As more Canadians embrace location independence, it’s crucial to understand the tax implications that come with living and working abroad. This article outlines how Canada’s tax system applies to both residents and non-residents, and what you need to know before cutting ties with the country.
Understanding Canadian Tax Residency
Canada follows a residential taxation system. This means:
- Tax residents must report and pay taxes on their worldwide income.
- Non-residents are taxed only on income that is sourced within Canada.
Domicile-Based Determination
Unlike many countries, Canada uses domicile-based criteria to determine tax residency. This is assessed through what the Canada Revenue Agency (CRA) refers to as “significant ties.”
- If your domicile is in Canada, you’re generally a factual resident for tax purposes—even if you spend less than 183 days in the country.
- Ties include having a home, vehicle, family, job or business, memberships, and similar connections.
You may qualify as a non-resident if:
- You’ve severed most or all Canadian ties.
- You spend fewer than 183 days in Canada per fiscal year.
- You’re a tax resident in another country under a tax treaty with Canada.
Tax Obligations for Canadian Residents
If you’re considered a Canadian tax resident:
- Federal tax rates range from 15% to 33%.
- Capital gains are taxed at 50% of their value.
- Self-employment and partnership income is taxed as regular income.
- Contributions to CPP or QPP may apply (~12%).
- Provincial taxes vary widely (4% in Nunavut to 25.75% in Quebec).
Example: A self-employed individual in Ontario earning $80,000 could owe approximately $21,700 in total taxes. In Quebec, that amount may increase to around $26,000.
Planning to Leave Canada
Relocating from Canada for tax purposes can reduce or eliminate personal taxation, but the process is complex.
Step 1: Preparation
- Choose a new country of residence. This will become your new tax home.
- Close unnecessary Canadian accounts and settle debts.
- Consider selling your stake in Canadian private corporations to utilize the lifetime capital gains exemption.
- Cancel local memberships and sever ties.
- Obtain the appropriate visa or residency permit in your new country.
Step 2: The Move
- Open new bank accounts and apply for local financial services.
- Arrange private health insurance and a new phone number.
- File your final Canadian tax return after your departure fiscal year ends.
- Report all income earned up to the departure date.
- Complete Form T1161 (for qualifying assets over CAD 25,000) and Form T2061 (for capital gains).
- Avoid filing Form NR73, as it’s not mandatory and could trigger a CRA review.
Step 3: Maintaining Non-Resident Status
- Ensure you remain compliant with both Canadian and foreign tax laws.
- Monitor any Canadian-source income and fulfill reporting obligations.
Non-Resident Taxation
As a non-resident:
- No Canadian taxes are owed if you have no Canadian-source income.
- Canadian-source income is still taxable and includes:
- Work performed in Canada.
- Rental income from Canadian properties.
- Income from Canadian investments.
Employment Income
- Work performed outside Canada: Not taxed in Canada.
- Work performed inside Canada: Taxable and requires filing a return.
Rental Income
- A withholding agent must remit taxes (typically 25%) to CRA.
- Withholding is applied after deducting eligible expenses and depreciation.
Passive Income
- Income from dividends, interest, etc., may be subject to withholding tax.
- Tax treaty rates vary. For example, UK residents may only pay 15% on dividends instead of 25%.
Business Ownership and Taxation
For Canadian tax residents operating businesses:
- Sole proprietors report income on their personal tax returns.
- LLPs and LPs offer liability protection with pass-through taxation.
- Corporations are taxed separately.
Corporate Tax Rates
- Canadian-Controlled Private Corporations (CCPCs):
- 9% federal on the first CAD 500,000 in profits.
- 15% federal beyond that.
- Provincial rates vary (Ontario: 3.2% on the first 500k, 11.5% beyond).
Paying Yourself from a Corporation
- Dividends: Taxed personally, credit for corporate tax paid.
- Salaries: Count towards RRSP room; subject to CPP/QPP.
- Other methods: Loans, royalties, or interest payments.
Options for Non-Resident Entrepreneurs
If you’re not a Canadian tax resident:
- You can form pass-through entities such as Ontario LPs or BC LLPs.
- These are ideal alternatives to US LLCs or UK LLPs.
You may also establish a Canadian corporation, but only in provinces that allow non-resident ownership. These businesses will not qualify for CCPC tax benefits.
Note: Tax residency and compliance can be complex and subject to change. Always consult a tax professional before making decisions.
For tailored guidance on relocating, managing tax liabilities, or setting up a compliant structure, reach out to The Tax Pro for professional assistance.