December 2001 volume 5, issue 3 

by Brian M. Kehoe, CA

If you are considering retirement and taking up permanent residence in a country other than Canada, planning for the tax consequences of your relocation should be a top priority. It is common that assets are sold prior to leaving and specific tax rules are triggered on the date of emigration so you should begin the planning process at least a year before you actually emigrate. There are also tax implications unique to each country that should be investigated. These research enquiries can often take weeks, or even months to complete. In the year of departure a taxpayer is required to file a final tax return reporting all your worldwide income from January 1 to the date of departure including the tax implications which are discussed below.

The most significant rule is that a taxpayer is deemed to dispose of virtually all of the capital property at fair market value at the date the taxpayer becomes non-resident. These capital properties include assets such as: cars, recreational vehicles, boats, bonds, shares in public companies, common and preferred shares of private companies, and real estate owned in other countries. A short list of assets excluded from this general rule include real estate held in Canada and stock options. The value of RRSPs, RRIFs, DPSPs, and pension benefits are not subject to deemed disposition rules and can still be held by a taxpayer as a non-resident. If you are unwilling to dispose of the capital property which is subject to the deemed disposition rules or feel the timing is inappropriate, you can post acceptable security with the Canada Customs and Revenue Agency (CCRA) and defer paying tax until you sell the assets.

In general, you can reduce your tax liability when leaving Canada by following four strategies:

1. Contribute the maximum amount permitted in your RRSP in the year you emigrate (and no later than February 28th of the following year).
   
2. Sell your principal residence so that the purchaser will not have to withhold taxes on profits from the sale.
   
3. Use up your Alternative Minimum Tax credits.
   
4. Consider the timing of your move to attempt to use marginal tax rates and earn income in the lower tax country.

While living outside Canada, you may be required to file a Canadian tax return. In particular you will be required to report the disposition of Canadian real estate and stock options in the year of actual sale. As a non-resident, the CCRA will permit you a reduced number of tax credits and deductions compared to what is available to a Canadian resident. If you work in Canada or earn income from a business in Canada, you will be required to pay Canadian tax. If you received pension and retirement income from Canadian sources while a non-resident, the CCRA may apply withholding taxes up to twenty-five percent of the value of that income. The amount of actual withholding taxes depends on the treaty arrangements (if any exist) that Canada has with the country you plan to reside in.

Make your emigration from Canada as worry-free and as tax-free as possible. Seek the advice of a Chartered Accountant or tax specialist to assist you with your tax planning. If you proceed methodically with the development and implementation of a properly planned non-resident tax strategy, you can enjoy significant peace of mind and substantial tax savings.

For more information on the tax planning required to establish residency in a foreign country, please call your Client Services Partner at Wilkinson & Company LLP.

Brian Kehoe , CA, is a member of the Wilkinson Tax Group and completed the CICA In-Depth Tax Course in 1988. Brian has an area-wide reputation for developing creative methods of saving tax dollars for our clients through effective tax planning. As taxation rules become more complex, he offers indispensable support in dealing with Canadian and foreign taxation authorities.