Canada is an attractive country consistently ranking as a premium destination for immigrants. Many individuals move to Canada either for employment purpose, or to settle here permanently. As much as we love our welcoming and diverse Canada, many newcomers and immigrants find it challenging to stay here in the long run. Long and cold winters and higher taxes can play a significant role for many to consider relocation.
This article is for informational purposes only. Readers must exercise caution while relying solely on this reading. Departure tax issues are complex and require a proper tax planning, therefore, this article is not a tax advice of any kind.
Canada taxes its residents on their worldwide income. When an individual becomes a resident of Canada by immigration or leaves Canada as an emigrant, there are specific income tax rules. Please note that immigration residency and tax residency are two different concepts.
It is very common for an employer to request an individual to come to Canada for employment purposes and as a result that individual becomes a resident of Canada. As a resident of Canada that individual is subject to Canadian income tax on his/her worldwide income.
What happens if an individual leaves Canada and becomes a Non-Resident? Should he be subject to departure tax as applicable for emigrants?
Individuals who move to Canada for a short-term or temporary basis are called Short-term residents of Canada. The short-term resident is a term that is generally used for income tax purposes despite the fact that it is not defined in the Income Tax Act. The term also does not literally mean the short-term.
How long is the Short-Term?
This short-term is decently long!
Income Tax Act (ITA) subparagraph 128.1(4)(b)(iv) provides certain exemptions from departure tax for a taxpayer who is a resident of Canada for not more than 60 months in the past 120 months.
In other words, just check if a taxpayer has had Canadian residency under five years in past 10 years, they may qualify for these exemptions. However, please note that the ITA uses the ‘months’ not the ‘years”, use of the term years here is just for perspective purposes.
Reliefs Available to Short-term Residents in Canada for Income tax purposes
There are two important areas where short-term residents of Canada are provided relief which are not available to tax residents otherwise.
- Relief from Departure Tax
- Relief from rules related to foreign pension plans
Relief from Departure Tax to short-term residents of Canada
Usually, emigrants, individuals leaving Canada, are subject to departure tax on the deemed disposition of their assets (subject to certain exceptions). Short-term residents are provided with some relief here.
Short-term resident is an individual who is a resident of Canada for not more than 60 months in the 120 months preceding the month of departure.
- Short-term resident of Canada is not subject to departure tax on the property which (s)he owned before becoming a resident of Canada.
- If a short-term acquired property as a result of inheritance or by bequest, such a property is not subject to departure tax on the deemed disposition of this property.
These so-called short-term residents need to watch for their assets and portfolios carefully! For example, if a portfolio keeps on reinvesting the distributions, the assets acquired during this residency period as a result of this dividend or distribution reinvestment are not exempt from departure tax. International employees must watch for their employee stock options (ESO). If these stock options are exercised the acquired shares are also not exempt.
Relief from rules related to participation in foreign pension plans
There are rules related to foreign pension plan participation for residents of Canada. Short-term residents of Canada are provided some relief from these strict rules. If an individual moves to Canada at the request of an employer, (s)he can keep on contributing to the foreign pension plan of the former employer for which (s)he is a member of – for the first five years. This is applicable for only the first five years and such an individual must consider and plan properly to avoid Canadian taxes on employer’s contributions to such a plan.
Whether you are a newcomer, short-term resident, an emigrant or a Non-Resident; navigating the maze of tax laws and rules is often confusing. It is always recommended to seek professional tax advice from a professional tax accountant in Canada to determine your Canadian income tax filing requirements.