Tax considerations and strategies when moving out of Canada

Sarah Widmeyer speaks with Sean Hsu about tax considerations and strategies when moving out of Canada.

We talk about residency and tax obligations and understanding how to use Canadian registered accounts as part of your tax strategies for maximum benefit.

Sarah Widmeyer  0:16

Welcome to Conversations on Wealth, a podcast dedicated to helping Canadians navigate the complexities of wealth with a multi-dimensional approach to planning and wealth management. I’m Sarah Widmeyer, Senior Vice President and Head of Wealth Strategies at Richardson Wealth, and today we’re talking about Canadians who choose to live outside of Canada. Currently, almost 3 million in fact. People decide to leave Canada for a whole pile of different reasons. Some might want to live in a warmer climate, pursue a job, opportunity, volunteer, you name it. Moving can mean great opportunities. But it also comes with important and often costly tax considerations, and it’s something that people really need to plan ahead for. Here to talk with us today about this is my colleague, Sean Hsu. He’s a senior tax specialist and part of our tax and estate planning team here at Richardson Wealth. Welcome to the podcast Sean.


Sean Hsu  1:16

Thank you for having me, Sarah.


Sarah Widmeyer  1:19

This is going to be fun-talking about taxes. Always,


Sean Hsu  1:22

Always fun.


Sarah Widmeyer  1:23

Yeah always!


Sean Hsu  1:23

Yeah, we did another episode.


Sarah Widmeyer  1:24

Always!


Sean Hsu  1:24

And that was fun as well, right?


Sarah Widmeyer  1:26

So much fun. So we’re talking about people who choose to leave Canada, and what that means when it comes to their taxes. And there’s a lot to know, I know, there’s a lot to know. But let’s start with residency, and the difference between those who leave Canada temporarily and those who establish a home outside of Canada permanently. What do those differences mean to your tax obligations?


Sean Hsu  1:52

Yeah, so as you were mentioning earlier, there’s a bunch of reasons why people leave Canada, and sometimes, part of those reasons are financial in nature, costs of living are not low, and Canada has very high income tax rates for individuals. So, the thought of not having to pay that amount of tax can be appealing for–for many, and many of the clients that I talked to–part of the reasons why we leave Canada is partly for tax reasons, so—residency becomes important when we’re thinking about taxes because it does establish the scope to which you’re subject to our tax rules. So if you’re a resident of Canada, then you are subject to Canadian income tax on your worldwide income and assets. But if you’re a non resident, you’re only subject to Canadian tax on Canadian sources of income, not your worldwide income. So just as an example, if, let’s say I have a villa in the south of France–


Sarah Widmeyer  2:53

Oh, I like that.


Sean Hsu  2:54

Yeah, you’d be invited if I had one. Um–


Sarah Widmeyer  2:56

Okay thank you.


Sean Hsu  2:58

If I was, and I rented it out. Um–


Sarah Widmeyer  3:00

Okay. To me.


Sean Hsu  3:01

If I was


Sarah Widmeyer  3:02

(Laughs) sorry


Sean Hsu  3:02

You, you get it, you get it free, you got it for free, you get it for free. Everybody else has to rent. Um, if I was a resident of Canada, that rental income, I would have to report here in Canada, potentially pay tax on it. Because again, as a resident, I’m taxed on my worldwide income and assets. So even though it’s an asset abroad, Canada can tax me on it. But if I’m a non-resident of Canada, Canada cannot tax me on my rental income from my villa. Because it’s not Canadian source income, it’s from a foreign source. So that’s why residency is important from a tax perspective and understanding what your residency status is.


Sarah Widmeyer  3:42

So residency doesn’t mean where you live, does it?


Sean Hsu  3:47

It does for tax purposes. And where I find people get confused a bit about this is residency for tax purposes is not the same as your residency status for immigration purposes.


Sarah Widmeyer  4:00

Okay.


Sean Hsu  4:00

So you could be a Canadian citizen, you can be a Canadian permanent resident, but that does not necessarily automatically make you a resident of Canada for tax purposes. So that’s very different from the United States where they actually say, if you’re a US citizen, if you’re a permanent resident, you have a green card, it doesn’t matter where you live, you are still subject to the full scope of our tax rules. So we have many US citizens here living in Canada, they live here, so they have to worry about Canadian taxes, but simply by holding US citizenship, they also have to worry about all of the US tax rules. So Canada is not like that. So I as a Canadian citizen can decide to move abroad permanently, doesn’t mean I’m not a Canadian citizen anymore, but it would probably mean that I’m not a resident for tax purposes anymore. So that’s where I find people may confuse the definition of residency. So really from a tax perspective residency is looking at where you maintain your residential ties. So the idea is you’re a resident of Canada, if your residential ties are still here in Canada.


Sarah Widmeyer  5:03

And residential ties, meaning


Sean Hsu  5:15

Meaning, so it’s a question of facts, so we’re looking at all the various facts that make up your circumstance with respect to where you keep your ties. So, from the Canadian tax authorities perspective, they categorize residential ties into two different types. So they have significant residential ties, and secondary residential ties, so naturally, the significant residential ties play a heavier role in determining what your residency status is. And so from the Canadian tax authority’s perspective, a significant residential tie to Canada would be still having a home available to you in Canada. If your spouse or common law partner still lives in Canada, that’s a significant residential tie. And if you have dependent children, here in Canada, that’s also a significant residential tie. So a family where one spouse moves abroad, but the rest of the family stays in Canada, the Canadian tax authority could argue that all of your significant residential ties–your spouse, your children, your home, are still here in Canada. So notwithstanding that you’ve–you have moved abroad, you may still be viewed as a resident of Canada, and therefore taxable on your worldwide income. So they placed a heavier emphasis on the significant ties, and then secondary residential ties are all of the other kind of smaller pieces that help build the story of whether or not you have left Canada and become a non resident. So things like maintaining social economic ties, maintaining memberships with Canadian organizations, maintaining a Canadian driver’s license, all of those things can help build a story as to your residency status.


Sarah Widmeyer  6:58

It sounds also very personal.


Sean Hsu  7:01

Exactly. Yeah. It’s a, it’s not very clear cut.


Sarah Widmeyer  7:03

No!


Sean Hsu  7:04

And um, it’s about creating as good of a position as you can depending on what you want. So if your intention is to become a non resident of Canada, for tax purposes, you really have to try to modify your facts and circumstances to make as clean of a break as possible from Canada. So oftentimes, it’s about moving the whole family out of Canada, selling the home in Canada, trying to get rid as many times as possible, if you want to not be subject to Canadian tax on your worldwide income.


Sarah Widmeyer  7:35

Now, is there an exit tax to leave Canada if you don’t maintain Canadian tax residency? Do they hit you while you leave?


Sean Hsu  7:43

They do. Because the idea, again, is once you become a non resident Canada–Canada can’t tax you on everything anymore. So there is an exit tax, we commonly call it a departure tax. So the intent of this tax is to force departing individuals to pay Canadian tax on gains that have accrued on assets that they’ve owned while (a) resident of Canada, because Canada going forward can’t tax them on those assets anymore. So the rules are pretending that you’ve sold certain assets for fair market value proceeds, and you have to report the accrued gains as well as accrued losses, if any, on your tax return and potentially pay tax.


Sarah Widmeyer  7:43

Wow


Sean Hsu  7:43

Yeah, so it doesn’t apply on all assets. So mainly, the assets that are usually of concern are assets at non registered accounts.


Sarah Widmeyer  7:49

Okay.


Sean Hsu  7:51

So if you have a non registered account, each of those investments would be deemed to be disposed of.


Sarah Widmeyer  8:39

Okay.


Sean Hsu  8:39

My villa in France would be subject to the departure tax, because it’s a non Canadian real estate asset.


Sarah Widmeyer  8:46

Really?


Sean Hsu  8:46

Yeah


Sarah Widmeyer  8:46

Wow.


Sean Hsu  8:47

Yeah, interesting, right?


Sarah Widmeyer  8:47

Wow.


Sean Hsu  8:48

Because they can’t tax it going forward, so they can tax the accrued gains while I’m resident. The other big issue we see with our client base is many of our clients are incorporated business owners, they have a private company set up, the shares that they hold in that company are a personal asset, and those shares are also subject to the departure tax. So that’s often the most nasty and complex area when it comes to planning around the departure tax because this corporation continues to exist. And so there can be a lot of nasty tax implications that need to be navigated through when it comes to incorporated business owners that want to leave for a new change of scenery.


Sarah Widmeyer  9:33

Okay.


Sean Hsu  9:33

Yeah.


Sarah Widmeyer  9:34

So, you’ve explained I think quite well, some of the nasty bits of leaving Canada. Are there any planning strategies? Are there things that we can do to help mitigate some of these which feels like very personal tax reaches into our lives?


Sean Hsu  9:50

Yeah, whenever I have conversations with clients about this, I always recommend or have them prepare a net worth statement.


Sarah Widmeyer  9:58

Okay


Sean Hsu  9:59

So take an inventory of what you have, because that really helps your advisors understand what assets you have, and what the degree of exposure to this departure tax could be if you are thinking about leaving Canada, and we always stress the importance of proactive planning, and so this is where it’s very important to do things in advance, don’t have the conversation a few weeks before you pack your bags in and leave, right. And it’s happened a few times. So, so once you have that inventory of assets and understanding what you have what could be subject to the departure tax, then there is an ability to think about planning strategies to try to minimize or mitigate that burden. So strategies would look to try to reduce the amount of accrued gains that would have to be recognized as–as a result of this departure tax, also have to look at funding this liability, how are we going to fund this liability on assets that actually haven’t been sold? Are we going to actually sell assets to try to fund this tax, there is an ability potentially to also file an election with the Canadian tax authority to defer having to pay the departure tax. So sometimes, in circumstances where the departure tax liability is so significant, and they’re based on assets that are less liquid, you can’t really sell them to try to pay this tax, it may make sense to try to file an election with the Canada Revenue Agency, and defer the payment of the tax, and so there’s a whole process with that, that takes time that takes analysis. And so yeah there are ways to plan for the departure tax. And then once you’ve planned for that, then you need to start to consider, well, if I’m going to keep assets in Canada, what are the implications for me going forward, depending on the types of assets that I’m keeping here in Canada?


Sarah Widmeyer  11:54

Right, Sean, I know that at Richardson wealth, we do have services that can help people as they move to the US. Could you talk about that for a moment?


Sean Hsu  12:04

Sure. So one of the issues that investment advisors throughout Canada have is that when their clients move to the US and become US residents, they may not be able to manage non registered assets for them going forward, and that’s just a regulations issue. Now, fortunately, here at Richardson wealth, we have a service offering that can allow our advisors to continue to conduct business and manage relationships with clients who are US residents. So that’s really great because it allows clients to have peace of mind that they can continue their relationship with their investment advisor and their team.


Sarah Widmeyer  12:46

And so let’s say for example, you are moving I know a lot of our friends are thinking about moving south, right? They’re starting to retire. They’re buying property down south. And they’re now starting to think about shifting to I guess, residency in the US. So I have a couple questions. If you were in that situation, and you decided to rent out your Canadian house as opposed to selling it. What should they know? What’s important to remember?


Sean Hsu  13:17

Yeah, so a few things. So Canadian real estate is not subject to the departure tax, because the reason for that is because Canada can continue taxing Canadian real estate even after you’ve left Canada, so they don’t need to charge a departure tax


Sarah Widmeyer  13:31

Okay


Sean Hsu  13:31

on those assets. So we don’t have to worry about departure tax. However, when it comes to Canadian real estate, oftentimes I see with clients, because having a home in Canada, going back to our discussion earlier about significant residential ties, it’s a significant residential tie to Canada. So oftentimes, people when they’re trying to make a position that they’ve left Canada, they will rent out their Canadian home, so they can say, I don’t have a home available to me. So what happens when you rent a home? What would happen is that our tax rules actually create another–a different type of deemed disposition, when you change the use of a property from personal use to rental use. So it’s almost like a departure tax, but it’s not applying because you’ve left Canada, it’s applying because you decided to start renting the property out. So there would be accrued capital gain or loss that would have to be recognized when you start renting the property out. And you could potentially claim your principal residence exemption to help offset any gains that would be recognized. And again, if you start earning rental income, Canada can continue taxing that, and so there’s a whole process of withholding tax continuing to have to file tax returns as part of that compliance. And now that you’ve lived–now you’re living down south, you’re subject presumably to the tax laws of that jurisdiction.


Sarah Widmeyer  14:59

The US


Sean Hsu  15:00

Of the US. And so, as a resident of the US, you would be subject to US tax on your worldwide income, which would include rental income here in Canada. So it’s about integrating all of that into the tax analysis.


Sarah Widmeyer  15:17

You know, it sounds like, I mean, we could talk about this forever, and I’m sure people are very interested in hearing all of this. But, you know, to kind of put a pin in it, it sounds like getting the right advice on the impact of tax laws is critical, not only for here in Canada, but also in the destination jurisdiction. Can you talk about why that’s so critical?


Sean Hsu  15:44

It’s critical, because you have to think about now that you moved to a new jurisdiction, you need to think about all of the rules that apply to the new jurisdiction, and for many of our clients, and many Canadians, they still keep assets, some assets here in Canada, and so those assets will become exposed to some extent to the laws of the new jurisdiction. So from a tax perspective, there’s lots of things to consider. You know, we’re only talking about tax residency here in Canada. But if you’re moving to another country, you need to think about what the tax residency rules are of that foreign jurisdiction. How do you become a resident for tax purposes over there? So oftentimes, the planning when it comes to shifting residency from Canada to another country is to make that transition as seamless as possible, but that requires tax advice in the other jurisdiction, and coordination to make that work. Also, we’re fortunate in that Canada has tax treaties with many countries, I think we have over 90 tax treaties. And those tax treaties can help with some of this cross border planning, it can impact how assets are taxed on a go forward basis. So just as an example, Canadian registered accounts, if I have an RRSP, and I leave Canada, I’m not subject to the departure tax on the value of my RRSP, because again, Canada can continue taxing that even after I’ve left, so they don’t need to charge at the departure tax. But what will happen is if I start making withdrawals from that account as a non resident of Canada, I have to pay withholding tax to Canada on those withdrawals, the withholding rate is usually 25%. But depending on whether or not Canada has a tax treaty with the country that I’ve moved to, that withholding rate could actually be reduced to a lower rate, it’s often 15%. So instead of having to pay 25%, Canadian tax, every time I make a withdrawal, I could potentially only have to pay 15%. And whether or not I pay 25, or 15, it’s still better than having to pay here in Ontario, almost 54% on an RRSP withdrawal if I remained a resident of Ontario. So for many people leaving Canada, that registered account’s–and the ability to draw those funds out in a more–at a lower tax cost is very appealing. So again, the tax treaty can help with that, that requires look, understanding what the laws are, and the agreements between Canada and the other country. And you also just need to understand if you do continue to hold assets, what are the tax implications of continuing to hold assets abroad in the country that you’ve moved to? So if you hold certain investments, are they still tax efficient from a foreign jurisdiction perspective, oftentimes, just as an example, the Tax Free Savings Account works very well here if you’re a Canadian, you live in Canada. But once you move to the US, doesn’t work so well, because the US doesn’t recognize the TFSA as a tax free account. So that may compel you to maybe just close that account before you leave because you don’t want to deal with the tax headaches of having a TFSA as a US resident, so it is important to coordinate with tax and other professional advisors in the country that you’re moving to to understand how everything plays together.


Sarah Widmeyer  19:15

Thank you. It’s almost mind boggling. It certainly points to the fact that you don’t want to navigate these waters without professional advice. Like you just don’t, because it seems like there’s admit some advantages, and it makes me my inside voice says, what’s the catch? But yeah, it certainly points to the importance of working with an advisor and working with tax advisors and estate planning. I mean, let’s talk about estate planning for a minute. So what should someone know about updating their estate plan when they leave Canada and I think, you know, just planting the seed for another podcast could be–you know, what happens if you pass away abroad as a resident of another country?


Sean Hsu  19:56

Yeah.


Sarah Widmeyer  19:57

Because I think that’s a whole (a)nother issue ball of you know, giggles, to talk to talk about that.


Sean Hsu  20:04

I like that term giggles


Sarah Widmeyer  20:05

Right? because you know, now I think you’re subject to different estate laws in different countries.


Sean Hsu  20:10

Yeah. And that’s why you need to review your estate plan if you are thinking about moving abroad, because the recommendation is always to review your estate plan every few years or as life circumstances change. And I would say moving out of Canada, moving to a foreign country is a–important enough change to warrant an estate plan review. Because you’ve done your wills, your powers of attorneys here in Canada, those are all on the basis that you are here living in Canada, you’re going to stay here, you’re going to die here. But now when you’re moving to another country, you may start building assets over there, you may start taking assets out from Canada and move it to the new country. And so it’s important to start thinking about how the estate–or learn about how the succession laws work in the foreign jurisdiction and work with an estate planning lawyer there to help build out an estate plan to make sure that things work the way you want them to, you know, you may not be able to just take your Canadian will and Canadian Power of Attorney to the courts in the country that you’ve moved to and have them accept it. So it’s important to get that advice, and to see whether or not it’s necessary to create new documents, integrate it with any Canadian documents you already have for the Canadian assets that you still hold, so that there are no nasty surprises when it’s the most inconvenient time


Sarah Widmeyer  21:43

Yeah


Sean Hsu  21:43

–to, to happen.


Sarah Widmeyer  21:45

Right. Well, thank you so much for sharing your thoughts and experiences on this important topic with us today. I’d–I’d like to focus on the villa in France and yes, yes, sunny days. Is there anything else you’d like to add before we wrap up?


Sean Hsu  22:12

You mentioned it earlier, and–and that really is just the importance of getting the proper advice from the proper advisors earlier rather than later. This is a big life event with many different moving pieces. Unfortunately, tax is one of them. And so the earlier you get on this, you understand the implications to you, the more time you have to plan and the better you are, you will be with respect to preserving the wealth that you’ve accumulated while a resident of Canada.


Sarah Widmeyer  22:48

Okay. I’d like to thank Sean Hsu for joining us today and sharing his expertise on this important topic. I think we’ve learned that if you’re considering a move out of Canada, starting the process as early as possible is so important when it comes to understanding how taxes will affect your transition. And of course working with a skilled tax and state planning team and getting the right advice on ways to reduce or defer your tax obligations and stay on track with your financial plan couldn’t be more important. If you have any questions about your taxes, reach out to your advisor. Conversations on Wealth is available wherever you get your podcasts. Remember to follow us on LinkedIn, Twitter or Facebook for the latest on wealth strategies. Thank you all for listening. And join me again next time!

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