Expatriate Tax Status for Canadians

At some point in their careers, healthcare professionals may consider working abroad. One of the main advantages of working abroad is that many foreign posts offer high paying US dollar positions. And some positions promote themselves as being either in low tax or tax free jurisdictions. Healthcare professionals should be very careful as to what this means. The income tax may be low or nonexistent in the country in which they are going to work, but they must also consider how they will be taxed on this income in Canada.

Canadian Residency and Worldwide Income

Determining what the tax consequences are of moving to another country, either permanently or temporarily, requires some foresight. If an individual severs Canadian residency for tax purposes, a final "departure tax return" should be filed in Canada.

Since many other countries around the world have lower individual income tax rates than Canada, an individual may want to sever Canadian residency in order to be in a situation where they will no longer be taxed on their worldwide income in Canada. It is important that before this decision is made, the individual first determines if they are even in a position to be able to sever their Canadian residency for tax purposes given the facts of their situation.

Determining if you are a resident of Canada for tax purposes depends on your intention at the time you leave Canada. There is no specific time period after which you will be seen to be a non-resident of Canada, so it is important that the steps you take to prove your intention to be a non-resident are followed carefully.

Two examples of the various things that one should do to indicate that one is a non-resident include selling or renting one's house to a third party and selling one's vehicle or taking it to the new country of residence.

Tax Issues Related to Ceasing Canadian Residency for Tax Purposes

If you become a non-resident of Canada for tax purposes, you must file a final departure tax return, which is due April 30 after the year in which you sever your residential ties with Canada. There are various tax implications that could arise in this final return. The most common example is the deemed disposition of certain assets you own, based on their fair market value at the time of your departure. The pro-ration of personal tax credits for your period of residency is another example of many. Apart from the departure tax return, rental properties owned by non-residents have specific filing requirements in Canada on an annual basis. Depending on the procedures you follow to either sell or rent your home, this could continue to be seen as a significant residential tie to Canada, and may hamper your ability to sever residency.

This is just a sample of some of the issues that should be considered on your departure from Canada. It is important that you seek professional advice to ensure that all of your departure tax issues are taken into consideration in your final tax return, and that you take the steps necessary to properly sever your residency from a tax perspective.

Maintaining Canadian Residency

If it is determined that your residency in Canada has been maintained while you are abroad, you will have to file a Canadian tax return on an annual basis reporting your worldwide income, even if this income was earned in another country. In most cases, you will be allowed a foreign tax credit for any foreign taxes already paid on this income, but if the tax rate is lower in the country in which you are working, there will be excess tax payable to Canada. If you do maintain Canadian residency, such as by leaving a spouse and/or dependent children in Canada while you work abroad, or maintaining other residential ties to Canada, you must meet your tax filing requirements in Canada by filing a Canadian resident tax return. If you do not file your tax return, you will likely receive a request at some point from the Canada Revenue Agency requesting that you do file.

Arun (Ernie) Nagratha, CA and Wayne Bewick CA, CFP, are Canadian Chartered Accountants and Tax Advisors. Their firm focuses on international tax for Canadians around the world. Through their affiliation with the Global Tax Network (they are able to offer international tax services to non-resident individuals in various countries throughout the world). For further information on their firm and the services they provide, visit www.trowbridgepc.ca. You can call them at their Toronto office at 416-214-7833 or email Ernie at arun.nagratha@trowbridgepc.ca or Wayne at wayne.bewick@trowbridgepc.ca.

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