely presume that you did not sever all of your residential ties and retroactively deem you to be a resident of Canada for the entire time you were abroad. If you have been absent from Canada for 2 years or longer, you will generally be presumed to have become a non-resident of Canada, provided that you have severed all of your ties and have satisfied all of the other departure requirements.

Who did you notify about your planned departure from Canada? This is another important factor that CRA will consider when determining whether you truly intended to permanently sever all of your residential ties. An individual who ceases to be a resident of Canada should notify others of their intention, including CRA, financial institutions, OHIP, etc. If you are currently receiving the Canada Child Tax Benefit, HST credit, Universal Childcare Benefit, etc, you will need to notify CRA before your departure from Canada.

This notification also includes compliance with the “departure tax” rules and more importantly whether you have fulfilled your obligation to pay or post acceptable security with respect to any outstanding tax. Such notification is evidence that you intend to leave Canada permanently.

In general, an individual who ceases to be a resident of Canada will be deemed to have disposed all of their property at fair market value, subject to certain exceptions. The capital gain resulting from this deemed disposition will be subject to tax on your T1 General Departure return. This tax is commonly referred to as “departure tax”. The departure tax rules apply to non-registered shares of public and private Canadian and non-Canadian corporations, personal property and real estate situated outside Canada. The departure tax rules do not apply to cash, business property, real estate situated in Canada, pension plans, and all other registered investments.

An individual may elect to defer the payment of the departure tax until the asset is physically sold by providing adequate security. An individual who leaves Canada must also comply with the “reportable properties” obligation and list certain types of the property that collectively exceed $25,000.

CRA will also take into account whether any Canadian residents making payments to you were informed that you intended to become a non-resident; such as financial institutions that you have investments with. Non-resident withholding tax is required for rent, dividends, pension payments, etc.  Not only does this show the CRA your intention to become a non-resident, but it also ensures that payments made to you after your departure are subject to the appropriate non-resident withholding taxes. If these non-resident withholding taxes are not withheld by the Canadian payer, you will be required to voluntarily remit the withholding tax after you have left Canada.

If you are uncertain about your residency status, CRA invites you to complete and submit Form NR73 before leaving Canada. This form is NOT mandatory, it’s completely optional. The decision to submit this form should not be taken lightly. Based on the answers you submit, CRA will determine whether you are considered a resident or non-resident and you will be obligated to accept their decision. It is advisable that you fill in this form at the time of your departure and keep a copy for your records in case CRA requests it. However, it’s not advisable to submit this form to the CRA, unless you have difficulty determining your residency status and you are not willing to accept the risk of being wrong. Many of the answers to questions on this form are yes and no. This gives very little opportunity to elaborate, which can give a misleading overall impression.

Contact us for a Free Consultation on Your Tax Status

With years of cross border tax experience, we can provide you with the necessary guidance required to make this transition as seamless as possible. Please contact us for a complimentary consultation.

 

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