So You Want to Move Abroad? Part 1: Leaving Canada

Between 2020 and 2021, my family sold nearly everything we owned. Our home. Our cars. Nearly all our possessions. We condensed our lives into three suitcases (one each for me, my wife, and my son).

We were moving to Tamarindo, Costa Rica. I had qualified for a "rentista" (economic solvency) visa. We enrolled our son in an expat school. Leased an apartment. Our Costa Rican lawyer was working on setting up banking. I'd even managed to pull off acquiring a 4x4 vehicle without being present in the country (no small feat if you know anything about Costa Rica).

But, we never got on the plane. My wife confessed to me one day she had cold feet. For her, the realization that going to Walmart in Iberia was an all-day excursion had started to trigger doubts. For me, I was growing increasingly uneasy about whether this was a good financial decision for us. Two things concerned me: taxes and currency risk. We started to think that we had a case of Instagram FOMO and that the grass might not be greener (ironic given it was Costa Rica!) on the other side.

Whilst we bailed at the last minute, I did learn an incredible amount about the implications of Canadians becoming expats in terms of personal finances and logistics. It was a learning process but I found very few complete sources of information at the time.

With that in mind, I thought I would share some of the knowledge I gained. Whether you're going through a mid-life crisis like us, looking to retire abroad, or returning to your country of origin, you should likely read this series of posts before leaving Canada.

This was originally one post, but when it grew beyond 4,500 words I decided to split it into two.

In Part 1, we cover the process of leaving Canada and why it's more complicated than you might expect. This includes tax residency, "departure tax", what happens to investments, and what happens with things like wills and powers of attorney.

I will link Part 2 here when it's published next week and it covers things to be aware of once you've left Canada such as withholding taxes. Part 2 is live and you can read it here.

Tax Residency

Becoming Non-resident for Tax Purposes

Several people I've spoken to erroneously think that if you leave Canada, you no longer have any tax liabilities under Canadian tax law. This is not necessarily correct and there's also a process for leaving.

Canada separates domicile (physically living in Canada) and tax residency (the requirement to pay Canadian taxes). You can physically leave Canada and remain liable to pay Canadian taxes on your worldwide income under certain circumstances.

The Canada Revenue Agency (CRA) will provide an opinion on your tax residency if you file form NR-73. Do be aware that the opinion is considered non-binding, and therefore they can change their opinion at any point.

Determining Tax Residency

The CRA looks at two levels of ties with Canada to determine tax residency: primary ties and secondary ties. A single primary tie is generally enough to be considered a tax resident and you will be taxed by Canada on your worldwide income.

There's a CRA "folio" that outlines in relatively easy-to-understand English the following points in more detail.

The biggest primary tie to Canada, and one that will automatically make you a tax resident, is having a home in Canada for your exclusive use. Having a rental property is not generally an issue as long as it's leased to a third party at arms-length (i.e. someone not closely related to you). You should read the later section on homes for more details about the repercussions of keeping real estate in Canada after you leave, though.

Leaving your spouse or children (dependents) behind in Canada will also generally continue to make you a tax resident in Canada as that's a primary tie. You'll still be subject to paying taxes on your worldwide income even if you spend the entire year working abroad whilst your family remains behind.

A single secondary tie is not generally enough to make you a tax resident by itself. However multiple secondary ties may affect your tax residency when considered together. Unfortunately, there's no clear method for establishing how many or what secondary ties might make you a tax resident in the eyes of the CRA. A qualified tax professional who's familiar with cross-border situations can likely help you here.

Secondary ties include:

• personal property in Canada (such as furniture, clothing, automobiles, and recreational vehicles);
• social ties with Canada (such as memberships in Canadian recreational or religious organizations);
• economic ties with Canada (such as employment with a Canadian employer and active involvement in a Canadian business, and Canadian bank accounts, retirement savings plans, credit cards, and securities accounts);
• landed immigrant status or appropriate work permits in Canada;
• hospitalization and medical insurance coverage from a province or territory of Canada;
• a driver's license from a province or territory of Canada;
• a vehicle registered in a province or territory of Canada;
• a seasonal dwelling place in Canada or a leased dwelling place
• a Canadian passport; and
• memberships in Canadian unions or professional organizations.

This is also not an exhaustive list and other ties may be taken into account when painting a picture about your connection with Canada.

"Ordinarily Resident"

You can read more about this in the aforementioned Folio, but being "ordinarily resident" in Canada can have tax consequences. Your intentions matter.

Imagine a scenario where you become a digital nomad for a few years. You may think you're no longer a tax resident in Canada because of this. But in a scenario where it's always your intention to return home, you may continue to be required to pay Canadian income taxes on your worldwide income over that period.

Again, you should get professional advice here concerning your exact circumstances.

"Deemed Non-resident"

If you leave Canada and become a tax resident in another country that has a tax treaty with Canada, you may find that you have severed tax ties with Canada automatically. The tax treaties avoid double taxation and generally have tie-breaker rules in them to assist with this.

You can find more information about the countries that Canada has a tax treaty with here. Most people are interested in the treaties that cover double taxation (so-called "DTAs" or Double-Taxation Agreements). Do be aware that some treaties merely establish the sharing of information rather than DTA.

Your Final Tax Return

Once you have decided on a departure date, you can file a tax return immediately or wait until the normal filing window.

Be aware that any credits you receive will be pro-rated for the year. For example, if you leave mid-way through the year, your provincial and federal credits will be roughly halved.

Once you have indicated on your return (there's a box for your departure date) that you no longer consider yourself a tax resident in Canada, you will not be entitled to GST credits or Canada Child Benefit. You should also inform your financial institutions that you will no longer be a tax resident. Read the sections on Banking and Investments for an idea of what may be in store.

"Departure Tax"

Another area people I've spoken to are surprised about is that Canada is one of the few countries with a concept of a "departure tax". It's a deemed disposition rule that results in capital gains tax being payable for certain assets on the date that you elect as the day you leave Canada.

The good news is that registered investment accounts are exempt, so your TFSA, RRSP, RESPs etc. won't incur a tax burden (but read on about those). Real estate is exempt, but read on for why that might still create a tax liability. Things like cash and cars are generally exempt, but if you have a car, jewellery, or art collection they are likely not exempt.

The big danger is cash (unregistered) investment accounts. On the day you leave, you will have a capital gains liability that is equal to the market value of the account(s) minus the cost basis. This is called "deemed disposition" in the tax world. You won't have sold anything, but you'll owe taxes as if you had.

If you owe capital gains taxes due to this condition, you may be able to avoid paying it immediately. You can look to file a Form T1244 which will defer the payment of the taxes subject to offering appropriate security (for example, a charge over shares). Do be aware that if you dispose of assets whilst under a T1244 election, you will immediately owe the taxes payable at that point.

How Your Home Affects Your Tax Residency

Your home becomes pivotal in your tax residency status in Canada. In short, having a home in Canada for your exclusive use (i.e. no Airbnb, no leasing it out) generally makes you a tax resident in Canada because it constitutes a significant residential tie with Canada.

From the CRA's Folio on tax-residency:

1.12 Where an individual who leaves Canada keeps a dwelling place in Canada (whether owned or leased), available for his or her occupation, that dwelling place will be considered to be a significant residential tie with Canada during the individual's stay abroad. However, if an individual leases a dwelling place located in Canada to a third party on arm's-length terms and conditions, the CRA will take into account all of the circumstances of the situation (including the relationship between the individual and the third party, the real estate market at the time of the individual's departure from Canada, and the purpose of the stay abroad), and may consider the dwelling place not to be a significant residential tie with Canada except when taken together with other residential ties.

As you can see from the above, if you're renting out your residence, things can get more muddied and you should get professional help to avoid surprises.

If you own a home in Canada for your exclusive use and have a home somewhere else, you may be subject to "tie-breaker" rules if the other country has a tax treaty with Canada. In short, your tax residency may be determined not by where you habitually reside or where you have a home, but by where your centre of vital interests (most of your economic activity) is. If this is a scenario that might apply to you, you should likely seek professional assistance.

Your Financial Affairs

Banking

We know from friends who have moved abroad that maintaining a Canadian chequing account (but not a savings account) does not generally create too much of a problem. But do be aware that maintaining a Canadian bank account or credit card becomes a "secondary tie" to Canada and may be factored into the CRA's opinion of your tax residency status.

You must also inform all financial institutions that you are no longer resident.

For those who have a relationship with American Express, they have a service called Global Transfer. Global Transfer will allow you to transfer your Amex account to another country if serviced by Amex. The advantage is you now have a local currency account and can start building a credit profile in that country. Costa Rica was not on the list of supported countries, but we also looked at moving to Mexico and it was included.

Investments

One major challenge with leaving Canada is with investments that you might own.

Currently most, but not all, brokerages will switch your account to "liquidate only" on receiving notice you are no longer a tax resident. You can still receive dividends and interest, and sell securities, but you cannot buy new securities. This includes DRIPs. You should also read the section on Withholding Taxes in Part 2 of this post.

I use the word "currently" because before we were due to leave, TD had confirmed they'd keep my unregistered investment account active. My account manager would inform me later on that they had changed corporate policy and would enforce the above "liquidate only" scenario for nearly every country.

You can legally keep a TFSA or RRSP and even RESP open when you leave, but they might well be set to liquidate only. You should read Part 2 as to some of the pitfalls of doing this, though – just because they're still tax-free in Canada doesn't mean they'll be tax-free in your new home!

I did speak to Interactive Brokers (IBKR) and they were willing to let me keep my Canadian taxable account positions open but in a US-domiciled account. Some wealth managers may be prepared to maintain accounts for non-residents as they will take on the compliance and regulatory burden that this creates.

Health Care

Most Canadians are blissfully unaware of what major healthcare expenses cost. In other countries, that's not necessarily the case.

Due to my health history, I was not able to qualify for an "expat" health insurance plan that would cover major medical expenses. I was able to get coverage under what's called a "catastrophic policy".

The cost for my wife and son under an expat policy was roughly a thousand Canadian dollars a month. We do know people who "self-insure" (they pay all medical expenses out of pocket), but that could leave you in a predicament in a major medical emergency.

Life Insurance

My wife has a term life policy that takes her through to traditional retirement age. In the case of her policy, we were informed that the policy and coverage would remain intact even if she were no longer habitually living in Canada.

You should check with your policy provider as to whether that would be the case. During this process, I found out that it is not always the case that insurers look kindly on moving abroad. Moving to certain countries or exposing yourself to certain risks may invalidate your policy. Your insurance agent can likely help you navigate here.

Wills and Power of Attorney

This can be a fairly complicated area. We had wills and full power of attorney drawn up in Ontario.

Our wills may have successfully dealt with our Canadian assets, but the power of attorney would not have been valid in Costa Rica and I was advised there might well be issues with the wills too.

Coming in Part 2

In Part 2 we'll talk about the dreaded withholding taxes, which are something to be aware of if you have Canadian-source income (dividends, royalties, RRSP/RRIF payments, CPP or OAS are some examples).

There are also potential perils with keeping a home after you leave when you sell it, and we'll go through that too.

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Whilst every effort is made to make sure this information is complete and accurate, it is not advice and you should talk to a professional about your circumstances.