Canadian Tax Post-Emigration: Canadian Investments and Working in Canada

While some individuals sever all their ties to Canada after they have emigrated, many individuals continue to maintain economic, financial and familial ties. Economic and financial ties often include investments in registered and non-registered accounts, private holding companies and investment in Canadian real estate. Individuals may also continue to work in Canada.

In our last article, Tax Considerations on Emigrating from Canada, we covered some of the major tax issues and certain planning opportunities to consider before emigrating from Canada. In this article, we discuss certain tax issues and planning considerations that arise post-emigration.

Investments

Despite the outperformance of U.S. equity markets over the last decade, Canadian investors continue to have a “home bias”, allocating about 50% of their total equity portfolio to Canadian stocks. While it is not the purview of a tax lawyer to advise on investment strategies, it is important for Canadians to know the tax consequences of their investments after they have left Canada.

Withholding Tax

Non-residents of Canada that invest in Canadian securities may be subject to withholding tax on those investments. Portfolio dividends paid from a Canadian corporation to a non-resident of Canada are subject to withholding tax at a rate of 25% (subject to a reduced rate under an applicable treaty). Interest (subject to certain limited exceptions) and capital gains (that do not arise from the disposition of “taxable Canadian property”) are generally not subject to Canadian withholding tax.

Although interest payments are generally not subject to Canadian withholding tax, certain exceptions to this rule include: (1) interest on non-arm’s length (related party) debt, (2) participating interest (where the amount of the interest payment is determined in connection with the revenue or profit of the company or other similar indicia) and (3) interest paid in excess of the limit under “thin capitalization” rules (resulting in a deemed dividend), which generally limit the amount of debt that can be used by non-residents when capitalizing Canadian companies.

All else being equal, individuals that have emigrated from Canada to a low tax jurisdiction but want to maintain a portfolio of Canadian securities should therefore consider investing in securities that do not give rise to Canadian withholding tax (such as gains from the disposition of most publicly traded shares and arm’s length portfolio interest).

Investments by non-residents of Canada into privately held Canadian companies can result in significant tax complexity and the application of various Canadian tax rules depending on how the investment is structured (debt, equity, convertible debt, royalties) and how much leverage is used, resulting in increased withholding tax or a denial of interest deductions (under the thin capitalization and EIFEL rules). Where an individual continues to own a Canadian holding company after their departure, capital gains earned in the holding company will generally be taxed at a rate of 17.67%, foreign portfolio dividends and interest income will be taxed at a rate of 26.5% and portfolio dividends from Canadian companies will be subject to tax at a rate of 38.3% (which will be refunded when an eligible dividend is paid out of the corporation). As mentioned, additional withholding tax may be payable when the income earned by the corporation is paid out in the form of a dividend to the non-resident shareholder.

Treaty Benefits

When considering the tax implications of investing in Canada, it is also important to consider whether the individual’s new home country has a tax treaty with Canada. Tax treaties may reduce withholding tax on dividends or interest (where applicable) to 15%, 10% or even 5% in certain circumstances. Certain treaties (such as the Canada-US Tax Treaty) also exempt interest income from withholding tax altogether.

Certain Registered Accounts: RRSPs, RRIFs and TFSAs

RRSP and RRIF withdrawals by non-residents of Canada are generally subject to withholding tax at a rate of 25%. If the withdrawal constitutes a “periodic pension payment”, the withholding tax rate may be reduced to 15% under an applicable tax treaty. Generally, a “periodic pension payment” is an amount withdrawn from an RRIF in a calendar year that does not exceed the greater of (a) twice the RRIF minimum for the year or (b) 10% of the fair market value of the RRIF at the beginning of the year. In instances where the withholding tax would be greater than the Canadian income tax otherwise payable on the withdrawal to a Canadian resident individual, the non-resident individual may elect under section 217 of the Income Tax Act to be taxed as though they were subject to tax as a Canadian resident individual (subject to certain adjustments). In contrast to withdrawals from RRSPs and RRIFs, withdrawals from a TFSA are not subject to Canadian withholding tax.

When contemplating withdrawals from your registered accounts or maintenance of those accounts, it is also critical to consider the tax implications of your new home country (and state) of residence. For example, as RRSPs are generally viewed as grantor trusts from a US tax perspective, a certain portion of the withdrawn amount (generally up to your principal contribution) will not be subject to U.S. tax, but the increase in value in the RRSP will generally be subject to U.S. tax.

Most tax treaties ensure that income earned in an RRSP will not be subject to tax until it is withdrawn from the registered account. This treatment, however, is not uniform. Individuals that move to certain U.S. states may be subject to state tax as the income is earned in the RRSP since certain U.S. states (such as California) do not abide by federal tax treaties (including the Canada-U.S. Tax Treaty).

It is also important that non-residents are wary of their contribution limitations to registered accounts. If a contribution is made by a non-resident to their registered account (such as their TFSA or RRSP), in addition to a penalty tax for overcontributions of 1% per month, the individual may be subject to an additional 1% penalty tax per month for the amount they contribute as a non-resident, until such overcontributions and non-resident contributions are withdrawn from the account.

Canadian Real Estate

Rental Income

Passive rental income from Canadian real estate paid to a non-resident of Canada is generally taxed at a rate of 25% on the gross amount of the rental income. Alternatively, a non-resident may make an election under section 216 of the Income Tax Act to be taxed on the rental income on a net basis. A net basis election allows the investor to deduct certain expenses related to earning the rental income, such as interest and depreciation (subject to applicable limits).

Where the level of activity involved in generating the rental income is sufficient to constitute a business, the income may be taxed on a net basis in Canada with additional branch tax of 25% (subject to reduced treaty rates). In such a case, additional structuring should be considered, including incorporating the real estate investment portfolio prior to emigrating from Canada or making a section 216 election with a head tenant to reduce their tax exposure.

Capital Gains

Capital gains from the disposition of Canadian real estate are subject to Canadian source tax. To ensure that a non-resident vendor pays their required tax obligation, the buyer is required to withhold 25% (or 35% from January 1, 2025) of the purchase price (or 50% for depreciable property) and remit the amount to the CRA, unless the non-resident seller applies for and receives a section 116 clearance certificate from the CRA. Since the CRA typically takes anywhere from 6 to 12 months (and sometimes longer) to issue a clearance certificate, standard practice has been for the CRA to issue a comfort letter advising that the buyer should withhold but is not required to remit the applicable amount to the CRA, pending their review of the Section 116 application.

Non-Residents Working in Canada

Individuals who continue to physically work in Canada after they emigrate may continue to be subject to Canadian tax. If an individual is employed in Canada and physically performs their work here, they will continue to be subject to Canadian tax on their income, unless a tax treaty provides for an exemption. Tax treaties typically restrict Canada’s ability to tax employment income where (a) the individual is present in Canada for 183 days or less in a year, (b) the employer is not Canadian, and/or (c) the employer does not have a permanent establishment in Canada.  It is always necessary to review the provisions of the applicable tax treaty to determine if an exemption applies. Although a non-resident employee may be exempt from tax under the terms of an applicable tax treaty, an employer will still be required to impose payroll withholding, unless a waiver is obtained.

Where an individual operates a business in Canada, the business will be subject to Canadian income tax (and branch tax, which may be reduced under a tax treaty), unless the individual’s new country of residence has a treaty with Canada and the business is not carried on through a permanent establishment in Canada. This may be the case where a non-resident individual operates a services business and periodically carries on business in Canada. In this case, the service recipient is required to withhold 15% of the payment for services, unless the non-resident obtains a waiver.

Conclusion

Individuals who have emigrated from Canada may have continued exposure to Canadian tax on their Canadian based investments or if they continue to work in Canada. Individuals who continue to have Canadian based assets should seek advice of both a Canadian tax professional and a tax professional in their new home country to ensure their tax situation is optimized.

This article is not intended and does not constitute legal or tax advice. Such advice can only be provided after a full review of an individual’s facts and circumstances. Please reach out to your local tax and legal professionals for help.