BECOMING A NON-RESIDENT OF CANADA FOR TAX PURPOSES
If you are a Canadian residing in Mexico, you should consider the possibility of becoming a non-resident Canadian for tax purposes only. This article will explain how to do that. It will not consider the benefits or advantages for making this selection. This is always a personal decision and will be based on individual choices, values, and priorities. We will review the practical steps and will attempt to eliminate common myths regarding non-residency status for Canadians.
Other than the tax benefits of renouncing their residency status, Canadians should remember that, if they reside outside of Canada for more than 183 days, they will lose any social benefits, such as healthcare and insurance protection if involved in automobile accidents abroad, for example. The tax benefits, on the other hand, are simple to consider. Most Canadian provinces now have a marginal tax rate of 53.5% of worldwide income. Mexico has a flat tax rate of 30%.
Unlike the United States, Canada determines the obligation to pay taxes based on residency and not citizenship. Therefore, Canadians can retain their citizenship and any benefits thereof, while shedding their residency. Canadian law does not provide a checklist of items to determine residency. An individual’s residency status is always determined by their circumstances and that person’s intentions as to where they plan to have their residency.
It is a popular misconception that Canadians must cancel all ties with Canada, including bank accounts, credit cards, and family ties to claim non-residency status. In fact, Canadians can keep some ties with Canada. What will be the determining factor will be the balance of the ties an individual has with Canada versus those in another country.
Here is a partial list of what will determine residency:
- Ownership of a property in Canada
- Residence of a spouse, children, or other dependents
- Registration and maintenance of an automobile
- Credit cards issued by Canadian banks or businesses
- Rental of a safe deposit box in Canada
- Mailing address in Canada
- Bank accounts
- Canadian driver’s license
- Holding directorships in a Canadian corporation
- Frequent visits to Canada, whether for social or business purposes
- Filing a Canadian income tax return as a resident
- Employment or employment income from Canada
These items and other facts, are considered only if the Canadian taxing authorities (the CRA) question or doubt an individual’s residency status. The CRA will initially consider only three factors to make this determination. If there remains a doubt, they will then consider other factors. Those are:
- Does the individual reside permanently in a country that has a tax treaty with Canada?
- Does the individual have a permanent home available in Canada?
- Does the individual have a permanent home in the new country?
In relation to those Canadians living in Mexico, the first item above is a positive factor, as Canada and Mexico have tax treaties that go beyond NAFTA. Therefore, Canadians residing in Mexico can successfully argue on this point that they are non-resident Canadians if they are registered to pay taxes in Mexico. They also must establish the other two circumstances mentioned above which are the determination of a permanent home.
The size and the nature of ownership of the home is irrelevant. A Canadian can own property in Canada and rent it and successfully argue that it is not their permanent home in Canada. What is relevant is the individual’s intention to have that home as permanent. In considering this, the CRA will consider such factors as whether the home is the only mailing address for the individual, if they own it or have a long-term lease, if the address appears on the individual’s driver’s license, do they have their personal belongings there? Does the individual have a tax registration in the new country (RFC and FIEL in Mexico), and is the permanent home indicated on that registration?
It should be noted that you cannot elect to be a non-resident retroactively. You must identify a specific date in the future on which you plan on being a non-resident and notify the CRA. This can be done at any time during the year. However, most Canadians do so by filing their last Income Tax Declaration in Canada and selecting the option indicating that this is their last tax report in Canada as they will consider themselves non-residents for the future.
MYTHS RELATED TO BEING A NON-RESIDENT
“If I cease to be a non-resident, I will have to renounce my passport”
FALSE: As mentioned earlier, residency and citizenship in Canada are two different legal status. You can always retain your Canadian citizenship if you cease becoming a resident. One does not have an impact or influence on the other. Furthermore, if you change your plans, you can return to Canada and elect to become a resident once again.
“If my spouse and children are living Canada, then I cannot renounce my residency.”
FALSE: Having a spouse, a common-law relationship or dependents residing in Canada will weigh in the balance in determining whether an individual is a non-resident for tax purposes, but will not be a determining factor.
“I must break all ties with Canada.”
FALSE: A Canadian citizen can maintain some ties, including utilizing bank or retail store credit cards, membership to clubs and even own property and still be considered a non-resident of Canada.
“If I reside outside Canada for more than 183 days, I am considered a non-resident.”
TRUE: The 183-day rule is only a presumption. If you have resided outside of the country for more than 183 days, cumulatively, over the previous 12 months then you are “deemed” to be a non-resident Canadian. It can be contradicted by evidence demonstrating that you are a resident and that it was not your intention to be considered a non-resident Canadian.
“I need permission from Canada to cease becoming a resident.”
FALSE: There is no such requirement. The purpose of notifying the CRA of your residency status is only to determine the taxes that are payable on property owned in Canada and that you are presumed to have sold before changing your status.
“I will lose my pension if I live abroad.”
FALSE: Although you may no longer contribute to your pension funds, you will not lose them.
If the three conditions mentioned above exist, the CRA will not consider other factors in determining if they are non-residents of Canada. Canadians can keep their driver’s license, maintain membership to clubs and associations, operate a bank account, and hold credit cards in Canada and only pay taxes in Mexico.