Can you take a working tax holiday? Part 3

In Part 1, we looked at becoming a non-resident to shed Canadian tax obligations. In Part 2, we considered tax and investment implications when you become a non-resident and when you return to Canada. Here, we consider insurance policies for non-residents and the penalties if you file your tax return incorrectly.

Canadian insurance abroad

Can you keep your policy? Yes. For most policies sold in Canada, “continuing is never a problem,” says Lawrence Ian Geller, president of L.I. Geller Insurance Agencies. “The insurer cannot change the contract or cancel the contract while you continue to pay premiums.”

But if you know you’re about to leave the country, you can’t buy a new policy. That’s because Canadian insurers won’t sell to non-residents. The insurer will ask you if you intend to reside elsewhere. If you know you’re going to leave and buy a policy anyway, the insurance company may void it, Geller says. On the other hand, if you didn’t intend to go abroad when you bought the policy, it should stay in effect.

Is the policy taxable? All life insurance policies, except segregated funds, are exempt from Canadian exit tax, says CRA. A segregated policy would undergo a deemed disposition when you become a non-resident — meaning you could have to pay tax.

Once you’re out of the country, there will still be tax to pay. “Segregated funds have a capital component which is non-taxable, and an interest or earnings component which is taxable as income when distributed. It’s taxable whether you’re in Canada or elsewhere,” says Geller. As a non-resident, the interest and earnings would be subject to withholding tax of up to 25%.

Is insurance a residential tie to Canada? If CRA looks at your ties to Canada, it would consider insurance a secondary tie, says Warren McCann, partner at Kudlow & McCann. Primary ties include owning a home and having a spouse and children in Canada. Like professional memberships, insurance policies could be one of a number of items CRA could put forth to argue you haven’t truly severed residential ties. But “in itself, it wouldn’t make you a resident,” he says.

Penalties for residency mix-ups. If CRA determines you haven’t successfully severed residential ties — or have purposefully misled the tax agency about your status — hefty penalties apply. Even tried-and-true non-residents should avoid filing mistakes that could cost thousands.

Failure to file a form. If you don’t file form T1161 listing your properties with your exit return, CRA could fine you $25 a day, up to $2,500.

Late filing. If you owe CRA money in a tax year and file your return late, the tax agency charges a fine of 5% of the balance owing, plus 1% for every outstanding month, up to 12 months. If you file late in multiple years, the fine is 10% of the balance plus an additional 2% per every additional month, up to 20 months.

Failure to report income. If you don’t report income for multiple years, the federal and provincial governments could each fine you 10% of the amount you should have reported.

Misleading CRA. If you knowingly make a false statement or omission on your return, CRA could fine you at least $100, or up to 50% of the tax owed.

Source: CRA