Author Topic: Optimizing Canadian Tax Residency and Non-Residency  (Read 1352 times)

CanuckExpat

  • Magnum Stache
  • ******
  • Posts: 2732
  • Age: 35
  • Location: Travelling
    • Freedom35
Optimizing Canadian Tax Residency and Non-Residency
« on: March 21, 2018, 07:31:19 PM »
My wife and I are Canadian citizens, and US permanent residents (green card). We first left Canada almost almost ten years ago, and for that time we were pretty clearly not Canadian tax residents: permanent home in US, no permanent home in Canada, only short visits to Canada never more than a week or two in duration, all more or less by neccessity (work, vacation days, etc). Since retiring, I don't think our tax residency has been as clear cut and I have been thinking about what that implies, if I should ignore it, or try to optimize it for tax purposes.

We currently don't have a permanent home in either the US or Canada. We generally spend more time in a given year in the US, but do often spend up to several months at a time in Canada, always at the same location, where as our time in the US is usually in different places. Based on this, and my reading of the US-Canada tax treaty, it sounds like it might be argued we have enough of a home base in Canada and combined with our Canadian Citizenship but no US citizenship that we would now be considered residents of Canada for tax purposes (and also US residents for tax purposes, due to green card and substantial presence in US, escaping US tax residency is harder than escaping Canadian tax residency).

Aside from additional paperwork and tax planning headaches, in the short term, the implications of being considered Canadian tax residents seems relatively benign, and perhaps financially beneficial strangely. Long term, it seems more complicated. I'd like to know if I'm considering everything and what the appropriate strategies might be.

The main implication of being considered Canadian residents is that we would have to pay Canadian taxes on world wide income. For us, our main current source of income is US based investment income, which is currently purposely low ($20k-$30k USD / annually), so I imagine the tax bite wouldn't be too bad. It also appears that while the drawbacks of being Canadian residents is that we have to pay taxes on our worldwide income, we then become eligible for Canadian tax benefits. The Canada Child Benefit would in this case almost certainly pay us back more than we would pay in Canadian taxes on our small amount of investment income. (It actually seems a little weird and perhaps slightly unsavory to me that situation seems to be "welcome back to Canada, here is $6k per kid", but that looks like the way the law is written.. I haven't decided if this is reason to just ignore filing Canadian taxes, or it should be reason to take advantage of the tax situation).

In the medium term with two sets of taxes to consider, it seems things get more complicated and might limit aggressive tax planning in either country. We don't have to do any US "Roth conversions" yet, but may want to in the future. I'm not sure how this ties in with Canadian taxes. Also, as long as we have only minimal investment income, all coming from regular taxable accounts, it's easy-peasy. However, if we start getting consulting income, or a rental property, I think it would get more complicated fast.

Long term, we then become on the hook for having all our world wide (read US) assets and any capital gains from date of entry tied to Canada's tax system. One draw back is that Canada is probably not as friendly as US in relation to this. If we were only US tax residents, we could conceivably liquidate up to $70k USD tax free.. I think being tied to the Canadian tax system would limit this (we have no reason to withdraw that much currently).

When it seems to become very inconvenient is if our future situation changes that we might then be no longer considered Canadian tax residents: the "departure" tax would kick in, and we would be taxed as if we sold all our assets at once. That might be more capital gains realized in one year than I would like to deal with. Our cost basis would be based on the time we became residents in Canada, and it seems that there is a five year window when we can leave again with no departure tax on those assets. So it looks like we would have five years until our US assets became inconveniently tied to Canadian taxation. This looks like one option to consider for optimization: if you become a Canadian resident with existing world wide assets, it might be prudent to see if you can arrange to stop being a tax resident every five years, to move up your tax basis cost free (easier said than done, depending on your personal and family situation).

Is there anything else I might be missing?
« Last Edit: March 21, 2018, 07:39:36 PM by CanuckExpat »

RichMoose

  • Pencil Stache
  • ****
  • Posts: 927
  • Location: Alberta
  • Yes, I'm Canadian
    • The Rich Moose | A Better Canadian Finance Blog
Re: Optimizing Canadian Tax Residency and Non-Residency
« Reply #1 on: March 22, 2018, 09:24:24 AM »
I think your question is pretty complicated and delves into legal areas which have been extensively battled out.

If you haven't already, it may be worth reading this Folio document and the referenced case law (Allchin v. R. in particular):
https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-5-international-residency/folio-1-residency/income-tax-folio-s5-f1-c1-determining-individual-s-residence-status.html#p1.25

You'll probably be required to complete this form to get any benefits:
https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/nr74/nr74-17e.pdf

Depending on how you successfully obtain tax resident status in Canada, it could be difficult to sever that down the road. Given the big deductions for US taxed persons on worldwide income, maybe you're better off staying under their system if living in the US is still important.

Is there any reason, now that you are retired, to continue residence in the USA? If not, you might want to sever that link and move between Canada and a no-tax or low-tax jurisdiction instead. Costa Rica, Panama, Mexico, Nicaragua, Ecuador, or Malaysia for example.

From a financial perspective, the Child Benefit is definitely very rich. But Canada's tax system can get pretty punitive if your wealth continues to grow over time, so what happens if your family income goes over CA$30,000 and CA$65,000? Or when your kids grow old?

Prairie Stash

  • Handlebar Stache
  • *****
  • Posts: 1572
Re: Optimizing Canadian Tax Residency and Non-Residency
« Reply #2 on: March 22, 2018, 04:12:05 PM »
$70,000 in capital gains, taxed in my hands...

Lets pretend its 50/50 to each spouse, so $35,000 each. Multiple that by 50% (capital gains exemption), you owe tax on $17,500. Deduct basic amount of $10,800, leaves $6,700.

Tax on $6500 (ontario) is about $1150 each. If that's the breaking point, you're cutting it too close ;) Take it from the CCB payments of $5400/kid.

I suggest pulling up simpleTax and running some basic scenarios, pick a province and have at it. The 50% capital gains exemption is pretty significant, I'm wondering if you missed it. Its a weird step, you pay tax on 50% of the gains (not the entire amount) at full tax rates. Its often states as being 1/2 the marginal rate, but to be precise the order of operations matters.

In my case I can claim $23,000/spouse tax free if I have no other income. If each of you are eligible to claim, you could be claiming $46k/year and adjusting your cost base if you don't require all the money. I'm not giving recommendations, just pointing out the tax rule.

CanuckExpat

  • Magnum Stache
  • ******
  • Posts: 2732
  • Age: 35
  • Location: Travelling
    • Freedom35
Re: Optimizing Canadian Tax Residency and Non-Residency
« Reply #3 on: May 13, 2018, 10:13:09 PM »
Thank you to both, very helpful. I did realize the Tax residency question is litigated a lot and not well defined, but wasn't sure about the specifics. The Allchin v R case is troublesome in that it seems the CRA can take a very liberal definition of residency. It looks hard to escape the fact that if you are a Canadian citizen and spend reasonable amounts of time in the country at some point, there is a claim you are a resident. I think filling out the requisite determination of residency form might be in order.

The Canadian tax situation, once taking into account 50% tax rate on capital gains may not be too bad. More research to be done. Thank you again