Thank you to Chaim Wigoda for preparing this article.
So you have decided to live outside of Canada. Before you make your final plans, there are several financial factors that you should consider.
Generally, the Canada Revenue Agency (CRA) considers a non-resident to be someone who moves out of Canada without contemplating coming back. For your move to be considered permanent, you should be establishing ties outside of Canada. Visits to Canada should be short and for infrequent periods of time and should not be routine. Other facts that indicate non-residency include:
- Ceasing to maintain a home
- Canceling your credit cards and club memberships
- Canceling your medical plans
- Your spouse and dependants have also moved
- Closing your Canadian bank accounts or putting them on non-resident status
- Canceling your Canadian driver’s license and plate
- Changing your mailing address for all correspondence
- Leaving Canada with your personal property such as furniture or cars
- Moving your business outside of Canada.
It is important to note that under Canadian law everyone must be tax resident somewhere. A Canadian who claims to have given up his Canadian residence but cannot prove residence in another country for tax purposes will likely to be deemed to have retained his Canadian residence.
Once you have established that you are a non-resident of Canada, you will still be subject to Canadian tax only if you:
- Dispose of Canadian Taxable Property (TCP) such as real estate
- Receive a Canadian corporate dividend or certain interest income
- Receive rental income from Canadian properties
- Are employed or perform services in Canada
- Carry on doing business in Canada
One of the main considerations for a person leaving Canada is the deemed disposition tax or departure tax. As of the date of departure, the CRA considers you to have sold your assets (deemed to have disposed of all assets). The deemed disposition tax is an attempt by the CRA to tax the appreciated value of your capital property that grew in value during your residency.
Under the departure tax, all of your capital assets are deemed sold at a fair market value (“FMV”) which is determined immediately before ceasing residency and on which capital gains tax is payable except for certain assets (like most life insurance policies, RRSPs and RRIFs) and Taxable Canadian Property (TCP). TCP includes real or immovable property situated in Canada, property used or held by the taxpayer in a business carried on in Canada and a share of the capital stock of a corporation resident in Canada that is not listed on a prescribed stock exchange.
Simply stated, gains on marketable securities are generally deemed to be disposed of and consequently taxed in your year of departure.
Being deemed to dispose property will result in an immediate tax liability on the resulting income or gains. One either pays the resulting tax or elects to defer the payment of the tax until actual disposition by depositing security with the government. You will not have to post security for the first $100,000 of deemed disposition tax, and the tax will only be due when the assets are sold.
What happens when the property owned declines in value after emigration? For certain property, like TCP (most notably, Canadian private company shares or most real estate), individuals may be able to apply the actual losses realized on the sale against the deemed gain on emigration.
Also, if an individual returns to Canada. within five years of departure, he or she can generally unwind the deemed disposition on departure for property that is still owned by making special elections.
If you are an active or retired partner of a professional partnership and you are leaving Canada, the CRA will continue to tax any income allocated to you from the partnership. There are many other implications to leaving as a partner (retired or active) of a professional partnership and professional advice should be obtained.
Many steps can be taken to reduce and sometimes eliminate departure taxes. Proper planning before you leave is critical for wealth preservation.
One of the easiest ways to reduce departure taxes is by using the capital gains exemption. That is, in 2016, every individual is entitled to receive an $824,176 capital gains exemption on gains from disposing qualified small business shares or farm property. This exemption amount is indexed to inflation. As a non-resident, you cannot use the capital gains exemption. To the extent that you have not used the capital gains exemption, you should consider taking steps to “crystallize” your gains before you emigrate.
For example, if at the time of your departure, you have shares of a qualified small business corporation with a FMV of $750,000 and a nominal adjusted cost base, you could be subject to $174,000 of taxes when you leave Canada (taxes will vary depending on the province in which you reside). By using the capital gains exemption, you will not be subject to Canadian taxes upon departure, and Canadian taxes will only apply to the increase from the FMV at time of departure to the value when you eventually dispose of the shares.
As mentioned above, your RRSPs are not subject to the deemed disposition rules. If you have contribution room, you can continue to make contributions to your RRSP but only enjoy the tax deductibility of these contributions if you have Canadian taxable income.
As a non-resident, you could be subject to a maximum withholding tax of 25% on all withdrawals from your RRSP. In some cases, payments from your RRSP or any Canadian pension plan can be subject to a reduced withholding tax.
If you withdrew funds from your RRSP under the Home Buyers’ Plan or Lifelong Learning Plan, you have up to 60 days of becoming a non-resident to repay the entire withdrawal. Any portion not paid within the 60 days will be included in your Canadian taxable income for your last year as a resident.
When leaving Canada, it is likely that the need for insurance on your estate will remain. Although the purpose of the policy may change over time, there is usually a role for life insurance in estate planning. And the good news with respect to life insurance policies is that leaving Canada generally does not trigger a tax event.
Life insurance plays many roles in estate planning and is likely to be among the assets held when you leave Canada. For example, life insurance could be purchased to fund:
- capital gains tax
- estate equalization planning
- emergency expenses or for children/grandchildren
- pay for final expenses such as funeral costs
- a buy/sell agreement
- wealth used in departure tax payments in the estate
- investments funds that grow on a tax-sheltered basis
There are many different types of life insurance policies available in Canada. For example: Yearly Renewable Term, Term-100, Whole Life and Universal Life policies. The latter three are often referred to as “Permanent Insurance” policies. The specific needs you have will determine the kind of insurance policy you require.
In Canada, insurance proceeds received on the death of the life insured are generally not taxable. Similarly, the premiums you pay for your life insurance are typically not tax deductible. It is important to review the laws and tax treatment of life insurance proceeds of your new country. Sometimes careful planning before you emigrate is required to preserve the tax free nature of life insurance proceeds.
If you own property with a total value of $25,000 or more, when you leave you are required to file an information form (TlI61). On the form, you are required to list all your significant assets with your final Canadian tax return, which is completed for the year of emigration. The following assets are not included in the calculation:
- Personal use items with a value of less than $10,000
- Cash, bank deposits
- RRSPs, RRIFs, retirement compensation arrangements (RCA), private company pension plans (RPPs), employee benefit plans and deferred profit sharing plans (DPSPs)
It is important to remember that once you become a non-resident of Canada, you will not qualify to buy Canadian life insurance products. Canadian Life insurance products are known to be among the most competitively priced and flexible policies available.
Also, the availability of many Canadian structures will not be available outside of Canada. For example, Israel does not offer the permanent insurance policies that are offered throughout Canada.
Typically for Canadian residents, there is no income tax levied on the gain from selling their home, or what is more technically referred to as your ‘principal residence’. So if you leave Canada and sell your home before you leave, there should be no tax on any gains from the sale.
However, what happens if you leave Canada and don’t sell your home? Your home, and generally all Canadian real estate, is considered TCP. As mentioned above, real property ( TCP) that you own will not be subject to the deemed disposition rules when you emigrate – that means that leaving Canada will not trigger a tax event with respect to your principal residence.
In some cases, emigrants will keep their homes and rent them out. The CRA will tax you on your gross rental income (generally subject to a 25% non-resident withholding tax), unless you file form NR6 before your first non-resident tax payment is due. By filing the NR6 form, the withholding tax will be assessed on your net rental income. This will allow you to reduce the amount subject to withholding taxes and reflect the expenses you incurred to generate the rental income. If you file the form, you will be required to file an annual rental income tax return by June 30.
In such a case, what happens if after several years of becoming a non-resident, you decide to sell what was your Canadian home? Only a portion of the gain would be exempt under the principal residence exemption. The portion considered a principal residence is based on the following formula:
1+ #yrs the property was your principal residence
total # years you owned the property
Bear in mind that by renting out what was your Canadian home after you emigrate, you will be likely changing the use of the property from a principal residence (personal use) to an income producing property. Any gains after the change would be subject to capital gains tax.
Only the number of taxation years ending after 1971 during which you are a resident of Canada are counted in the numerator. Only the years after 1971 that the property was owned by you are included in the denominator.
Furthermore, you must notify the CRA of the disposition to obtain a clearance certificate. Without a clearance certificate, the purchaser is required to withhold one-quarter of the gross proceeds for the CRA. To obtain the clearance certificate, you should file the CRA’s Form T2062 at least 30 days before the property is sold or within 10 days of the sale. If your home was in Quebec, additional filings must be made to Revenue Quebec to avoid potential additional provincial taxes.
Ceasing to become a Canadian resident and becoming an Israeli resident will often provide for special tax advantageous.
On May 25, 2008 a press release from the Ministries of Finance and Absorption clarified a new law that provided for a 10 year tax holiday on both active and passive income earned outside of Israel for qualified Olim.
Qualified Olim are “New Immigrants” and “Long Absent Returning Residents” who became residents of Israel after December 31, 2006. A Long-Absent Returning Resident is an individual who was considered a foreign resident for a period of at least 10 years.
It is important to note that only income earned outside of Israel is exempt from Israeli taxes. Many new immigrants have improperly applied the 10 year Israeli tax holiday – to find that after being audited, the Israeli Tax Authority levied not only back-taxes, but interest and penalties.
The good news is that Israel does not tax its residents for gifts of cash they receive in their lifetime. And there is no limit to the amount.
However, there can be issues of mismatched taxation on gifts in kind – that is, some assets are exempt from capital gains tax in one country and are not exempt in the other country. For example, if an Israeli resident inherits the home of a Canadian resident, the estate of the deceased Canadian resident generally would not be taxed on gain of the sale of the principle residence. However, the Israeli resident would be taxed on the gain.
It may be possible to avoid mismatched taxation depending on the facts of your case.
Foreign Settled Trusts – Inheritances – The New Law
On July 30, 2013, the Knesset (i.e., the Israeli Parliament), approved a new bill which is referred to as the Law for the Change of National Priorities (“the New Law”). The Bill includes, inter alia, radical amendments in the taxation of trusts in Israel. The effective date of all of the provisions of the New Law listed above is January 1, 2014 (“Commencement Day”).
In general, when making Aliyah or even if you have been in Israel for years, careful tax planning and a well-thought out exit plan will ensure that a lot more of your hard earned money stays in your pocket.
Beginning from Commencement Day, virtually all trusts with an Israeli resident beneficiary will be required to either register with the ITA, or pay taxes to the ITA, or do both. Even if there is one Israeli resident beneficiary among many other non-Israeli resident beneficiaries, the trust will be effected.
Chaim Wigoda is the Managing Director of HCC International Services Ltd., an Israeli corporation that specializes in international tax and financial planning for olim – email@example.com