My question is: Canadian-specific
QUESTION: HI:
I am a Canadian non-resident living in HK, I want to get my son a
mortgage so that he can buy his own house. The title will be
his. If I do that am I liable to catch the attention of the CRA
and pay income tax, even if the house is in his name?
Your answer is appreciated.
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david ingram replies:
This should not cause you any problems if you are just giving him
money. If you are loaning him the money, you could end up with a
non-resident withholding tax situation on any interest he is
paying you.
If you are talking about co-signing his mortgage, you have
another problem because the bank will use your residency status
and record it on the documents as Dennis Lee found out in the
Judge Teskey decision which you can find in the following which
is to be found in total at www.centa.com - click on US / Canada
Taxation (second box down on right hand side).
In short, if you are a genuine resident of Hong Kong and you
co-sign his mortgage as a non-resident, there should not be any
problem.
---------------------------------------------
Excerpted from the ULTIMATE TAX GUIDE by david ingram
So what are the rules?
Well, to leave Canada for tax purposes, you must give up clubs,
bank accounts, memberships, driving licences, provincial health
care plans, family allowance payments (if you are a returning
resident, you can continue to get Family Allowance out of the
country), your car, and furniture. You can keep a house here as
an investment and rent it out, but it must be rented on lease
terms of a year or more. And you MUST have an agent sign an NR6
for you (see example). This NR6 has the Canadian Resident AGENT
** guarantee the Canadian Government that if YOU do not pay your
tax to Canada, the AGENT WILL. Even after fulfilling the
foregoing, the Canadian government can still tax you or "try" to
tax you on your income out of the country. If you are being paid
by a Canadian Company, they can quite often succeed.
Even though you can collect family allowance out of the country,
don't! One client's wife found out that she could get family
allowance out of the country if she said they were coming back to
Canada. She got some $3,000 of family allowance and cost the
family some $80,000 in income tax when they came back to Canada
from Brazil. I will never forget the husband's expression when he
found out why he had been reassessed and I will never forget his
wife's explanation. She said he was a skinflint and never gave
her any money. The total episode cost them their house.
** The "agent" referred to above can be a friend, relative, or a
business such as ours. We charge a minimum of $40.00 per month to
be an "AGENT" for an NR-6 filing. This $480 per year is "in
addition" to any other fees but "well worth it" of course. It
stops your mother, father, brother, next door neighbour or
ex-best-friend from being plagued by paperwork they do not
understand.
OUT OF CANADA AND RESIDENT - IN CANADA AND NON-RESIDENT
It is possible to be physically "in Canada" and be treated as a
Non-Resident and it is possible to be out of the country for
seven years, or never have even lived in Canada, but wanted to,
and be taxed as a Canadian resident as the following three cases
show. In case you missed it, the reason for the different rulings
is the "INTENT" of the parties involved. Wolf Bergelt intended
to leave Canada. David MacLean was only working out of the
country. He still maintained a residence and could not ever
become a resident of Saudi Arabia anyway. Dennis Lee "wanted" to
live in Canada.
In 1986, Wolf Bergelt won non-resident status before Judge
Collier of the Federal Court, even though he was only out of the
country for four months and his family stayed behind to sell his
house. He had given up his memberships, kept only one bank
account and rented an apartment in California until his house in
Canada was sold. Four months after his move, his company advised
him that he was being transferred back to Canada. Judge Collier
said his move was a permanent (although short) move and he was a
non-resident for tax purposes for those four months.
In 1985, David MacLean lost his claim for non-residence status
even though he was gone for seven years. He kept a house and
investments in Canada and returned a couple of times a year to
visit parents. He had even been to the Tax Office and received a
letter on January 29, 1980 stating that his Canadian Employer
could waive tax deductions because he was a non-resident.
However, he did not advise his banks, etc. that he was a
non-resident so that they would withhold tax, he did not rent his
house out on a long term lease and he did not do any of the
things that makes a person a "NON-RESIDENT". Judge Brule of the
Tax court of Canada said that he thought Mr. MacLean had stumbled
on the non-resident status by chance rather than by design. In
other words, to become a non-resident of Canada, you must become
a bone fide resident of another country. As a rule, only a
Muslim born in Saudi Arabia to Saudi Arabian parents can become a
Saudi Arabian citizen. The best that David MacLean can hope for
is that he has a Saudi Arabian temporary work permit.
In other words, when a person leaves a place, they usually leave
and establish a new identity where they are because the "new
place" is where they live now. Trying to "look" like a
non-resident is not the same as "BEING" a non-resident - think
about it.
In 1989, Denis Lee won part but lost most of his claim for
non-resident status. He was a British Subject who worked on
offshore oil rigs. He maintained a room at his parents house in
England and held a mortgage on his ex-wife's house in England.
For the years 1981, 82 and 83 he did not pay income tax anywhere.
in 1981 he married a Canadian and she bought a house in Canada in
June of 1981. On September 13, 1981, he guaranteed her mortgage
at the bank and swore an affidavit that he was "not" a
non-resident of Canada. [As I have said in the capital gains
section of this book, bank documents will get you every time.]
During this time he had a Royal Bank account in Canada and the
Caribbean but no Canadian driver's licences or club memberships,
etc.
Judge Teskey said:
"The question of residency is one of fact and depends on the
specific facts of each case. The following is a list of some of
the indicia relevant in determining whether an individual is
resident in Canada for Canadian income tax purposes. It should be
noted that no one of any group of two or three items will in
themselves establish that the individual is resident in Canada.
However, a number of the following factors considered together
could establish that the individual is a resident of Canada for
Canadian income tax purposes":
- past and present habits of life;
- regularity and length of visits in the jurisdiction asserting
residence;
- ties within the jurisdiction;
- ties elsewhere;
- permanence or otherwise of purposes of stay;
- ownership of a dwelling in Canada or rental of a dwelling on a
long-term basis (for example, a lease of one or more years);
- residence of spouse, children and other dependent family
members in a dwelling maintained by the individual in Canada;
- memberships with Canadian churches, or synagogues, recreational
and social clubs, unions and professional organizations (left out
mosques);
- registration and maintenance of automobiles, boats and
airplanes in Canada;
- holding credit cards issued by Canadian financial institutions
and other commercial entities including stores, car rental
agencies, etc.;
- local newspaper subscriptions sent to a Canadian address;
- rental of Canadian safety deposit box or post office box;
- subscriptions for life or general insurance including health
insurance through a Canadian insurance company;
- mailing address in Canada;
- telephone listing in Canada;
- stationery including business cards showing a Canadian address;
- magazine and other periodical subscriptions sent to a Canadian
address;
- Canadian bank accounts other than a non-resident account;
- active securities accounts with Canadian brokers;
- Canadian drivers licence;
- membership in a Canadian pension plan;
- holding directorships of Canadian corporations;
- membership in Canadian partnerships;
- frequent visits to Canada for social or business purposes;
- burial plot in Canada;
- legal documentation indicating Canadian residence;
- filing a Canadian income tax return as a Canadian resident;
- ownership of a Canadian vacation property;
- active involvement with business activities in Canada;
- employment in Canada;
- maintenance or storage in Canada of personal belongings
including clothing, furniture, family pets, etc.;
- obtaining landed immigrant status or appropriate work permits
in Canada;
- severing substantially all ties with former country of
residence.
"The Appellant claims that he did not want to be a resident of
Canada during the years in question. Intention or free choice is
an essential element in domicile, but is entirely absent in
residence."
Even though Dennis Lee was denied residency by immigration until
1985 (his passport was stamped and limited the number of days he
could stay in the country) and he did not purchase a car until
1984, or get a drivers licence until 1985, Judge Teskey ruled
that he was a non-resident until September 13, 1981 (the day he
guaranteed the mortgage and signed the bank guarantee) and a
resident thereafter.
My point is made. Residency for "TAX PURPOSES" has nothing to do
with legal presence in the country claiming the tax. It is a
question of fact. My thanks to Judge Teskey for an excellent
list. The italics are mine and refer to the items which I usually
see people trying to "hold on to" after they leave and are trying
to become non-residents. No single item will make you a resident,
but there is a point where the preponderance of "numbers" leap
out and say, "He / She is a resident of Canada, no matter what he
/ she says."
The case above is not unusual in any way. It is a fairly typical
situation in my office.
In 1990, John Hale was taxed as a resident on $25,000 of
directors fees he had received from his Canadian Employer and on
$125,000 he received for exercising a share stock option given to
him when he had been a resident of Canada (the option, not the
stock). Judge Rouleau of the Federal Court ruled that section
15(1) of the Great Britain / Canada Tax Convention did not
protect the $125,000 as it was not "salaries, wages, and other
remuneration". It was, however a benefit received by virtue of
employment within the meaning of section 7(1)(b) of the act.
Even a car you do not own can make you a resident as the next
sailor found out.
In 1988, Frederick Reed was claimed by the Canadian Government as
one of their own. He lived on board ship and shared an apartment
with a friend in Bermuda but only occasionally. He also stayed
with his parents in Canada when visiting his employer in Halifax.
Judge Bonner of the Tax court ruled that he could not claim his
place of employ or the ship as his residence and just because he
did not have a fixed abode, did not make him a non-resident. He
was also the beneficial owner of a car in Canada which even
though of minor consequence, served to add to his Canadian
Residency. He had in fact borrowed money from a credit union to
buy the car, even though it was registered in his father's name.
He had maintained his Canadian Driver's licence as well.
An interesting case in June, 1989 involved Deborah and James
Provias who left Canada in October of 1984. They had sold a
multiple unit building to James' father on September 21, 1984 but
the statement of adjustments did not take place until December 1,
1984. They tried to write off rental losses and a terminal loss
against other income as `departing Canadians'. Judge Christie of
the Tax Court ruled that they had left before the sale and were
not entitled to the terminal loss or another capital loss as
these could only be applied against income earned in Canada from
October 13, 1984 (the day they left) to November 30, 1984 (the
day before the sale) and there was no income, only a rental loss.
But June, 1989 was a good month for Henry Hewitt. He had been a
non-resident living in Libya for four years and received some
back pay after returning to Canada. DNR tried to tax him on the
money but Judge Mogan of the Tax Court came to the rescue. He
ruled that although Canadians were usually taxable on money when
received, that assumed that the money itself was taxable in
Canada, which was not true in this case.
In 1989, James Ferguson lost his claim for non-residency status
but from the information, it didn't stand a chance anyway. He had
been in Saudi Arabia on a series of one year contracts for four
years. His wife remained employed in Canada, and he kept his
house, car, driver's licence, union membership, and master
plumber's licence. Judge Sarchuk ruled that he had always
intended to return to Canada and was a resident.
A similar situation involved John and Johnnie M. Eubanks in the
United States. He was working on an offshore oil rig in Nigeria
with a Nigerian work permit and attempted to claim non-resident
status for the purposes of exempting the foreign earned income
exclusion. His wife was in the United States at all times and
because he worked 28 days on and 28 days off, he returned to the
U.S. for his rest periods using 4 days for travel and 24 days for
rest with his family. He did not spend any 330 day period (out of
a year) in Nigeria and only had a residency permit for the
purposes of working in Nigeria. Judge Scott ruled he was a
resident of the U.S. and taxed him some $20,000 with another
$6,000 penalties and interest.
The Tax departments in Canada and the U.S. issue Interpretation
Bulletins and Information Circulars and Guidance Pamphlets. These
documents sometimes get people in trouble because the individual
reads the good part and doesn't pay any attention to the
exceptions. The following case ran contrary to a Guidance
Pamphlet issued by the IRS.
On and Off-shore Oil rigs were involved with William and Margaret
Mount and Jesse and Mary Wells. William and Jesse worked in the
United Arab Emirates. However, they kept their homes and families
in Louisiana and kept their driver's licences in Louisiana and
voted in Louisiana. No evidence was shown that they had tried to
settle in The United Arab Emirates. Judge Jacobs turned down
claimed exclusions of approximately $75,000 each.
There isn't any question about what oil rig people talk about on
oil rigs. It has to be "how to beat the tax man". Unfortunately,
they all seem to think it is easy. Another such story follows.
In 1989, Clarence Ritchie found out that bona fide residence
means just what it says. You cannot be a non-resident of the U.S.
for tax purposes if you are not a bona fide resident of another
country. He was working on the Mobil Oil Pipeline in Saudi Arabia
and although when he left he was married with a couple of kids,
by the time he returned permanently, he was a happily divorced
man. Judge Scott ruled that though he did not have an abode in
the United States, he had not established one in Saudi Arabia and
therefore was not entitled to the foreign earned income exclusion
which requires you to be away for 330 days out of 365. He had
worked a 42 days on, 21 days off schedule and usually returned to
the U.S. for his days off although he did spend time in Tunisia,
England, Italy and Greece.
-------------------------------
Answers to this and other similar questions can be obtained free
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