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The tax consequences of leaving Canada permanently

From assets and property to personal ties, several factors affect the tax consequences of leaving Canada. As a result, detailed planning needs to be done in advance of the move.

About three million Canadians currently live outside the country. And many others contemplate making a move at some point in their lives – whether it be to pursue a professional opportunity, return to their home country or relax in a warmer climate.

But if you are thinking of moving abroad, it’s important to remember that the process can be complicated. Among other things, you will need to plan for the tax consequences, especially if you expect the move to be permanent. There are many rules to consider – the key considerations below are just a few of them – which is why professional advice is important.

“Having a CPA oversee the process helps avoid unpleasant surprises,” says Virginie Vargel, a CPA who specializes in expatriate and non-resident taxation.

Here are four factors to think about:

Determining your residency status

To determine whether you will need to continue paying tax in Canada, the Government will first check whether you have retained significant ties here, says CPA Annie Poitras, lead senior manager, U.S. and international taxation at Raymond Chabot Grant Thornton. Such ties, she says, might include owning a house in Canada or having a spouse or common-law partner and/or dependents who are minors still residing in the country. The Government will also consider secondary ties, such as owning personal property, bank accounts, or a valid driver’s licence.

“These ties are acceptable as long as they can be justified,” says Poitras. “You can keep your driver’s licence if it is valid in the host country and you can continue to own a residence that you are renting out if conditions are met, such as having a written lease. The Canada Revenue Agency starts to ask more questions, however, if you leave the country but retain a vacant home or if you have dependents, spouse or common-law partner in Canada. Residency status is based on facts and on the taxpayer’s firm intention to leave the country.”

If the Government determines that you are no longer a resident, you will be considered an emigrant and subject to certain restrictions. For example, you will no longer be able to make regular contributions to a tax-free savings account (TFSA). However, as the CRA website explains, “Any withdrawals made during the period that you were a non-resident will be added back to your TFSA contribution room in the following year, but will only be available if you re-establish your Canadian residency status for tax purposes”.

You will still be able to contribute to a registered retirement savings plan (RRSP) if you have unused contributions but it may not make sense to do so. “This is why it is so important to carefully consider the date on which you give up your Canadian residency,” says Poitras.

Avoiding double tax

Switching to non-resident status is crucial because every host country has its own tax rules and, in many cases, an agreement with Canada.

“The goal,” Poitras points out, “is to avoid being taxed twice.” For example, in Canada, the tax rate on an RRSP withdrawal is generally 25 per cent for non-residents. However, depending on tax agreements, this rate could be lowered to 15 per cent depending on how amounts are withdrawn.”

“Whether there is double tax or not depends on whether the foreign country will tax the RRSP,” says FCPA Bruce Ball, vice-president of taxation at CPA Canada. “If the rate is 25 per cent but no tax is paid in the new country of residence, there is no double tax. Also, one may be able to claim a foreign tax credit in the other country based on the Canadian tax depending on the tax rules of that country.

Paying a departure tax

The moment a resident leaves Canada, the CRA deems that they have disposed of certain kinds of property at fair market value and immediately reacquired it at the same price. This is known as a deemed disposition and you may have to report a taxable capital gain that is subject to tax (also known as departure tax). But, that doesn’t mean an individual leaving should rush to liquidate everything.

For example, says Poitras, “furniture and vehicles, are excluded from tax, as are registered plans (such as RRSPs or TFSAs) and CPP and QPP benefit entitlements, because they will be taxed at a later date.” Same for foreign assets, such as, property that generate taxable capital gains, as long as the person has been a resident for 60 months or less during the 10-year period prior to emigration and held the property when residency was established.

Also, there is no immediate need to sell your home, as the deemed disposition does not apply to real property. “There is no deemed capital gain on a principal residence,” Vargel explains. “The property only becomes taxable when you leave the country and it is sold.” At that time, recognition is given to the principal residence designations which apply.

That said, leaving a vacant home can be an issue for residency determination, so it’s common for people to sell or rent the home, says Ball. If the property is rented, there may be a deemed disposition due to a change in use and other issues may arise, such as withholding tax on rental income. Hence, getting professional advice is important.

If the house is sold once the owner has become a non-resident, the vendor must notify the CRA about the disposition or proposed disposition by completing Form T2062 and send the payment or acceptable security to cover the resulting tax payable.

Also, any balance owed under the Home Buyers’ Plan must be repaid before you leave, otherwise it will be included in taxable income, says Vargel.

Poitras adds that it’s also important to communicate your change in status to any financial institutions where you have accounts generating passive income, such as interest or dividends. Also, provide a foreign address.

Final tax return and tax deferral

Since it will include your departure date, the change will be confirmed when you file a final tax return by April 30 of the year following the one you left Canada.

“The tax authorities treat this final tax return much like they would treat the tax return of a deceased person,” says Poitras. “It’s the last chance for the CRA to tax the income and property of a Canadian resident, including foreign assets, such as a condo in Florida.”

When filing their return, the resident can choose to defer the departure tax to be paid on income relating to the deemed disposition of property, says Poitras. This can include some or all the assets with no pre-set time limit, even if the eventual return date to Canada has yet to be decided. “Some may defer, since they might come back,” adds Ball.

“If the person provides guarantees [such as a letter from a bank], they will not pay the tax immediately, but only when the assets that are the subject of the guarantee are actually deemed to be disposed of,” she says. “If the amount of federal tax owing on income from the deemed disposition of property is more than $16,500 ($13,777.50 for former residents of Quebec), you have to provide adequate security to the CRA to cover the amount [see Form T1244].”

“Leaving the country has significant and costly consequences from a taxation standpoint,” reminds Poitras. “However, a CPA can review everything in advance before the tax return is filed. It’s always much cheaper to hire an expert to help you plan than to pay them to fix mistakes.”

Stay updated on taxes

This article includes a general summary of detailed tax rules. Need specific tax advice? Hire a Chartered Professional Accountant (CPA) and get the best working for you. Visit the website of your provincial or regional CPA body to access a CPA directory.

Disclaimer:
Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

US Taxes - Accidental american

U.S. Taxes For Individuals: Accidental Americans

It is becoming more well-known that United States citizens have income tax filing requirements from their home country, regardless of where they reside. However, there are some people who do not know they hold U.S. citizenship.

Are you potentially one of these “accidental Americans”?

What Is An “Accidental American”?

An “accidental American” is someone who has inadvertently acquired U.S. citizenship. This can include people in the following situations:

  • A child is physically born in the United States, even though they may not have remained there.
  • A child born in wedlock that:
  • has two U.S. citizen parents, and at least one parent resided physically in the United States or one of its outlying possessions at the time they were born

or

  • has one U.S. citizen parent and one U.S. national parent (lawful permanent resident, or “green card holder”), and the U.S. citizen parent was physically present in the United States or one of its outlying possessions for at least one continuous year

or

  • has one U.S. citizen parent and one non-U.S. parent, and the U.S. citizen parent was physically present in the United States for at least five years, with at least two of those years being after the parent was 14

Additional rules apply for a child born out of wedlock to U.S. citizen parents, and they have specific requirements depending on what year the child is born and whether it is the father or the mother that is the U.S. citizen.

As it can be complicated to determine whether someone in fact has U.S. citizenship, it will help to discuss your situation with a U.S. immigration lawyer.

Benefits and Responsibilities as a U.S. Citizen

If you are a U.S. citizen, you are eligible to have and travel on a U.S. passport. Among the other benefits are that you can:

  • travel to the United States without a visa
  • vote in U.S. federal elections
  • sponsor family members to move permanently to the United States
  • obtain U.S. citizenship for your children

Generally, you would also have the responsibility to pledge allegiance to the United States and give up allegiances to other countries. However, some countries – notably Canada – have agreements in place with the United States for dual citizenship.

You must also file a U.S. income tax return to report your worldwide income annually, regardless of whether or not you are physically living in the United States. There are mechanisms, such as the foreign earned income exclusion or foreign tax credits, that will reduce or eliminate double taxation on the income reported in both the United States and the country where you physically live.

In addition to the income tax return, you may also be required to file additional information reports. Some of the more common ones include:

  • FinCEN Form 114: Report of Foreign Bank and Financial Accounts (FBAR).
  • This form is required when the maximum value of all financial accounts outside of the United States that you own individually or jointly, or for which you have signing authority, exceeds $10,000 USD in aggregate.
  • Form 5471: Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
  • This form is required when you are a U.S. person with share holdings in a non-U.S. corporation. The required sections of the form are dictated on the share transactions that took place during the calendar year, as well as the percentage of ownership you have by vote or value.
  • Form 8621: Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.
  • This form is required when you are a U.S. person with shareholdings in a non-U.S. corporation that is classified as a Passive Foreign Investment Company. Common examples are non-U.S. mutual funds, exchange traded funds and some real estate investment trusts.

What are your U.S. income tax voluntary disclosure options?

If you find yourself in the situation of being an “accidental American” and are delinquent on your U.S. income tax filings, there are voluntary disclosure programs available. Under these programs, you could be subject to lower civil penalties than the default penalty amounts or, if you qualify for the Streamlined Foreign Offshore Filing Compliance Procedures, you could potentially face no penalties.

The voluntary disclosure program that you qualify for depends on your situation. One determining factor is whether your delinquency was willful (on purpose) or non-willful (not on purpose). If your situation is more on the willful side of the spectrum, it is advisable to go through the voluntary disclosure process with a U.S. tax lawyer to reduce and/or avoid criminal penalties as well as civil penalties.

Do you have to keep your U.S. citizenship?

Even though you may be an “accidental American,” you can choose whether to keep your U.S. citizenship. However, as the renunciation is generally irrevocable – it cannot be reversed – it is not a decision to make lightly. If you are thinking of renouncing, please speak to a professional in the U.S. immigration space so that you avoid any potential issues. The websites below can give you further interpretation, but only a professional immigration counsel can advise on what would apply in your circumstances.

U.S. Citizenship and Immigration Services. Policy Manual. Chapter 3 – U.S. Citizens at Birthhttps://www.uscis.gov/policy-manual/volume-12-part-h-chapter-3

U.S. Citizenship and Immigration Services. What Are the Benefits and Responsibilities of Citizenship?https://www.uscis.gov/sites/default/files/document/guides/chapter2.pdf

U.S. Department of State – Bureau of Consular Affairs. Renunciation of U.S. Nationality Abroadhttps://travel.state.gov/content/travel/en/legal/travel-legal-considerations/us-citizenship/Renunciation-US-Nationality-Abroad.html

Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR) (filing information)https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Canadians US Tax Mistakes

Mistakes Canadians Make With U.S. Taxes

Tax requirements in the United States are quite different than those of other countries around the world. This article will outline some of the common mistakes Canadians make when it comes to U.S. taxes.

Do you recognize yourself in any of these scenarios …?

Not Filing a U.S. Tax Return When Required

The United States is one of the few countries in the world that imposes taxes on citizenship as well as residency and source of income. Other countries typically tax based only on residency and source of income.

If someone is a U.S. citizen or a U.S. green card holder (also known as a U.S. lawful permanent resident), they are required to file a U.S. resident return (Form 1040), even if they are living outside of the U.S. Their worldwide income is reported on Form 1040, and the use of mechanisms such as the foreign earned income exclusion or foreign tax credits will reduce or eliminate double taxation on the income reported in both countries.

Being physically present in the United States can also trigger a U.S. tax filing requirement. The substantial presence test involves a calculation based on the past three years of physical presence in the United States. Generally, each day in the current year counts as a full day, each day in the first previous year counts as one-third of a day, and each day in the year before that counts as one-sixth of a day. If the calculated number of eligible days is 183 or more, then the individual meets the substantial presence test, is considered a U.S. tax resident and must file a U.S. tax return.

Corporations or partnerships may also have U.S. filing requirements if they earn revenues from U.S. sources. Corporations must still file a Form 1120-F with a Treaty-Based Return Position Disclosure (Form 8833) if they are taking a treaty position that their business profits are only taxed in the country where it is permanently established.

Not Filing the Correct Forms

Individuals meeting the U.S. substantial presence test are considered U.S. tax residents and by default would be required to report their worldwide income on a Form 1040 return. However, you can file as a U.S. non-resident and only be subject to U.S. tax on your U.S.-sourced income. If you meet the substantial presence test and are physically present 183 days or more in the current year alone, you must file a Form 1040NR return with a Form 8833 treaty position in order to be treated as a U.S. non-resident for tax purposes.

Alternatively, if you meet the substantial presence test and are physically present less than 183 days in the current year alone, the Closer Connection Exception Statement (Form 8840) may be all that is required, unless you had income from U.S. sources, in which case you should attach the Form 8840 to a Form 1040NR.

It should be noted that the treaty positions do not preclude the individual from other U.S. resident-required tax filings such as the Reporting of Foreign Bank and Financial Accounts form (FBAR).

Not only could there be a U.S. federal tax filing to complete, you may also need to complete various state tax filings. Each state has their own rules on individual filers, as well as different registration and reporting requirements for corporations or partnerships doing business in each particular state.

Corporations or partnerships may also have U.S. payroll reporting, Form 1099 reporting, or Form 1042-S reporting to complete if they have U.S. employees or contractors.

Unknown Exposure to U.S. Estate Taxes

Even though an individual may not be a U.S. citizen or green card holder or meet the U.S. substantial presence test, they may still have assets south of the border that expose them to U.S. estate tax liabilities. If you fit this description, know that the U.S. federal estate tax employs a graduated rate that can reach as high as 40%. There may also be additional state estate taxes.

An obvious way you may have U.S. estate tax exposure would be if you own U.S. real estate. U.S. taxes will apply to the fair market value of this investment.

A perhaps not-so-obvious area of U.S. estate tax exposure would be if you hold securities or stocks of U.S. companies inside a Canadian brokerage account. Canadian mutual funds that hold shares of U.S. companies would not be classified as “U.S. situs property,” but the direct stocks of those companies would. These investments would be subject to U.S. estate taxes on their fair market value, not just on the gain portion of the investments.

U.S. non-residents can take a treaty position to claim a pro-rated unified credit exemption to gain some relief from U.S. estate taxes. This formula consists of U.S. situs property over worldwide assets multiplied by the unified credit exemption limit ($11,580,000 USD for 2020). To rely on this treaty position, you must arrange to have Forms 706-NA and 8833 filed nine months after the date of death of the estate owner (unless an extension was granted), even if no U.S. estate tax is due. Without this treaty position, you are entitled to a credit of $13,000 USD, which exempts $60,000 USD in value of U.S. situs property from your U.S. estate tax obligation.

You Can Correct Your Mistakes

To avoid the large penalties that could be assessed on late or incorrect filings, you can catch up and correct delinquent tax filings without fear of penalties. Voluntary disclosure programs and delinquent filing programs are available through some states and the Internal Revenue Service (IRS). However, you are advised to do so as soon as possible, as it has been mentioned that these programs may not be available in the future.

If you have U.S. estate tax exposure, you can use one or more of these remedies:

  • You could liquidate your U.S. situs property or limit the amount you purchase or gain in future.
  • Utilize a trust structure to hold the U.S. situs property.
  • Secure sufficient life insurance to cover any U.S. estate tax exposure.

Whether you have committed one or more of these common mistakes, forewarned is forearmed when it comes to preventing and correcting them going forward. There may be other U.S. tax implications in your situation not covered here. If you want to be more certain about your situation, talk to a professional who specializes in U.S. taxes.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.