Nefesh BNefesh

Guest Contributor: Prof. Jerome Pollock FCA

Note: This information is of general application only. An individual may have special circumstances, which have not been covered by this article. In such event, please refer to a Canadian CA or an Israeli CPA who is familiar with the Canadian and Israeli Income Tax Acts and the Canada/Israel Double Tax Avoidance Agreement.

Date of Emigration for Tax Purposes

Your date of Aliyah as set out in your Teudat Oleh, Teudat Zehut, citizenship documents or passport may not be the applicable date for tax purposes. Even the date on which you actually arrived in Israel is not the applicable date. For all tax matters, the applicable date is the date you ceased to be a resident of Canada and became a resident of Israel.

How do you establish proof that your residency has moved to Israel and is no longer in Canada? Buying or renting an apartment or home in Israel is not sufficient. Rather, you must discontinue having a residence available for you in Canada. This means that you do not have a place in Canada in which you have furniture, clothing, personal effects, etc. Generally, this results from selling your home or renting it out for a period of at least two years. Selling your home is defined as the date when the house is no longer available to you; this is usually the date when the sale is closed. Note that the sale of your principal residence is generally not subject to capital gains tax.

In the event that you have homes in both countries, you will be deemed to be a resident of the country with which you have the closest economic relations, which is called your center of vital interests. This will be determined by where you have investments, an occupation, banking, a business or other sources of income. For most Olim, this will likely be Canada, so the key factor in determining the effective date for tax purposes is the date when you cease to have a residence in Canada.

There tends to be confusion about other matters that might influence the determination of your country of residence. In principle, anything that you could use or take advantage of only when spending time in Canada, infers that you remain a resident of Canada. This would include, for example, memberships at golf clubs, tennis clubs, service clubs, health clubs, etc.

On the other hand, matters which you wish to retain for various reasons, independent of any need to be located in Canada, do not limit your change of residency. This includes professional society memberships, synagogue membership, etc. You may retain your driving license, although you will need to use an address of a friend or relative.

To assist you in this matter, Canada provides a questionnaire which you can complete in order to obtain a ruling. The date of change of residence determines when your treatment for tax purposes changes.

When You Cease to be a Resident of Canada

When you leave Canada, you are required to take care of the following responsibilities: You must notify all sources in Canada that make payments to you. These include Canada Pension, Canada OAS, Quebec Pension, Banks, Trust Companies, Child Tax Benefit, other sources of pensions, brokers and other sources of investment, etc. For each of these, you must indicate that you are moving to Israel and that it is a Treaty Country, and that the Non-Resident withholding rate is 15%. (For non-treaty countries it is 25%.) If you do not make such notification and they continue to make payments without withholding, you will be personally responsible for making the payments that were missed. The 15% rate applies to all periodic payments. Lump sum payments are subject to a 25% withholding. These include single payments from, for example, a separation or retiring allowance, a lump sum taken from your RRSP, RRIF, etc.

It is possible to take a 10% reducing balance amount from your RRSP at 15%, but this requires a special procedure for which you should refer to your CA.

An important exemption to the 15% withholding rate involves interest payments. Effective January 1, 2008, the withholding was cancelled for interest received from any source in which you do not have an interest (known as that which you deal with at “arms’ length.”

You must file a Canadian tax return for the part year in which you leave, covering the period from January 1st to your date of departure. In this return, on the front page, there is a line to indicate your date of departure, which is sufficient notice to the Canadian Tax Authorities. The Canada Revenue Agency (CRA) has a guide T-4056 which sets out the requirements to deal with preparing your tax return for the year you leave Canada. It is best to have a qualified accountant prepare this final return, as there are many issues involved.

One important matter, involved in the tax return for your year of departure, is that you have to declare a deemed disposition of certain types of assets that you own in Canada. The concept of this is that you should pay capital gains tax on assets you own, which would be subject to capital gains tax if you sold them. This covers the increase in market value of those assets from the date you acquired them (starting with December 31, 1971) until the date you cease to be a Canadian resident. You have to pay the tax even though no actual sale took place. There are many assets that are exempt and the payment may be deferred by providing collateral. The CRA provides guidelines, but this is best left to a qualified accountant. However, it is important that you are aware of this requirement.

You may continue using your Canadian bank account, but you should give the bank your Israeli address. You can continue to have all payments made to you from Canadian sources deposited to your Canadian bank account. You can then transfer amounts to Israel as you require.

You maintain all your rights to receive Canada Old Age Assistance and Canada and Quebec Pensions.