Can you take a working tax holiday? Part 2

In Part 1, we looked at becoming a non-resident to shed Canadian tax obligations. Here, we consider tax and investment implications when you become a non-resident and when you return to Canada.

After becoming a non-resident, you must file a tax return the following April 30. Since it’s your exit return, CRA also requires that you list all your property if its total value is over $25,000. Use form T1161 and submit it with the return.

CRA deems your assets to be sold at fair market value the day you leave, says Warren McCann, partner at Kudlow & McCann. To report these assets, fill out form T1243. Some assets, including real estate, registered savings funds, pensions, interests in trusts and stock options, are exempt from this deemed disposition. Canadian life insurance policies, other than segregated fund policies, are also exempt.

Report capital gains or losses from the disposition on Schedule 3 of the return. The disposition may create a hefty tax bill for you, but CRA allows payment deferral until you actually sell your property.

To enter into a deferral agreement with CRA, fill out form T1244. You won’t incur interest, but if you owe more than $14,500, you must provide security to cover the amount, such as bank letters of guarantee or credit, and Canadian or provincial bonds.

While you’re away

If you earn Canadian income while abroad, such as rent payments from your old house, you’ll have to pay tax on it, says McCann. Use CRA’s income tax package for non-residents.

And, payments from a Canadian source, including interest payments from financial institutions, are also subject to withholding tax. The usual rate is 25%, though it varies, says Michael Cadesky, managing partner at Cadesky and Associates.

Canadian financial institutions usually hold back taxes, but if they don’t, you must report the income. Apply to have the tax reduced by filling out form NR5. CRA will use the information you provide on the form to determine your eligibility for reduction.

Keep your registered accounts, says Allan Madan, founder of Madan Chartered Accountant. Along with pensions, they maintain their tax-deferred status even when you’re a non-resident. He cautions the standard withholding tax would apply to RRSP withdrawals while you’re away. You could contribute to your RRSP from afar, but it wouldn’t make sense, as you wouldn’t have any Canadian income from which to deduct contributions, he adds.

Madan also says if you have withdrawn registered money under the home buyers’ plan, you have 60 days to pay it back once you become a non-resident. If you don’t, the amount is included in your income for the year.

As for TFSAs, Madan says some places treat them as taxable foreign trusts. You won’t accumulate contribution room while you’re a non-resident, and you can’t make contributions either. If you do, you’ll be subject to a 1% penalty each month. If you want to take money out of a TFSA, you won’t incur Canadian tax. That contribution room would be added to your future limit if you return.

Coming back

Plan to be a non-resident for at least two years before returning to Canada, recommends McCann. The less time you’re gone, the more likely CRA will scrutinize your non-residency status and assess you as a resident retroactively. When you leave your foreign home, most low- or no-tax places, including Hong Kong, Qatar and the Bahamas, don’t have exit taxes, says Cadesky.

Once landed in Canada, let CRA know you’re back by filling out form NR74, says Madan. CRA deems the adjusted cost base of your property to be its fair market value on the date of re-entry.

Any gains on foreign property accrued while you’re a non-resident of Canada aren’t taxable when you return, Madan says. “Let’s say I move to Qatar and buy a [$400,000] apartment there, and I’m a non-resident of Canada,” he explains. “Five years later, [say] it appreciates to $700,000. My cost basis when I come back would then be $700,000.”

If you deferred the tax on the deemed disposition of your assets when you left Canada, you can reverse that agreement in order to reduce or eliminate the gain you reported the year you left.

To do so, write to the International and Ottawa Tax Services Office by the filing deadline of the year you re-establish residency. You must list your properties and their fair market values. (Once your taxes are settled, CRA will also return all or part of your security.) Going forward, you will also have to fill out form T1135 if you own foreign property worth more than $100,000. You’ll also have to re-apply for certain tax credits, including the Child Tax Benefit and the GST/HST credit.

After a waiting period, you’ll be eligible for provincial health care again. In Ontario, new residents must be in the province for 153 of the last 183 days.

Despite the residency interruption, you should also be eligible for CPP and OAS when the time comes, says McCann. The government calculates CPP payments using the best 40 years of a person’s contributions between ages 18 and 65. “You could be a non-resident of Canada for five years, but if you worked in Canada the other 40, you’d still get full CPP,” he explains. To be eligible for OAS, you must be a Canadian resident for 20 years after age 18.

The series continues with Part 3, when we consider insurance policies for non-residents and the penalties if you file your tax return incorrectly.