Are you a Canadian resident?

Whether you’re an immigrant or a snowbird, CRA uses various factors to determine residency. This helps you cope with inter-jurisdictional tax issues.

Cheng-Chung Yu, CFA, CA outlines four that will help you determine whether or not you’re considered a Canadian resident.

• Home and real estate locations
• Location of family
• Social ties, friends, association memberships
• Where you earn your income

Also, be aware of the following tax traps; otherwise, you could get hit with a hefty bill.

Withholding tax and the foreign tax credit

Foreign tax credits prevent Canadians with worldwide income from paying double tax. However, CRA credits the rate prescribed in tax treaties.

Let’s say you pay 30% withholding tax on your income, but the treaty prescribes 10%. (That happens if you don’t tell foreign tax agencies you’ve moved to Canada.) In that case, you’re stuck paying the remaining 20%.

RRSPs

Canadians don’t have to collapse RRSPs if they leave Canada or renounce citizenship, says Joanne King, a U.S. tax associate with BDO. But not everyone knows that. She knew a client whose advisor told him to collapse his RRSP before leaving Canada, sticking him with a large tax bill.

What’s more, “you’re only subject to 25% withholding tax on proceeds of collapse after you leave Canada,” she says. So if you’re a retiree in the highest marginal bracket, collapsing the RRSP outside of Canada can cut your taxes almost in half. So be sure to check how the your new country of residence taxes the RRSP.

Forced heirship

Those with heirs outside Canada must be careful, says Steve Harding, director, International Solutions with RBC Wealth Management.

Say an Indonesian family immigrates to Canada, and the son goes back. The parents want to leave more to their Canadian daughter in their will. Turns out, the son could argue for equal division because he lives in a country with forced heirship rules.

“Indonesia follows Sharia law,” which prescribes the proportion all heirs must receive, says Harding. “Children may successfully claim they’ve been denied their entitlements.”

If you’re an immigrant, to ensure your wishes aren’t thwarted, make sure your estate planner checks the beneficiary’s local tax and inheritance rules before setting up a gift. Parents could also gift into trust or directly while alive to avoid this problem.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.