Q.
We are Canadian citizens from Toronto but living for two years now in the United Kingdom, where my spouse has a great job. He paid
income tax
our first year in the U.K. and our main taxes are filed with the
Canada Revenue Agency
(CRA). I paid any tax owing on my account to the CRA and cannot earn money in the U.K. under my visa. I do some consulting work in Canada. My spouse’s Canadian tax lawyer (covered by his employer) is applying to CRA to continue this arrangement for another year or two. We are not sure how long we will stay here. We have a business in Canada with a Canadian address, a residence and cottage, and bank accounts and investments. Our lawyer says we could continue this arrangement as Canadian tax residents for a few years if the CRA gives its okay.
If in future we have to become full-tax residents in the U.K., what are the implications for my investments? I have $1 million in stocks that are not in a registered investment plan and they are up $300,000 since we left Canada. Is that money taxable at some point or does it need to be secured in some way if I become a U.K. tax resident? I’m assuming that if I bring my Canadian assets to the U.K., there will be a tax to pay. Any light you could shed on our tax situation would be most helpful.
—Thanks, Cindy
FP Answers:
Canada taxes its residents on worldwide income and when you move to another country, you may or may not give up Canadian tax residency, Cindy. There is a tax treaty between Canada and the U.K. that seeks to determine, among other things, residency and who taxes what income.
Article 4 of this treaty deals with the concept of fiscal domicile, which can help with understanding the relevant facts in determining your status. Similar treaty articles often apply between Canada and other countries.
The focal point of the residency determination with the U.K. surrounds these key statements:
- (A taxpayer) shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);
- If the Contracting State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;
- If he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national;
- If he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
When looking at your situation, Cindy, your real estate and consulting work are Canadian ties that would factor into your residency determination. You presumably rent a home in the U.K. and your husband works there, so you also have ties with the U.K. Based on the facts, your tax lawyer likely determined that you both remain Canadian residents for tax purposes.
If there is a doubt as to your residency, there is the option of completing Form NR73 Determination of Residency Status with CRA. By completing the form, you are providing CRA with full details of your situation with the goal of determining their opinion on residency. The downside of filing the form is that you may not like the answer while also attracting the attention of CRA.
The U.K. has relatively high tax rates so there may only be a slight advantage to tilting your situation toward factual U.K. tax residency, Cindy.
The primary conditions to establish emigration for tax purposes are: 1) you leave Canada to live in another country; and 2) you sever your residential ties in Canada. CRA states that severing ties may include renting out or selling your home, breaking social ties and cancelling provincial health insurance.
The most significant cost of becoming non-resident is usually departure tax. Departure tax can be levied when individuals “emigrate” from Canada and become non-residents. When you factually “leave” Canada, certain types of property are deemed disposed of or sold at fair market value (FMV) on your date of departure.
Typical assets that are subject to departure tax include securities such as stocks in taxable non-registered accounts, and even your businesses. If these assets have FMV above their cost base, you will have capital gains tax payable when you leave.
If your businesses are incorporated, you may also lose tax benefits associated with Canadian-controlled private corporations such as the small business deduction that allows a low tax rate on business profit.
Registered accounts such as
registered retirement savings plans
(RRSPs) and
tax-free savings accounts
(TFSAs) can remain tax sheltered or tax-deferred in Canada while you are a non-resident and are not factored into the departure tax. Non-residents should never contribute to a TFSA though because they will be subject to a penalty tax.
When you start withdrawing from tax deferred accounts such as RRSPs, your financial institutions in Canada will withhold tax at source, which can typically be used as a foreign tax credit in your country of residence. You can receive government pensions as a non-resident as well, with tax withheld. Taxable accounts such as non-registered investments may be subject to withholding tax on dividends, interest and other distributions.
Andrew Dobson is a fee-only, advice-only certified financial planner (CFP) and chartered investment manager (CIM) at Objective Financial Partners Inc. in London, Ont. He does not sell any financial products whatsoever. He can be reached at adobson@objectivecfp.com.
