For the past two winters, many snowbirds have been forced to hibernate at home. With travel now accessible, some are looking to resume their migration south to escape the cold. If this is within your plan, consider the potential implications.
Leaving for Extended Periods? Beware of Tax Issues
If you leave Canada for extended periods, a significant consideration may be the potential tax implications, both in Canada and your chosen destination. Canadian income tax obligations are based on your residency status, which is determined on a case-by-case basis. This can be affected by factors such as the amount of time spent in Canada, residential ties (i.e., property owned), purpose for your time abroad and your ties abroad. Being a Canadian non-resident for tax purposes may still require you to file a Canadian income tax return and pay taxes. A non-resident withholding tax of 25 percent may also apply to certain income received, such as dividends or pension payments.
If you are deemed to be a resident of a foreign country, you may be subject to that country’s tax rules. For example, the U.S. Internal Revenue Service (IRS) uses the “substantial presence test” to determine whether an individual is considered a U.S. resident for tax purposes, a formula using the days spent in the U.S. in the current and prior two years. Qualifying as a U.S. resident for tax purposes can have tax consequences, such as subjecting worldwide income to U.S. taxation or exposing Canadians to the U.S. estate tax at death.
Other Financial Implications
Beyond the potential tax issues, there may be other financial implications. Although the rules vary by province, provincial medical coverage may become invalid as a result of extended periods spent out of province. Even if coverage remains valid, certain services received abroad may not be covered by provincial healthcare plans, so having adequate private coverage should be a consideration.
Your government benefits may be affected by your residency status. For example, Old Age Security (OAS) and Canada/Quebec Pension Plan (CPP/QPP) benefits may be subject to a non-resident tax of 25 percent (unless reduced/exempted by a tax treaty between Canada and the country of residence). The value of OAS payments is impacted by how long you have lived in Canada after age 18, so a non-residency status may reduce payment amounts. For Tax-Free Savings Accounts, you cannot accumulate contribution room for any year that you are a non-resident of Canada throughout the entire year and any non-resident contributions will be subject to a penalty tax.
Consider that the laws of the jurisdiction of residence at the time of death may govern how an estate will be taxed. Even if you remain a Canadian resident, if you have appointed a non-resident to administer your estate, your estate may be considered a nonresident estate and may not receive preferential tax treatment (i.e., on Canadian dividends/capital gains) or it may be subject to the tax laws of the country where the trustee resides. Power of attorney (POA) documents may also become complicated by a non-residency status. If you are appointed as POA for property but are no longer a Canadian resident, you may be limited in your actions, such as potentially not being able to give trading instructions on an account.
There may be other implications resulting from a change in residency status due to extended periods spent outside of Canada. This discussion isn’t meant to be comprehensive, so please seek advice from cross-border tax and legal advisors regarding your situation.