Canadian individuals and corporations pay income taxes based on their world-wide income. They are protected against double taxation through the foreign tax credit, which allows taxpayers to deduct from their Canadian income tax otherwise payable from the income tax paid in other countries. A citizen who is currently not a resident of Canada may petition the CRA to change his status so that income from outside Canada is not taxed.
Whether a Canadian citizen is liable for tax in Canada whilst living overseas is largely determined by residence. Unlike their close neighbours in the US, Canadian citizens can avoid paying Canadian taxes whilst living overseas, but only provided they follow fairly strict guidelines. In order to shed the tax obligation, it is necessary to shed residence. Essentially the Canadian Revenue Authority (the CRA) has a number of ‘tests’ that they use to determine residency. In short, Canadian citizens need to sell all their assets, close account and act as if they do not plan to return. The CRA has a form NR73 which can be completed and filed to claim non-residency whilst overseas, but a number of Canadian tax lawyers have advised that it is better not to do so. They state that submitting the form gives the CRA the opportunity to deny non-resident status and leaves an individual open to additional scrutiny. There is no legal requirement to complete it.
The CRA has issued a document entitled IT-221R3 Determination of an Individual’s Residence Status, which is a comprehensive guide. It is available online. Much of the information is open to interpretation as the term ‘resident’ in this context at least, is not defined by the Income Tax Act. There are however, several major and minor factors that CRA will take into account when determining residency status, including ownership of property and other assets, where your immediate family resides, social and economic ties and business connections.
Moving out of Canada does not necessarily mean an end to tax obligations within the country. Queries should be referred to the Canada Revenue Agency and seek professional assistance if questions remain.
Canadian citizens are considered non-resident for tax purposes if they
- normally, customarily, or routinely live in another country and are not considered a resident of Canada; or
- do not haveresidential ties in Canada; and
- live outside Canada throughout the tax year; or
- Stay in Canada for less than 183 days in the tax year.
Different rules apply for government employees, members of the Canadian Forces or their overseas school staff, or those working under a Canadian International Development Agency (CIDA) program.
Pension legislation is complex and specific advice should be taken.
The Old Age Security (OAS) is a monthly social security payment paid to most Canadian aged 65 or over, but is mean-tested so the higher a person’s declared income, the less they receive. A person must have resided in Canada for at least 10 years to be eligible to receive the OAS.
Whilst resident in Canada, all residents who are employed contribute to the Canada Pension Plan (CPP), an additional state run pension scheme. The only exception are those living Quebec as this province opted out of the scheme, but runs its own plan on a broadly similar basis. It is not possible to make contributions to the CPP whilst living overseas.
Canada Pension Plan (CPP) and Old Age Security (OAS) pensioners may receive benefits whilst living overseas and since 2004 have been able to receive payments in currencies other than Canadian Dollars. As yet, UAE Dirhams is not on the list, but payments can be paid in US Dollars in order to minimise currency fluctuations.
Registered Retirement Savings Plans, or RRSPs, are authorised personal pension plans with tax benefits, available for individuals, spouses and for employer sponsored groups. Contributions, up to an annual limit are tax relievable each year. Benefits must be accessed by age 71.
Canadians abroad are only eligible to make RRSP contributions if they have no yet declared non-residency status. Monies in an RRSP can be withdrawn prior to retirement. As a resident you pay withholding tax of 10%, 20% or 30% depending on the amount withdrawn, with 30% tax being charged on amounts in excess of CAD 30,000. If you are non-resident when funds are withdrawn, the tax charge is a flat 25% under Part X111 rules.
Canadian nationals may open bank accounts anywhere that they wish and whilst it is practical and indeed necessary to have a Dirham account, many will want an offshore bank account. In most cases these are subsidiaries of international banks with offices in one of the major offshore jurisdictions such as the Channel Islands or Isle of Man. Advantages include payment of gross interest and the ability to time the repatriation of funds in a tax efficient manner.
For Canadian living abroad and wanting to retain non-resident status investments in Canada are best avoided as there would be tax liabilities on growth or income. Existing RRSPs can be retained, but no new funds can be contributed to these plans.
There are a number of well known insurance companies who have offshore divisions and these offer a range of plans to suit most circumstances, both for regular payments and lump sums. Generally these providers offer access to several hundred funds for each plan, many managed by well known international fund managers, so suitable portfolios can be constructed in accordance with an individual’s personal attitude to risk, preferences and timescale. It is also possible to invest locally, but as assets in the UAE may be subject to Sharia law this may not suit all.
Many people have life assurance policies that they took out whilst resident in Canada, but in a few cases these become invalid after moving overseas, especially if the policy includes critical illness cover. Plans that were taken out after knowing there would be a move overseas are also invalid. It is often worth double checking to ensure that plans are valid.
Once you are non-resident it is not possible to take out Canadian life assurance policies, but offshore providers offer a range of policies to suit most circumstances, including term assurances, whole of life plans and critical illness cover.
All residents should have suitable medical insurance to cover them whilst abroad, but many people do not realise that once they move overseas they are not eligible for free treatment by Medicare. Under the Canada Health Act, legal and permanent residents of Canada are entitled to receive what are terms ‘insured services’ without co-payment. The rules, and costs, for this health care vary by province, but in all cases if a person is resident outside of Canada for six months or more, their entitlement to medical care under this system ceases. With this in mind international medical insurance policies that include Canada are recommended. Upon return to Canada, in most provinces there is a six month waiting period before you qualify for Medicare treatment. This may be a significant issue for those with health issues, so consideration should be given to continuing with private insurance, at least for a limited period.
Canada repealed inheritance tax in 1972 and so on death the value of a person’s estate is treated as a sale or ‘deemed disposition’, unless it is inherited by a surviving spouse or common law partner. Any personal taxes outstanding must be paid by the estate and RRSPs are encashed and the assets that are distributed to beneficiaries are treated as withdrawals and thus taxed as at the normal applicable income tax rates with no reduction for capital gains. Non-registered capital assets are treated as having been sold, and are taxed at the applicable capital gains tax rates.
General advice to all nationalities is that you should draw up a will to ensure that on your death assets are distributed in accordance with your wishes. A suitable will can be set up in the UAE and registered with the Canadian embassy to be valid at home.