Overseas Canadian Residents and Tax Returns
This is a column by regular contributor Clark
Recently, a friend went overseas (the US) on a temporary assignment. He is a perennial last-minute income tax filer and so, I joked that the tax deadline in the US is two weeks before the Canadian one and that he might want to advance his last-minute rush to April 15. After his departure, I started to wonder about how Canadians working or living overseas are treated for income tax purposes and the curiosity has resulted in this post.
The term “residency” is not defined in the Canadian Income Tax Act but the Canada Revenue Agency publishes an interpretation bulletin that provides guidelines to help taxpayers determine their residency. In Canada, all residents are required to pay tax on their yearly worldwide income, whether they are citizens or landed immigrants. When a person goes overseas for study, job, vacation, or on part-vacation, part-work arrangement, they will have to determine their residency status based on their residential ties before filing their tax return.
Residential Ties
Residential ties include having a home in Canada, other property such as car, boat, furniture, lake-side cabin or cottage, a spouse or common law partner who lives in Canada, driver’s license, bank accounts, brokerage accounts, credit cards, health insurance with any province/territory and social ties in Canada. Based on these criteria, there are four types of “overseas Canadian residents”.
1) Factual Resident. If a person maintains significant residential ties to Canada while overseas for any reason, then they are considered as a Canadian resident for income tax purposes. However, if the person establishes residential ties in another country with which Canada has a tax treaty, then the person is considered as resident of that country and a deemed non-resident of Canada. As a factual resident, the tax-filer is treated as if they never left Canada and all the rules that apply to someone who lives in Canada all year are employed.
2) Deemed Resident. Members of the Canadian Forces, members of the Canadian Forces overseas school staff, government employees who are posted overseas, people working under a Canadian International Development Agency assistance program, dependent children of any of the first four categories, or persons exempt from tax on atleast 90% of their world income in the other country under an agreement or convention are considered as deemed residents. A deemed resident would report their worldwide income, claim all deductions and federal tax credits, and can apply for GST/HST credits. They would pay surtax instead of provincial/territorial tax and cannot claim any provincial/territorial tax credits. If they have business income from Canada, then they would pay provincial/territorial tax and can claim any related provincial/territorial credits.
3) Non-resident. If a person establishes permanent residence overseas and breaks their residential ties with Canada, then they become a non-resident. They are considered as an emigrant in the year they leave Canada and a non-resident in subsequent years. A non-resident would only have to report Canadian employment income, Canadian business income, taxable Canadian scholarships, grants and bursaries, and taxable capital gains from sale of Canadian property. If a non-resident has Canadian investment income, the tax payable is withheld before payment (to the non-resident) and this is usually the final tax obligation to Canada for that income. If the tax is not withheld, then the banking/brokerage institution should be informed that they are dealing with a non-resident account (investor’s responsibility).
4) Deemed Non-resident. A person who has residential ties with another country is considered a deemed non-resident of Canada if their ties with the other country have become such that they are considered a resident of that country under the tax treaty. Deemed non-residents fall under the same category as non-residents for income tax purposes.
Special Tax Credits
Factual residents and deemed residents can apply for tax credits such as foreign tax credit and overseas employment tax credit to reduce their taxes payable.
This post is just an overview and there are other scenarios/issues such as people working as missionaries, people who lived in Quebec before leaving Canada, eligibility for Canada Child Tax Benefit and Universal Child Tax Benefit based on the residency status, etc. Please refer to this Foreign Affairs and International Trade Canada page and browse the several links included there to know more.
Have any of you been (or are) overseas Canadian residents? What other pointers can you provide to fellow readers?
About the Author: Clark is a twenty-something Saskatchewan resident employed in the manufacturing sector. He repaid around $20,000 in student loans and has been working to build his investment portfolio as a DIY investor (not trader) while nurturing plans to retire early. He loves reading (and using the lessons learned) about personal finance, technology and minimalism.
13 Comments, Comment or Ping
1. GTA_Tom
I have heard about an approach where someone, at any age, can sell their Canadian home, close all their bank accounts, essentially vacating Canada, then move to the USA for a few years and then after a certain period of time (2 years?) withdraw all of their RSP’s with only minimal tax (I’ve heard 15%). Unfortunately, I can’t find where I read all about this in the past. Does anyone know the details behind this? Definitely something that would be an interesting post for me! I’d definitely consider moving ‘permanently’ to the USA at, say, age 50, spend a few years down there, then move back to Canada, saving enough in taxes to help me retire 5, 10, or more years early!
Aug 17th, 2010 @ 11:58 am
2. Jane
GTA_Tom,
I haven’t heard about what you talked about. But it does reminds me the book I read “Take your money and run” by Alex Doulis. His approach is similar but need to require a residence of another country that has tax treaty with Canada. He got his Italian citizenship and severed all ties (homes,bank accounts, significant others, brokerage account) with Canada, thus he was able to withdraw all his RRSP with minimal tax (15%).
Not sure how US will work out. You might need a greencard or sth to prove that you are a resident of US not Canada?
Jane
Aug 17th, 2010 @ 1:03 pm
3. Laura
Very interesting. What happens if you go to another country to earn money on a visa? Do you pay taxes to your home country or to the country you’re earning the money in?
Aug 17th, 2010 @ 1:59 pm
4. Clark
Thanks for the comments.
@GTA_Tom and Jane: I didn’t know about the minimal tax issue but you’ve piqued my curiosity.
@Laura: If you have residential ties, then you are a factual resident of Canada. For example, if you work in the US on a visa, you would file a Non-Resident Alien tax return there. You will have to file a T1 in Canada and claim the foreign taxes paid on it.
Aug 17th, 2010 @ 4:12 pm
5. Pat
I think that things are very murky when it comes to residency status, I say this because I worked overseas for ~2 years and am currently having quite the battle with the CRA. For example, in their literature they say that in order to be a non-resident you must sever all residential ties (ie. give up all property, bank accounts, passports etc.) to be a non-resident. When you just described a non-resident in your post you even say:
“If a person establishes permanent residence overseas and breaks their residential ties with Canada, then they become a non-resident”.
However, I can attest that this is not true, as I was in Germany on a temporary work Visa and CRA is still considering me as a non-resident during that time even though I was coming back to Canada and had maintained all of my normal residential ties. I think the only thing they look at is if you sell your home, since I was a student a student I only rented both there and in Germany.
My only pointer is that it’s best to stay a factual resident if you can as the taxes you pay in the foreign country should offset your CDN taxes, and you can still claim your moving expenses. As to how they determine your residency, I’m afraid that’s a black box.
Aug 17th, 2010 @ 6:06 pm
6. Clark
@Pat: Thanks for that info. I can see a student not owning a home or other property and closing bank accounts; but, did your driver’s license and health insurance expire when you were overseas (assuming you had them when you left Canada)?
Aug 17th, 2010 @ 8:52 pm
7. Pat
@Clark: Well, I lived in Ontario and OHIP does expire after so many months so yes that lapsed. But I kept my driver’s license, all of my bank accounts, my CDN credit cards and my RRSP’s, I was also a full-time student at a CDN university during 8 months of my 2 years abroad and received T2202’s and T4a’s. On a side note I had all of my possessions in storage in Canada too (including beds and kitchenware) which I also indicated in my “Determination of Residency” form, and was still part of my CDN professional association and was still receiving mail at a CDN mailing address.
But it doesn’t seem to matter to them, if it’s not a house it doesn’t count it seems, which is very confusing since most of their literature seems to indicate that these other residential ties also matter.
Aug 17th, 2010 @ 9:11 pm
8. JFG
GTA_Tom
I’ll look into it deeper, but this is what I know for the 6 clients I’ve done this to so far.
If you have an RRSP and are no longer a Canadian Resident, then all trades stop. All you can do is redeem.
If you keep your RRSP, you have to declare Income, as (for example) the US does not recognize a RRSP as tax free (tax deferred, but will do for now)
As far as I know, it depends on which country you end up in, as there are different percentage. And sorry to say, but US is 20%.
Aug 18th, 2010 @ 12:06 am
9. GTA_Tom
JFG – thanks for the feedback. Even 20% isn’t too bad if you have a sizable RSP portfolio. Say you have $2,000,000 put away. Pay 20% and you’re still left with $1,600,000 and after a few years you can move back to Canada and collect full CPP and OAS because you have no income! Plus you can earn interest on your $1,600,000 and pay no (or very little) taxes since you have no other income. I haven’t done the full calculations but will do it sometime (I have lots of time; still in my early 30’s :))
Aug 18th, 2010 @ 12:30 pm
10. saveddijon
Ow! Nasty to hear that the U.S. does not recognize the tax-deferred nature of the RRSP. On a similar note, how does the CRA treat a 401(k)?
I would also be interested in understanding the other consequences of dual residency. e.g. the IRS allows you to deduct mortgage interest on a principal residence but the CRA does not. If there are other issues like this it would seem to me that your tax situation if you are taxable in both countries would be worse because most of the tax deductions would not be recognized in the other country, and therefore not available to you.
Aug 18th, 2010 @ 2:14 pm
11. Chris
The US does recognize the tax deferred nature of an RRSPs under the Can-US treaty – its just an election to be made when you file a US return (Form 8891 if memory serves me correctly)
RRSP is taxed by Canada at a flat rate if you are a non-resident (I believe 25% off the top of my head per Can-US tax treaty) – however, if you are subject to US taxes, you pay at marginal rates (35% federal plus state taxes) and can claim a foreign tax credit for the difference – thus you effectively pay US tax rates, just a portion of the taxes goes to canada. Say you are in Floriday (no state tax), then there is the potential to save about 10% in taxes – still pretty sizeable savings on a $1M+ portfolio!
If you are considering such a maneuver – seek professional advice!! Residency issues can be quite complicated, and the US has very different rules than in Canada. The interest/penalties can be severe if CRA doesn’t agree wtih what you have done and reasseses you as a canadian resident.
Aug 28th, 2010 @ 2:19 am
12. Sara
I do not have a property or a residential address in Canada, currently working, living and paying tax in China. But I am still having minimal “residential ties”, a Canadian driver license and a Canadian bank account to settle for student loans.
Am I a deemed non-Residents?
Apr 29th, 2011 @ 12:43 am
13. Clark
@Sara: If you do not work in one of the fields that could classify you as a deemed resident, then you are likely to fall under the deemed non-resident category (due to the tax treaty with China). It is prudent to consult an expert or CRA directly for a proper evaluation.
Apr 29th, 2011 @ 10:03 pm
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