QUESTION: I'm a little confused, when should you declare non-residency? When
you prepare your taxes for that year abroad? I'm leaving for Japan in
January 2006 to work, but I'm thinking of only staying for 2 years, not
forever, I don't have many ties to Canada, (RRSP, passport, driver's lic.)
can I still avoid paying the Canadian taxes? I will be paying 8% Japanese
taxes, withdrawn from my Japanese employer. I have not filled out the NR73
form, should I before I leave?
Thank you.
---------------------------------------------------------------------------
david ingram replies:
Article IV of the Canada - Japan Income Tax Convention (Treaty) is one of
the weirdest of all the treaties and reads as follows:
Japan
Article 4
1. For the purposes of this Convention, the term "resident of a Contracting
State" means any person who, under the laws of that Contracting State, is
liable to tax therein by reason of his domicile, residence, place of head or
main office, place of management or any other criterion of a similar nature.
2. Where by reason of the provisions of paragraph 1 a person is a resident
of both Contracting States, then the competent authorities of the
Contracting States shall determine by mutual agreement the Contracting State
of which that person shall be deemed to be a resident for the purposes of
this Convention.
The US treaty is much more specific and detailed and reads as follows:
Article IV
Residence
1. For the purposes of this Convention, the term "resident" of a
Contracting State means any person that, under the laws of that State, is
liable to tax therein by reason of that person's domicile, residence,
citizenship, place of management, place of incorporation or any other
criterion of a similar nature, but in the case of an estate or trust, only
to the extent that income derived by the estate or trust is liable to tax in
that State, either in its hands or in the hands of its beneficiaries. For
the purposes of this paragraph, an individual who is not a resident of
Canada under this paragraph and who is a United States citizen or an alien
admitted to the United States for permanent residence (a "green card"
holder) is a resident of the United States only if the individual has a
substantial presence, permanent home or habitual abode in the United States,
and that individual's personal and economic relations are closer to the
United States than to any third State. The term "resident" of a Contracting
State is understood to include:
(a) the Government of that State or a political subdivision or local
authority thereof or any agency or instrumentality of any such government,
subdivision or authority, and
(b)
(i) a trust, organization or other arrangement that is operated exclusively
to administer or provide pension, retirement or employee benefits; and
(ii) a not-for-profit organization
that was constituted in that State and that is, by reason of its nature as
such, generally exempt from income taxation in that State.
2. Where by reason of the provisions of paragraph 1 an individual is a
resident of both Contracting States, then his status shall be determined as
follows:
(a) he shall be deemed to be a resident of the Contracting State in which he
has a permanent home available to him; if he has a permanent home available
to him in both States or in neither State, he shall be deemed to be a
resident of the Contracting State with which his personal and economic
relations are closer (centre of vital interests);
(b) if the Contracting State in which he has his centre of vital interests
cannot be determined, he shall be deemed to be a resident of the Contracting
State in which he has an habitual abode;
(c) if he has an habitual abode in both States or in neither State, he shall
be deemed to be a resident of the Contracting State of which he is a
citizen; and
(d) if he is a citizen of both States or of neither of them, the competent
authorities of the Contracting States shall settle the question by mutual
agreement.
3. Where by reason of the provisions of paragraph 1 a company is a resident
of both Contracting States, then if it was created under the laws in force
in a Contracting State, it shall be deemed to be a resident of that State.
Notwithstanding the preceding sentence, a company that was created in a
Contracting State, that is a resident of both Contracting States and that is
continued at any time in the other Contracting State in accordance with the
corporate law in that other State shall be deemed while it is so continued
to be a resident of that other State.
4. Where by reason of the provisions of paragraph 1 an estate, trust or
other person (other than an individual or a company) is a resident of both
Contracting States, the competent authorities of the States shall by mutual
agreement endeavour to settle the question and to determine the mode of
application of the Convention to such person.
5. Notwithstanding the provisions of the preceding paragraphs, an
individual shall be deemed to be a resident of a Contracting State if:
(a) the individual is an employee of that State or of a political
subdivision, local authority or instrumentality thereof rendering services
in the discharge of functions or a governmental nature in the other
Contracting State or in a third State; and
(b) the individual is subjected in the first-mentioned State to similar
obligations in respect of taxes on income as are residents of the
first-mentioned State.
The spouse and dependent children residing with such an individual and
meeting the requirements of subparagraph (b) above shall also be deemed to
be residents of the first-mentioned State.
----------------------------------------------------------
end of US Article IV
----------------------------------------------------------
It has been my experience that the CRA will live by the terms of Article IV
of the US / Canada Treaty because those are the most common rules and apply
to Indonesia, Great Britain, Australia, New Zealand, Greece, Spain and
another 50 or 60 countries. Japan is the odd Treaty out.
So, in general, if you are in Japan for two years and do not have an empty
house or an empty apartment to return to and do have a house or apartment in
Japan, you are tax exempt from Canada.
I do not recommend that the NR73 be filled out. Even if you get a letter
from the CRA suggesting you are a non-resident making the slightest change
in your lifestyle can negate their position.
You should hand in your driver's licence, cancel your provincial medical and
make sure that there is NO home available to you to come back to at a
moment's notice. Tell your banker's that you are a non-resident.
Read the following tax cases and pay particular attention to the David
MacLean and Dennis Lee cases.
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.
---------------------------------------
Hope all this helps.
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