Can you take a working tax holiday? Part 1

See Part 2 and Part 3 here.

Working abroad can provide both career building and adventure. But Canadians moving to certain exotic locales can also take a tax holiday. Dozens of countries charge residents little or no tax. And Warren McCann, partner at Kudlow & McCann, has seen people leave to work in those countries and return years later with significant nest eggs. “They can accumulate a lot of net worth tax-free,” he says.

Qatar, for instance, which has many expatriates working in oil production, levies no income, capital gains or sales taxes. Residents of the Bahamas pay only a 3.9% social security levy on their incomes. In Hong Kong, residents pay a maximum income tax of 15%, and there is no tax on capital gains or dividends.

Getting ready to leave

To shed Canadian tax obligations, you must become a Canadian non-resident. That means establishing residency in your destination country and cutting ties to this one. Otherwise, you’re still liable for Canadian tax.

In places that have tax treaties with Canada, such as Hong Kong, you pay Canadian taxes beyond what you’ll pay locally. Tax rates are also set out in the treaty, including Canadian dividend (up to 15%) and interest (up to 10%) taxes. For non-treaty, no-tax countries, such as the Bahamas and Qatar, that means paying full Canadian tax. “If you move to a treaty country, it’s a lot easier to become a non-resident of Canada than if you move to a non-treaty country,” says Michael Cadesky, managing partner at Cadesky and Associates. Canada tends not to have treaties with countries with no taxes, or that tax only some income types, he adds.

In addition to outlining tax rates, treaties dictate the ties that would cause governments to consider people resident. (You can’t be resident in two treaty countries.)

The first major tie is usually principal residence. If you sell your Canadian home or rent it out to an arm’s-length party, and then take up full-time residence with your partner and children in another country, you’ll be considered a resident of that other country.

Once residency is dealt with, treaty coverage lets you keep other ties to Canada, such as bank accounts, without needing to worry about their effect on residency status. But, if you move to a non-treaty country, you’ll have to sever more ties. Otherwise, “it’s very likely that [you’ll] still be considered a Canadian resident,” says Cadesky. Other everyday ties you could eliminate include local phone numbers and credit cards.

“If you’re not dealing with a treaty country, the Canadian government can still make you a resident, even though the other country might say you’re a resident as well,” McCann adds.

No matter where you’re going, you should return your health card and driver’s licence to your province, because you’re no longer eligible for health care as a non-resident, says Cadesky; nor can you legally drive.

Plus, if you’re going to a non-treaty country, those cards can be used by CRA to establish secondary ties to Canada and dispute non-residency status, adds McCann.

Keeping ties

If you decide to keep ties, such as a house, investments or bank accounts, make sure you have good reason, says Cadesky.

For instance, “Let’s say you rent your home,” he says. “It would be reasonable to have a Canadian bank account to which rent payments are deposited.”

For Canadian investments, “a reasonable explanation might be you have a broker you’ve worked with for years, and you wanted to continue with that particular person because of the personal relationship.”

But each tie increases the risk CRA will deem you a Canadian resident.

There’s no minimum number of days you must be outside Canada to become a non-resident, says Allan Madan, founder of Madan Chartered Accountant. Instead, CRA will consider you to have become a non-resident after you leave Canada; your spouse or partner and dependants leave Canada (if applicable); and you become a resident of your new country.

CRA considers your intention to return to be a tie in and of itself, adds Cadesky. “If you were to leave for nine months and then come back, it would look very suspicious, and CRA may say that your intention was to always to return. On that basis, CRA may believe you were always a resident,” he explains.

Other items that could cause CRA to consider you a resident include owning a cottage or a safety deposit box, membership in Canadian unions or professional organizations, and even magazine subscriptions sent to a Canadian address.

In Part 2, we consider tax and investment implications when you become a non-resident and when you return to Canada. In Part 3, we consider insurance policies for non-residents and the penalties if you file your tax return incorrectly.