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Canadian personal tax rates may be too high, don’t compare favourably with those in the United States and are driving many of our successful people out of the country, but to be fair, there are many considerations other than high taxes that go into a decision to leave and become a non-resident for income-tax purposes.
As I often tell many of my clients and colleagues: “Don’t let the tax tail wag the dog.” In other words, tax is not usually the sole driver behind important decisions such as leaving Canada. There are many other factors including: Canada’s cold climate; where family and friends are located; the quality and cost of medical services in the new location; the cost of living — including housing; the language spoken and overall culture appeal; political stability/climate; the ability to legally reside in the new location; and the overall quality of life as compared to Canada.
In more than 90 per cent of the cases I’ve worked on in recent years — and that’s a lot of cases — clients desire to live in the U.S. That’s not a surprise to me. The U.S. is certainly — for most of the issues mentioned above — very comparable. It has a warmer and gentler climate. Medical services are world class. The languages spoken in the U.S. are virtually the same as in Canada.
Whenever I speak or write about the above, I inevitably get people who say Canada’s health-care system is superior to that of the U.S. Yes, I get it, the U.S. does not have universal health care and instead relies on a combination of public, private, for-profit and non-profit insurers and providers.
The U.S. does, however, fund the national Medicare program for people 65 and older (and other people who require assistance). Notwithstanding that, private for-profit insurance is the dominant form of health coverage in the U.S. and it can be expensive compared to the cost in Canada, which is essentially nil in most provinces.
But I don’t think it’s in dispute that wait times in Canada for routine procedures and referrals to specialists are very long as compared to that of the U.S. In other words, both countries’ medical systems have their pros and cons and need to be considered carefully rather than ideologically.
I often get similar comments from some about the U.S. political system, with some opining that the U.S. is more racist than Canada (an assertion that, in my opinion, is more grounded in ideology rather than fact) or that their politics are worse. People can certainly have their own opinions — and ideology — on these matters, but it is usually a minor factor when I’m dealing with people who are planning to leave Canada.
From a tax perspective, it takes careful planning to become a non-resident of Canada. There is no definition of “resident” in the Income Tax Act. Instead, the Supreme Court of Canada — in its 1946 landmark decision in Thompson v. Minister of National Revenue — determined what the factors are that must be considered (and virtually every subsequent court decision to this day still considers Thompson).
The Canada Revenue Agency in its folio on the subject has nicely summarized the factors laid out in Thompson and should be reviewed if you’re considering becoming a non-resident of Canada. Overly simplified, one must “cut their ties” with Canada if they are to become a non-resident of Canada for income-tax purposes. In some cases, that is easier said than done.
The facts, not the intention, will determine if a person has indeed become a non-resident of Canada. For example, one cannot simply say “I’m leaving Canada to go live in my cottage in the U.S. and I’m now a non-resident of Canada” if they still have a home available to them in Canada, strong economic ties to the country and other secondary ties.
But if a person does become a non-resident of Canada for tax purposes, that person will generally be deemed to have disposed of all their worldwide assets at fair market value on the date they become a non-resident. To the extent this deemed disposition of worldwide assets results in gains, then the resulting tax liability will need to be paid (or adequate security provided) for the taxation year that they “depart.”
In the tax community, these deemed disposition rules are generally referred to as the “departure tax” rules. What exactly the non-residency date is and determining the fair market value of the worldwide assets can be tricky.
There are several exceptions to the deemed disposition rules, with two of the largest categories being Canadian real estate held personally and registered assets, such as registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs) and tax-free savings accounts.
The logic of these exceptions is that Canada still has a right to tax you as a non-resident of the country in the future should you ever dispose of your Canadian real estate (or be deemed to have disposed of, such as on death) and on future withdrawals from your RRSP or RRIF.
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Accordingly, managing the departure tax exposure and payment can be a very tricky issue — and often expensive — for people who want to become non-residents of Canada. Don’t venture into this area without specialized advice from a tax professional who has lots of experience in this difficult area.
Taxes are not usually at the top of the list of factors for wanting to become a non-resident of Canada, but they are still a very important consideration for the ever-increasing number of Canadians wanting to or considering leaving. And, in recent years, this country’s high personal tax rates are indeed causing many to leave for greener pastures.
Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at [email protected] and his LinkedIn profile is www.linkedin.com/in/kimmoody.
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