A Break from the CRA (and Canadian Winters)…
By Andrew Rogerson LLB (Hons) TEP
Canadian executives (and their families) transferred overseas are usually very excited about the possibility of broadening their horizons. Living in places they have only heard or read about. Provided their departure is handled properly, then a period of years offshore will not only provide a sparkling addition to their resume, but also a temporary parting from the demands of the CRA.
Merely moving overseas does not make one become non-resident. If one does not become non-resident, then one is still liable for Canadian tax on one’s worldwide income (with deductions available in appropriate cases for overseas taxes paid). Becoming non-resident is not difficult, although each case will depend on its facts. Professional advice should be enlisted, not only as to how and where one’s salary is paid, but also as to severing the appropriate ties with Canada.
In 30 November 2006, Chief Justice Bowman, of the Tax Court of Canada, restated the legal test for determining non-resident status. He was ruling in the case of Jean Maurice Laurin v The Queen (2006) TCC 634. Mr Laurin was an Air Canada pilot, who went to live in Belize and then the Turks and Caicos Islands. To perform his flying duties, he commuted back to Winnipeg and Vancouver, from whence he piloted international flights. He returned offshore after each flight. Most cases of non-residency involve much less connection with the home country, such as a trip once or twice a year to visit family. The principles to be applied are, however, the same.
If one spends 183 days or more in Canada then one will normally be regarded as resident for tax purposes. However, in order to overcome a finding of being “ordinarily resident’, even though spending much less time in Canada, one must cut necessary ties. The question posed by most executives who are scheduled to depart, is: “must I sell my house?”. The answer is “no”, but it should be rented out and / or not be available for one’s own use. Availability of such accommodation is just one of the factors that the courts use to make a determination or ‘ordinary residency’. In Mr. Laurin’s case, the Chief Justice approved cases of long standing that characterised ordinary residence as “the place in the settled routine of his life he regularly normally or customarily lives… (as opposed to) …a place where he unusually, casually or intermittently visits or stays”. The court held Mr. Laurin to be a non-resident of Canada and not liable to Canadian income taxes notwithstanding that he:
- is a Canadian citizen;
- carried a Canadian passport;
- regularly visited his three children and four siblings resident in Quebec;
- made trips to Winnipeg several time a month to command international flights;
- overnighted at hotels before and after international flights;
- maintained Canadian RRSPS; and
- maintained membership of the Canada Pension Plan.
Each case depends on its facts. This is why adequate pre-departure planning is essential. This should be performed with the assistance of an adviser specialising in this area. The first point of reference the CRA uses in determining ordinary residence is whether one retains a home in Canada for one’s own use. Absent that, the CRA may take into account what are known as “secondary residential ties”. Secondary residential ties that will be taken into account in determining the residence status of an individual while outside Canada are:
- 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 organisations.
The CRA are transparent as to their approach and say as follows in document IT 221R3:
“Generally, secondary residential ties must be looked at collectively in order to evaluate the significance of any one such tie, therefore, it would be unusual for a single secondary residential tie with Canada to be sufficient in and by itself to lead to a determination that an individual is factually resident in Canada while abroad”.
In addition to the above, problems may arise in regard to terms in a contract that provide for re-employment in Canada upon completion of a contract overseas. The exact contractual position should be reviewed well in advance with a lawyer specialising in this area.
It is possible to obtain an advance ruling from the CRA as to one’s residency status by completing form NR73. The ruling will be based on the facts as disclosed prior to departure. Although the ruling will cease to have effect if one’s circumstances change, it is nevertheless a most useful document to have in one’s suitcase, as one departs to commence one’s dream of working overseas.
Don’t forget Capital Gains Tax. One is deemed to have disposed of almost all of one’s property at its fair market value when one leaves Canada and to have reacquired it for the same amount immediately thereafter. Exceptions to this rule include: Canadian real estate, pensions, insurance policies and rights to certain benefits under employee profit-sharing plans.
At the other end of the spectrum, employers who recruit senior employees from overseas should advise their new recruits to obtain pre-immigration legal advice. A very valuable 5-year exemption from Canadian income tax exists for landed immigrants who settle assets into an offshore trust.
Although Canadians are generally modest and likeable people, they do make a major impact on the world stage, in roles such as bankers, teachers, accountants, and oil executives as well as the “traditional” role of peacekeepers At the present time, 1.5 million Canadian citizens are living and working overseas. It is likely that a sizeable proportion of these will not have correctly structured their affairs prior to departure and may find themselves liable for unnecessary Canadian taxes. Thorough planning, ahead of time, with professional help, should prevent a multitude of problems arising at a later stage.