As the world becomes more connected, it’s becoming more common for Canadians to spend extended periods of time outside of Canada. With careful planning, it’s possible for Canadians to cease being a resident for Canadian income tax purposes, without giving up their Canadian citizenship.
When it comes to taxes, Canada and the United States have different rules. Canada taxes its residents on their worldwide income, but only if they are “ordinarily resident” in Canada or spend 183 or more days in the country in a calendar year. On the other hand, the United States taxes not just its residents, but also its citizens, on a worldwide basis. This means that if a U.S. citizen who is also a Canadian resident stops being a resident of Canada, they will still be liable to pay U.S. taxes, regardless of where they live.
When a Canadian stops being a resident of Canada, they will no longer be taxed on their worldwide income. However, Canada will still retain the right to tax certain Canadian source income, such as income earned from businesses carried on in Canada, real estate, and capital gains on taxable Canadian property.
When spending significant time in another country, it’s possible to meet the residency test of that country. This can lead to the possibility of being taxed by both countries, in the case of Canada and the other country both claiming the individual as a resident. This potential “double tax” problem is usually resolved through comprehensive double tax treaties between Canada and other countries, including the United States, Ireland and the United Kingdom. These treaties set out a series of residency tie-breaker tests, which help determine which country the individual has closer ties to and is therefore considered a tax resident.
However, Canada does not have income tax treaties with countries that do not have an income tax system, such as some Caribbean countries. In these cases, it’s crucial for Canadian residents to ensure that they don’t spend 183 days or more in Canada, and are not considered ordinarily resident in the country, as there will be no tax treaty to assist in breaking the tie.
Determining whether an individual is “ordinarily resident” in Canada is based on a number of Canadian income tax decisions. There are practical steps that can be taken to ensure that one is no longer considered ordinarily resident in Canada, such as severing ties with the country, like getting rid of a permanent home, and having closer personal and economic ties to another country.
In conclusion, it’s important for Canadians who spend significant time outside of Canada to be aware of the tax implications and plan accordingly. While it’s possible to cease being a Canadian resident for tax purposes, it’s important to consider how it may affect taxes in other countries and take steps to avoid double taxation. With the help of double tax treaties and by ensuring that you don’t meet the residency test of other countries, you can avoid these problems.
