Leaving and renting your house while gone. T776 - NR-6 NR-4 -Sec 216(4) tax return ACB - section 45(3) non-resident issues - dee

QUESTION: I will be leaving the country for 2 years to work overseas. Given the quickly rising home prices in Calgary, I wanted to buy a home before I leave. When I return in 2 years this home will become my principle residence but for the next 2 years I will rent it out. Can I deduct mortgage payments as a rental expense for the next 2 years before it becomes my principle residence? Also, if I renovate parts of the home and replace the appliances immediately so the renters benefit from them for the next 2 years, can I deduct these expenses or a portion thereof?

Thank you,

david ingram replies:

Whether leaving the country or staying, no improvements or renovations or additions to a new rental property are deductible if made BEFORE you rent it out.

If improvements to the building, they are added to the ACB (adjusted cost base) and become a depreciable Class 1 item at 4%.

Appliances are added to Class 8 and can be depreciated at 20%.

The same is true if you were living in the house with things that were not quite right (as we all do) but decided you should fix this and that before renting it out. None of those expenses would be deductible but

You can find out more about renting by going to www.centa.com, clicking on Tax Guide in the top left hand box and clicking on rental income.

However, no depreciation can be claimed unless there is a rental profit.

Go to the CRA website print out form T776 for an example of a rental schedule and what you can deduct. http://www.cra-arc.gc.ca/E/pbg/tf/t776/t776-fill-04e.pdf

BEFORE renting it out, you and a "tax" agent (which may be your rental real estate manager or could be your brother or sister if he or she is going to rent the property for you) need to file form NR-6 with the CRA.


Then by March 31, of next year your tax agent has to file form NR4 and an NR4 Summary to report the rents that they collected for you and any non-resident tax deducted.

And, By June 30, 2007, you will have to file a Section 216(4) non-resident rental tax return with the CRA. Of course, you will also need to file a "departing Canada" tax return and a form T1161 (penalty is $2,500 for failure to file ($25.00 a day for 100 days).

When you move back and into the house, there is a deemed disposition and you will owe tax to the CRA on any increase in value while you were a non-resident.

This taxable amount is calculated on Schedule 3 and put on line 127. However, under section 45(3)of the tax act, you can elect to defer actually "paying" the tax until you actually sell it by making an election and putting the same amount on line 256 that you put on line 127.

The subject of being a non-resident and not paying tax to Canada on your overseas earnings is another question and the answer depends upon whether you are working in a treaty country like Spain or Indonesia or Japan, a taxable country like Libya or a tax free jurisdiction like Kuwait, Saudi Arabia, Dubai or Panama.

The following has lots of good tips and you might want to book an hour of my time by phone. our costs are at the very end of this.


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We own land within a co-op on xxxxxx island, and a house in xxxxxxx that is leased. We are both residents in Canada and have two children. We have RRSPs and RESPs. What is the best course of action to take regarding taxes and working in the UAE? We plan to be gone no more than three years. Thank you.

----------------------------------------------- david ingram replies:

To go to the UAE and escape Canadian Tax you have to MOVE there, virtually lock, stock, and barrel.

If your home is rented out on a long term basis and not available to you to live in for a year, that usually solves the problem of the house being available.

I am giving you a long loonnngg prior answer. However, if you are genuinely going, you should consult with someone like myself to be sure.


QUESTION: RE:answer posted on Jan 11 I am a Canadian non-resident living and working in the middle east (6 years) with my wife. We had cut ties with Canada (even drivers licences have now expired) but last year put a deposit on a condo in Edmonton since we anticipated moving back in the next year or so if employment terminated here. However we have new contracts and expect to continue to stay away for an indefinite period. Would lending finance to our son (a university student who needs somewhere to live) to purchase the unit (and then for him to live there) cause significant problems with our non resident status??


david ingram replies:

Anything you do in Canada is liable to cause you a problem. However, loaning the money to your son to buy a condo should not pose a problem.

However, I would have been happier if it had been in his name to start with. The fact that it was originally in your name and is now going into your son's name could lead a suspicious CRA employee to think that it was only going in his name to make it look like it was not yours and not available for your use.

Whatever you do, DON'T stay there if you visit Canada!

Remember that the Rule is that there can NOT be a home "available" to you. It does not have to be registered in YOUR name to be "available”. Staying in it would be an absolute proof that it was available. Particularly, if your son chose that time to stay with a friend or something and if it was found to have your furniture “stored” in it.

Read Judge Teskey’s list in the following older questions:


Sent: Saturday, February 04, 2006 6:14 AM

To: [email protected]

Subject: Canadian with US Investments

I am a Non Resident Canadian citizen living and working in Saudi Arabia. I have been out of Canada for more than 10 years.

I have stock investments in Canada and the US. I am listed as a Non Resident with these brokers. I already have 25% Non Resident Tax deducted on interest income or dividends.

These are the only investments I have in Canada or the US.

Do I have to file a tax return in either country?


david ingram replies:

As a non-resident there is no tax payable to the US or Canada on publicly traded stocks.

As long as tax on dividends and interest is being deducted and you are receiving NR4 slips from Canada showing that fact and 1042S slips for the US, there is no reason for you to file a return in the US or Canada.

However, Canada DOES have a habit of taxing people who return from Saudi Arabia because they kept things like a Canadian Driver's licence.

My advice would be to switch all your investments to the US broker and closing down the Canadian accounts.

Read the following question and the "so what are the rules?" section from my 1991 Ultimate Income Tax Guide. i.e. it is all old stuff, not a new interpretation.


QUESTION: I am a Canadian non-resident living in Asia for the past 11 years. I am looking to buy a condo in Edmonton for investment purposes. If we do not rent it out immediately and it sits empty to be used occasionally when we visit family in Edmonton, will this jeopardise our non-resident tax status?



david ingram replies:

If you are in a tax-treaty country like Thailand or Indonesia, it will not matter because your family is with you in Asia. However, if your spouse wanders over to Canada and stays in the condo for five or six months, the CRA will have every right to try and tax you and may succeed because Article IV of the tax treaty will have your personal interests in Canada.

The Dennis Lee decision by Judge Teskey is one of the best ones to read. you can go to www.centa.com and click on US / Canada taxation in the second box down on the right hand side and it will give you a lot of information. I am repeating some of it here.

. 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.


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.

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 citizens.


Non-residents of Canada with investments in Canada are subject to a 25% non-resident withholding tax on any money paid to them while they are out of the Canada. Therefore, if they have $10,000 in the Bank of Montreal and they live in Argentina, The Bank of Montreal must withhold 25 cents out of every dollar of interest paid to the account. Most tax treaty countries such as Great Britain, Germany, the United States, and Australia have a reciprocal agreement with Canada that limits the withholding to 15%. So we have the anomaly that a Canadian with money in a bank in the U.S. has no withholding but an American with money in a Canadian Bank has 15 cents out of every dollar withheld as a foreign withholding tax. The American would report his interest on schedule A of his 1040 tax return and claim the tax withheld as a foreign tax credit on a form 1116.


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