- If you would like to terminate your Canadian tax residence, you will need to cumulatively meet two conditions, namely, (i) leaving Canada in order to live in another country and (ii) severing your residential ties with Canada. While the first condition is relatively simple the second condition requires a detailed elaboration.
To sever your residential ties with Canada, you will need to sell or otherwise dispose of your home in Canada and establish your new permanent home in another country. Next, your partner or spouse should leave Canada too. Furthermore, you need to dispose your personal property in Canada and cut your social and economic ties with Canada. Social ties include, but are not limited to, memberships in religious and recreational organizations, whereas the term “economic ties” encompasses Canadian credit cards and Canadian bank accounts.
To reduce the chances that you will be regarded as a factual Canadian resident, we also recommend: (i) notifying all financial institutions which you are dealing with of your new address; (ii) closing all your post box offices; (iii) terminating all your Canadian addresses and ensure that no mails addressed to you are delivered to any Canadian address; (iv) not making regular visits to Canada; (v) terminating each of your contracts for utility services in Canada (e.g., contracts for phone services, trash collection, water, electricity, and Internet); and (vi) terminating any Canadian insurance policies (including health-related policies). It is worth mentioning that the possession of a Canadian passport and a Canadian driver’s license may also be regarded as factors indicating ties with Canada.
A taxpayer who leaves Canada, without severing her ties with the country, will be considered a factual resident, unless otherwise stated in the double tax treaty between Canada and her new country of residence. The Canadian courts have stated that the term “residence” refers to 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 of question.”
If you meet the conditions required for terminating your Canadian residence, you will become a non-resident for tax purposes on the latest of the following events: (i) the date when you depart from Canada; (ii) the date when your spouse, partner, or dependents leave Canada; or (iii) the date when you become a resident of another country.
In comparison with the United States, Canada will stop taxing you if you leave the country and end all important connections with it. However, before leaving Canada, you may be required to pay departure tax on certain assets which will be deemed sold and repurchased again. The gains of this “sale” need to be declared in your tax return. Since the covered assets may include items, such as bonds, stocks, partnerships, income trusts, the amount of the departure tax liability may be significant. Many Canadian residents have never heard of the exit tax and may be surprised to learn that they will need to pay an additional tax amounting to thousands or even millions of Canadian dollars just because they decided to move abroad.
To reduce or completely eliminate the need to pay the departure tax, one needs to create and implement tax planning strategies long before one’s departure from Canada.
Please note that, in case you leave Canada and pay your departure tax, you will still be subject to Canadian taxes if you receive certain Canadian-source income. You may be able to reduce the amount of such taxes by electing to file a Canadian tax return (section 217 election).
If you have any questions about the Canadian exit tax or other related matters, please do not hesitate to contact us. We would be glad to help you! READ OUR FREE E-BOOK about the exit tax in Canada!
References
- https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents/leaving-canada-emigrants.html
- https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents/dispositions-property.html
- https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4058/non-residents-income-tax.html#P216_24360
- https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties.html
- https://www.theglobeandmail.com/globe-investor/personal-finance/taxes/leaving-canada-minimize-the-departure-tax-when-going/article22032765/
- https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents/electing-under-section-217.html
