What tax matters are important when emigrating from Canada?
When you take up residence in another country, have you obtained advice on tax matters both on departure and on any risks of having continuing connections with your former residence?
While it is possible with proper planning to minimize tax on expatriation to another country, it is equally important to reduce exposure to the risk of continued residence-based taxation in the former country.
When my client Michael told me he was planning to leave Canada and needed tax advice, I prepared to give him some advice he was not expecting. He had heard from some friends that they had emigrated to The Bahamas because there is no income or estate tax there. But Michael’s wife was pushing him to go to England where their teenage children might get a superior education.
He was surprised to find out that on leaving Canada he will be deemed to have disposed of all of his assets, subject to certain exceptions, for proceeds of disposition equal to the then fair market value of each such asset, resulting in capital gains tax (at a rate of 25%, effectively). Some have called this Canadian rule, “Golden handcuffs”. Several other countries have adopted similar departure taxes, including Spain and South Africa.
When Michael explained that he wanted to support the arts from his new home, I suggested a plan that could accomplish his goal and save tax on departure. I suggested we register a private charitable foundation with the Canada Revenue Agency, which he could run from his new home.
The object of this charity to support the arts was one that the CRA has found acceptable in the past. He could then make a tax-free gift of his publicly-listed securities to this foundation, which would reduce the value of his assets on departure. He would also be entitled to a donation tax credit based on the value of the donated securities, which in turn could be used to shelter taxable income for his year of departure.
While he liked the idea of going to The Bahamas and not to have to worry about paying local income tax or estate tax, I explained that he should not forget about his connections with Canada and the special risks associated with those continuing connections. When Michael said that he liked the summers in Canada and so would retain his cottage here, I cautioned him about his Canadian tax exposure.
The Income Tax Act (Canada) (the “ITA”) would deem Michael to be a resident of Canada if he sojourned in Canada for more than 183 days in any year, even though he may have acquired a residence for tax purposes elsewhere.
Under Canada’s tax treaties with ninety-four other jurisdictions, including the U.K. but not with The Bahamas, 1 there is a set of “tie-breaker rules” to determine if a person is a dual-resident, and which jurisdiction has the right to tax him/her on worldwide income on the basis of his/her having the closer connection with that jurisdiction.
In addition, I explained that the courts have broadly interpreted the rule in the ITA that a reference to a person resident in Canada includes a person who was at the relevant time ordinarily resident in Canada. In other words, the question is where the person in his/her settled routine of life regularly, normally or customarily lives.
One must consider the degree to which the person in mind and fact settles into, maintains, or centralizes his/her ordinary mode of living, with its accessories in social relations, interests and conveniences, at or in the place in question.
I told Michael that if he keeps the cottage in Canada and habitually returns to it from a non-treaty jurisdiction like The Bahamas, he is likely to be found to be a resident of Canada. In contrast, if he lives in England and maintains his “centre of vital interests” there and not in Canada, he is likely not to be found to be a resident of Canada under the Canada-U.K. Income Tax Convention.
In the end, Michael moved to England; we set up the foundation; and he uses the liquid funds in the charity to support the arts in Canada and elsewhere. https://www.grllp.com
- As Canada considers The Bahamas to be a tax haven, it does not have a double tax treaty with that country, but it does have a Tax Information Agreement that provides for tax information to be exchanged between The Bahamas and Canada.
In addition, the Agreement provides that a Canadian multinational with a subsidiary that carries on an active business, such as a hotel, in The Bahamas, is able to repatriate profits by way of tax-free dividends.
However, the Agreement does not provide Bahamian individuals with relief in the area of exposure to Canadian tax residence.