How to Become a Non-Resident of Canada
Canadians move abroad and become non-residents for a variety of reasons. Perhaps the company you work for has expanded globally and opened a UK office, requiring you to move. Maybe you’ve retired with substantial savings and want to live in Florida all year round instead of only during the cold months.
If you plan to move, it is important that you understand how your residency status affects income tax obligations. Unlike the U.S., Canada assesses these obligations according to residency, not citizenship. This means that you can give up your residency without losing your status and rights as a Canadian citizen.
One common myth states that to claim that non-resident status Canadian citizens are required to eliminate all ties to Canada, such as your bank accounts, credit cards, property, and other assets of Canadian origin. The truth is that you can keep some of these connections. What decides the issue is how many ties you keep with Canada versus those you create in your new home.
Determining Your Residency Status
When a Canadian citizen becomes a non-resident, the Canada Revenue Agency (CRA) uses a series of tests to verify their residency status. These evaluations examine your primary and secondary ties to Canada.
Primary ties include:
- Whether or not your primary residence is in Canada
- Where your spouse or common-law partner is living
- Where your dependents are living
If you have a home in Canada that you can theoretically occupy at any time, the CRA may treat it as a residential tie. You don’t necessarily have to sell it. If the real estate market in your area is experiencing a downturn, renting it out until the market recovers would be regarded as a reasonable move. However, you generally don’t want to maintain a Canadian residence or even rent it out under conditions that suggest a future return. When you’re looking at how to become a non-resident of Canada, addressing property issues needs to be a priority.
The CRA also takes a close look at where your spouse or common-law partner and your dependents live. If you leave Canada but they don’t accompany you, it could suggest that you don’t intend to remain abroad for long.
Secondary ties are more focused on your assets and financial holdings. They include:
- Working for a Canadian employer
- Personal property in Canada such as cars, boats, and jewellery
- Canadian health and medical insurance coverage
- Canadian passport
- Canadian driver’s license
- Canadian bank accounts, credit cards, and RRSPs
While closing all your bank accounts and cancelling your credit cards may furnish strong proof that you intend to sever ties with Canada, this may not always be realistic. For example, closing RRSPs may incur penalties. A tax professional can advise you on the best way to avoid potential residency tax issues, especially if you intended on maintaining any of these financial accounts in Canada.
The CRA assigns more weight to your primary ties because they can make you a Canadian resident for income tax purposes. Even a high number of secondary ties can result in the same conclusion. A tax accountant can give you an accurate opinion on your particular situation.
Even if you do not meet any of the primary or secondary residency tests, if you are in Canada for more than 183 days in any given calendar year, you are automatically considered a resident for tax purposes for the entire year. If you left Canada in August, for example, you would have to pay tax on all your income (Canadian and foreign) for the entire year. It’s something to keep in mind when deciding on a departure date.
The Exit Tax
Many people who leave Canada to live abroad are surprised by a final act of taxation known as the ‘exit tax’ or ‘departure tax’. The moment you become non-resident in Canada, the CRA considers you to have sold off all of your assets at their fair market value. Any qualifying capital gains will be included in your income and become taxable.
Many people don’t know this rule exists and fail to file this final tax return. This omission could potentially lead to any Canadian property you own, such as real estate and investment accounts, being seized by the CRA.
Some assets are exempted from the exit tax, such as real estate and shares in a small business. Meeting with a professional for a tax planning session before leaving Canada can help you determine if the tax applies to your situation and assist in preparing if it does.
Filing Your Last Tax Return
When you submit your final Canadian income tax return, you must:
- Indicate that you are non-resident in Canada as of December 31 of that taxation year AND
- Provide your date of departure
This information lets the CRA know that you’ve left. But does that mean you will no longer pay any Canadian income tax at all?
It depends. If your job or alternate source of income is in your new country of residence, you probably won’t pay taxes in Canada unless you come home for good. But if you have income from Canadian sources, you remain obligated to pay tax on it. In most cases, they can be deducted at the source so that you don’t face a massive tax bill when you return. Let the payor know that you are a non-resident of Canada so that the correct amount is deducted.
Many people wonder how to become a non-resident of Canada. It can be complicated, especially if you’re moving of your own volition and don’t have an employer supporting the transition. But many Canadians do it every year, and so can you.
- Your primary and secondary ties must be minimal
- You may have to pay an exit tax
- Your departure should be timed to avoid taxation on Canadian and foreign income
Working with a cross-border tax professional before you leave will help you understand any tax issues that may apply and decide on appropriate strategies for handling them. This way, you can enjoy life in your new home without worrying about what you may owe the CRA when you return.