Non-Residents for Tax Purposes
Individuals can define their residency in two ways: immigration residency and tax residency. An individual's tax residency determines to which country the individual pays taxes. The Canada Revenue Agency determines whether an individual is a Canadian tax resident based on the individual's residential ties to Canada and other countries based on the Canadian Income Tax Act and any applicable tax treaties. A Canadian tax resident may break their residential ties with Canada and become tax resident of another country while continuing to receive income from Canada. In these cases, Canada may continue to tax the income deemed to be coming from Canada. In this article, we will examine the tax treatment in Canada of continued ownership of two common savings accounts after becoming a non-resident of Canada; the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP). Emigration and non-resident will refer exclusively to becoming a non-resident of Canada for tax purposes.
Canadian Departure Tax
When a Canadian taxpayer emigrates Canada while still maintaining ownership of certain kinds of property, the taxpayer will pay what is called a "departure tax". The taxpayer is deemed to have sold the property, although it has been capped, and pays tax on the capital gain from the deemed sale. For example, Frank owns shares in a private business not through an investment vehicle such as a TFSA or RRSP. When Frank emigrates from Canada in 2020, he does not sell the shares. However, he is deemed to have sold the shares and pays Canadian tax based on the appreciation of the value of the shares since his original purchase of the shares.
Withholding Tax and the Section 217 Election
When non-residents receive certain income from Canada, that
income is subject to withholding tax. As the name suggests,
withholding tax requires the payor to withhold a certain percentage
of the income and remit this to Canada Revenue Agency (CRA) as tax
on the income. The withholding tax rate is 25% unless varied by a
tax treaty. This is the only Canadian tax remitted on the income so
the payee has no obligations to report or remit tax on the
The section 217 election is an optional election for non-residents that applies to certain kinds of income. If the non-resident files a section 217 election, the tax he or she pays on the income is calculated under an alternative method and may be lower than the withholding tax. As each taxpayer's circumstances differ, non-resident taxpayers should retain an expert Canadian tax lawyer to analyze whether filing a section 217 election creates sufficient tax savings in his or her circumstances.
Tax-Free Savings Accounts
Taxpayers can continue to contribute to their Tax-Free Savings Account (TFSA) once they emigrate from Canada. However, there are two important caveats when considering continuing to contribute to a TFSA as a non-resident of Canada.
- Contribution Room: The annual contribution room a taxpayer receives for his or her TFSA is not prorated in the year of emigration. The taxpayer will accrue the full contribution room for the tax year in which he or she emigrated. The year in which the taxpayer emigrates will be the final year he or she receives contribution room to his or her TFSA unless he or she becomes a Canadian tax resident again. As non-residents do not receive TFSA contribution room, they must ensure they do not over-contribute to their TFSA as a penalty will apply.
- Penalty for contributing as a non-resident: Non-residents who contribute to their TFSA after emigrating will be charged a 1% a month penalty on these contributions until the contributions are removed from the TFSA or the taxpayer becomes a resident of Canada again. Charging of these penalties can be successfully challenged in certain circumstances. Taxpayers should speak to one of our experienced Canadian tax lawyers if they wish to challenge these penalties.
Generally speaking, continuing to contribute to a TFSA after becoming a non-resident of Canada is inadvisable. Taxpayers do not pay departure tax on their TFSA accounts. Since withdrawals from a TFSA are not taxable, non-resident taxpayers will not pay Canadian tax on any amounts withdrawn from their TFSA after becoming a non-resident of Canada. The Section 217 election also does not apply to TFSA withdrawals. However, the amounts withdrawn may be taxed by the taxpayer's new country of residence.
Registered Retirement Savings Plan
A taxpayer can continue to contribute to his or her RRSP after emigrating from Canada. Contribution room is based on Canadian-source income, such that taxpayers who cease earning Canadian source income (e.g. employment income) after emigration will stop accruing RRSP contribution room. The emigrant can take advantage of any contribution room carried over from previous years.
Withdrawals by a non-resident of Canada from his or her RRSP are subject to withholding tax. The amount of the withholding tax is dependent on whether a tax treaty exists between the taxpayer's country of residence and Canada. If the taxpayer emigrates to a country which has a tax treaty with Canada that does not define "pensions", then the Income Tax Conventions Interpretations Act, defines pensions to include RRSPs. The tax treaty may apply a different tax rate to periodic pension payments versus lump sum payments. Payments made before maturity of the RRSP (i.e. the age at which the taxpayer can withdraw funds from the RRSP) or full or partial commutation payments are not considered periodic pension payments unless the treaty states otherwise. RRSP withdrawals may be taxed by the taxpayer's new country of residence.
RRSPs are not subject to departure tax. A taxpayer can file a section 217 election with respect to income from his or her RRSP.
If a taxpayer used his or her RRSP to participate in the Home Buyer's Plan, repayment of the amount withdrawn will follow particular rules based on whether the non-resident has built or bought a qualifying home when he or she become a non-resident.
- Has not built or bought a qualifying home: The taxpayer will need to cancel his or her participation in the Home Buyer's Plan in which case repayment of the all the funds must be made by December 31st of year after the year he or she received the funds. Alternately, the taxpayer can repay a portion or all of the funds to his or her RRSP by December 31st of year after the year he or she received the funds and record any unpaid amounts as RRSP income in his or her tax return.
- Has built or bought a qualifying home: The taxpayer can either pay back the entire balance by the earlier of a) before filing his or her tax return for the year he or she became non-resident or b) 60 days after he or she became a non-resident. Alternately, the taxpayer can include any unpaid amounts as RRSP income in his or her tax return for the year he or she became a non-resident.
Pro Tax Tip: Tax Treaties May Vary The General Rules
At time of writing, there are 94 tax treaties in force between Canada and other countries. Other treaties are currently signed but not in force, or are under negotiation. Each tax treaty dictates which of the two signatory countries can tax particular payments and what taxation rates are applied to each type of payment. For example, Canada's default withholding tax rate is 25%. Under the United States-Canada Tax Treaty, periodic payments from an RRSP are taxed at a 15% withholding rate, and lump-sum payments from an RRSP are taxed at the default 25% withholding rate. For those taxpayer who are considering emigration or have emigrated to a country who has a tax treaty with Canada, our experienced Canadian tax lawyers can interpret the relevant treaty and advise you on any continued Canadian tax obligations. Our experienced Canadian tax lawyers can additionally advise on issues related to emigration tax planning, departure tax and tax planning to qualify as a non-resident of Canada for tax purposes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.