HONG KONG offshore assets = Canadian wants to know what to do before returning to Canada -Dennis Lee case - Judge Teskey
I'm Canadian living in Hong Kong with signifcant offshore assets in funds
and insurance savings plans and portfolio bonds. I haven't filed a return
in Canada in several years. I want to return to Canada but minimize my tax
liabilities on these assets. Do I have to report them? Can I put them in a
trust to reduce taxes? Do I need to liquidate or consolidate them before I
return to avoid capital gains?
I'm Canadian living in hong kong with signifcant offshore assets in funds
and insurance savings plans and portfolio bonds. i haven't filed a retunr
in Canada in several years. I want to return to Canada but minimize my tax
liabilities on these assets. Do I have to report them? Can I put them in a
trust to reduce taxes? Do I need to liquidate or consolidate them before I
return to avoid capital gains?
_________________________________________________________________
david ingram replies:
If you have been a true resident of Hong Kong for several years and have not kept a house open for you to return to any day you wanted (this means that it is not available if rented out for a one year lease or longer), then you are or should be free of Canadian Income tax.
Your assets are valued at their fair market value as you return to Canada. You are only taxable in Canada on increases in value AFTER you return. Anything earned before your return is tax free as far as Canada is concerned.
You should read the David MacLean and Wolf Bergelt and Dennis Lee Cases and the Judge Teskey Decision which follows:
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, 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.
and insurance savings plans and portfolio bonds. I haven't filed a return
in Canada in several years. I want to return to Canada but minimize my tax
liabilities on these assets. Do I have to report them? Can I put them in a
trust to reduce taxes? Do I need to liquidate or consolidate them before I
return to avoid capital gains?
I'm Canadian living in hong kong with signifcant offshore assets in funds
and insurance savings plans and portfolio bonds. i haven't filed a retunr
in Canada in several years. I want to return to Canada but minimize my tax
liabilities on these assets. Do I have to report them? Can I put them in a
trust to reduce taxes? Do I need to liquidate or consolidate them before I
return to avoid capital gains?
_________________________________________________________________
david ingram replies:
If you have been a true resident of Hong Kong for several years and have not kept a house open for you to return to any day you wanted (this means that it is not available if rented out for a one year lease or longer), then you are or should be free of Canadian Income tax.
Your assets are valued at their fair market value as you return to Canada. You are only taxable in Canada on increases in value AFTER you return. Anything earned before your return is tax free as far as Canada is concerned.
You should read the David MacLean and Wolf Bergelt and Dennis Lee Cases and the Judge Teskey Decision which follows:
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, 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.
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