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.
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
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
example, a lease of one or
- residence of spouse, children and other
dependent family members in a dwelling maintained by the
individual in Canada;
maintained by the
individual in Canada;
- memberships with Canadian churches, or
synagogues, recreational and social clubs, unions and professional
organizations (left out mosques);
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.;
stores, car rental agencies, etc.;
- local newspaper subscriptions sent to a
- rental of Canadian safety deposit box or
post office box;
- subscriptions for life or general insurance
including health insurance through a Canadian insurance company;
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
- active securities accounts with Canadian
- Canadian drivers licence;
- membership in a Canadian pension plan;
- holding directorships of Canadian
- membership in Canadian partnerships;
- frequent visits to Canada for social or
- burial plot in Canada;
- legal documentation indicating Canadian
- filing a Canadian income tax return as a
- ownership of a Canadian vacation property;
- active involvement with business activities
- employment in Canada;
- maintenance or storage in Canada of
personal belongings including clothing, furniture, family pets,
clothing, furniture, family pets,
- 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
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, FrederickReed 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
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.
On a final note, as explained on page 143 of
the "PINK" 17th edition of my ULTIMATE TAX BOOK, it is possible to have
three countries after you for tax. If you are thinking of taking a job
because a recruiter told you the money is tax free, think twice and
check three times with competent individuals about what the rules
"really are". No government likes giving up the right to tax its
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