When considering the prospect of becoming a Canadian non-resident, it’s crucial to thoroughly research and understand the nuances of life in this new country, as it may become your home for an extended period.
Who are Canadian Non-Residents?
In 2021, Canada was home to 924,850 non-permanent residents, comprising 2.5% of the population. These non-permanent residents, often referred to as NPRs, include individuals in Canada for temporary reasons, like international students, temporary foreign workers, and asylum seekers.
Several factors influence your tax residency status in Canada:
- Physical Presence: The time you spend physically in Canada.
- Ties to Canada: This encompasses various connections such as family, home, and employment in Canada.
- Intent: Your intention to either stay in or leave Canada.
Here are some key statistics related to becoming a Canadian non-resident:
- In 2021, approximately 171,445 individuals transitioned to Canadian non-resident status.
- Of those who became Canadian non-residents in 2021, 55.8% were temporary foreign workers, 22.3% were international students, and 11.9% were asylum claimants.
- The top three destinations for Canadian non-residents in 2021 were India, China, and the United States.
What is Form NR73?
Form NR73, issued by the Canada Revenue Agency (CRA), serves as a crucial document for individuals seeking clarity on their residency status concerning Canadian taxation.
To complete Form NR73 effectively, you will be required to furnish details regarding your connections to Canada. This includes information about your family, residence, and employment in the country.
Here are a few scenarios where completing Form NR73 may be necessary:
- Relocating Abroad: If you plan to reside in another country for an extended period.
- Changing Ties: When you make significant changes to your connections with Canada, such as selling your Canadian home or relocating your family elsewhere.
- Dual Citizenship: If you hold dual citizenship, where one of them is Canadian, and you are unsure which country you should be considered a tax resident of.
Determining Residency through Ties
To transition into a Canadian non-resident, it is essential to sever your primary ties and a significant portion of your secondary ties to Canada.
Primary Ties
- A personal residence in Canada, whether rented or owned
- A spouse or common-law partner residing in Canada
- Dependents living in Canada
- If you maintain a single primary tie to Canada, you would still be regarded as a factual resident
Secondary Ties
- Driver’s license
- Health card
- Bank accounts
- Credit cards
- Possessions like furniture and clothing
- Memberships in clubs or organizations
- Financial investments like pension plans, RRSPs, and TFSAs
- Ownership of vehicles
- Having pets residing in Canada
- Other personal belongings
Becoming a Canadian Non-Resident: Pros and Cons
Deciding to become a Canadian non-resident is a significant step in your financial journey. It’s essential to weigh the pros of a non-resident of Canada and the disadvantages of being a Canadian citizen carefully before taking this step, as it can have far-reaching implications for your tax obligations and financial status.
Pros of a Non-resident of Canada
- Certainty in Tax Status: By completing the Determination of Residency Status form (Form NR73) with the Canada Revenue Agency (CRA), you gain clarity regarding your residency status for tax purposes.
- Reduced Taxation: Becoming a non-resident can lead to reduced taxation in Canada. As a non-resident, you’ll typically be subject to withholding tax on specific income sources, such as rental income and investment gains.
- GST/HST Credits: Non-residents cease to receive the Goods and Services Tax (GST) and Harmonized Sales Tax (HST) credits, which are provided to eligible residents. While this may seem like a downside, it can simplify your tax affairs.
- Tax-Free Savings Account (TFSA): After leaving Canada, you can maintain your TFSA but with some limitations. While earnings and withdrawals remain tax-free in Canada, they may be subject to taxation in your current country of residence.
This tax also applies to payments from the Old Age Security, Canada Pension Plan, and Registered Pension Plans. Failure to notify may result in later repayments, plus interest and penalties.
- Disclosing Canadian Assets: Non-residents must disclose Canadian properties worth $25,000 or more on Form T1161 of their final personal tax return. Failure to disclose can result in penalties. However, Canadian real estate, RRSPs, RESPs, and specific property types do not need to be disclosed.
- Deemed Disposition of Property: Upon becoming a non resident of Canada, you’re deemed to dispose of your property at its fair market value. Any unrealized gains are subject to departure tax, even if you haven’t sold the property.
Cons of Becoming a Canadian Non-Resident
- No More Canada Child Benefit: If you have dependents in Canada and qualify for the Canada Child Benefit (CCB), transitioning to non-resident status means you’ll no longer receive this financial support.
- Loss of GST/HST Credits: Becoming a non resident of Canada, you’ll no longer be eligible to receive GST/HST tax credits from the CRA. This may reduce your overall income.
- Departure Tax on Assets: Departure tax applies to certain assets when you becoming a non resident of Canada. This tax can be substantial, particularly if you have significant unrealized gains in your investment portfolio.
- Impact on RRSP Contributions: If you’re making RRSP contributions in the year of departure, you may not be able to deduct them from your income if you have minimal Canadian income.
- Impact on TFSA Contributions: Non-residents cannot accrue additional TFSA contribution room during their non-residency. Making contributions can result in penalties.
- Disclosure Requirements: Non-residents must disclose Canadian properties worth $25,000 or more, which can be a time-consuming process. Not disclosing these properties can lead to penalties.
Assets subject to departure tax encompass various categories:
- Stocks: This includes shares in all types of companies, both private and public.
- Investment Funds: Mutual funds, exchange-traded funds (ETFs), and partnership interests fall under this category.
- Real Estate Outside Canada: Any real estate situated outside of Canada is subject to departure tax.
- Foreign Trusts: If you have an interest in a foreign trust, it may be subject to departure tax.
- Certain Personal Property: Personal property can be subject to departure tax if it is appreciated. This can include items like art, jewelry, or collectibles.
However, it’s crucial to note that certain exceptions exist, and departure tax may not apply to the following:
- Returning Former Residents: Property owned by a returning former resident who last emigrated after October 1, 1996, is no longer treated as having realized accrued gains on departure.
- Short-Term Residents: Property owned by a short-term resident, defined as an individual residing in Canada for less than 60 months in the 120 months preceding the disposition, may not be subject to departure tax.
- Life Insurance Policies: The exemption for life insurance policies applies exclusively to Canadian residents. Non-residents of Canada who own foreign life insurance policies could be subject to departure tax.
Disadvantages of being a Canadian Citizen
Here are some potential disadvantages of being a Canadian citizen:
- Tax Obligations: Canadian citizens, regardless of where they reside in the world, are subject to Canadian taxation on their worldwide income. This means that even if you live abroad, you may still be required to file Canadian ta
- x returns and pay taxes on your global income.
- Financial Responsibilities: Canadian citizens are obligated to fulfill certain financial responsibilities, including paying taxes, student loans, and other debts, even if they live outside Canada. Failure to do so can lead to legal consequences.
- Limited Dual Citizenship: Canada allows dual citizenship in some cases, but not all countries do. If you acquire citizenship in another country, you may need to renounce your Canadian citizenship, which can be a disadvantage if you wish to maintain both.
Conclusion
Understanding the significance of both primary and secondary ties is essential in determining your residency status in Canada. If your objective is to transition into a nonresident status, it’s crucial to sever your primary ties and significantly reduce your secondary ties.
Frequently Asked Questions
Do I pay taxes in Canada as a non-resident?
As a non-resident of Canada, for tax purposes, you are typically only required to pay taxes on income earned from Canadian sources. Income earned outside of Canada is generally not subject to Canadian taxation.
Do non-residents have to file a tax return?
Non-residents of Canada may still need to file a tax return if they have earned Canadian-source income. Filing requirements depend on various factors, including the type and amount of income earned.
Do I pay Canadian tax on US income?
If you are a non-resident of Canada, you generally do not pay Canadian tax on income earned in the United States. However, you may be subject to U.S. taxation on that income based on U.S. tax laws.
How much US income is tax-free in Canada?
The tax treatment of U.S. income in Canada depends on various factors, including tax treaties between the two countries. While some income may be exempt or subject to reduced tax rates under these treaties, the specific amount and eligibility criteria can vary.