Essential Immigration and Tax Strategies for Canadians Moving Abroad

Reasonable Doubt
With David Lesperance

A contrarian expert on contingency plans for the wealthy delivers uncomfortable truths.

Throughout history, immigrants have looked abroad for an opportunity to have a better life or to flee danger. Unfortunately, in mapping out their migration plans, too many potential immigrants only look to at the destination and ignore where they are starting their journey.

Specifically, they ignore their current tax situation and do not consider whether their departure has significant financial ramifications or ongoing tax liability. This approach is always dangerous.

It is especially risky for Canadians whose move abroad could trigger an unwanted disposition of unrealized capital gains, known as an “exit tax.”

In this article, I will explore why Canadians may want to secure a second residence and/or citizenship and how they can achieve this goal. I will also explore the various tax issues arising from how they choose to use that second residence or citizenship by going to live abroad.

Why are Canadians interested in second residence and citizenship?

Traditionally, Canadians acquired a second residence or citizenship for work, study, or retirement abroad. Now, however, they are increasingly seeking these statuses to protect themselves and their families against what they believe is an uncertain political and economic future for Canada.

Growing concerns about economic, political, social, and environmental “wildfire” risks have fuelled the tremendous increase in interest. These risks include new tax-the-rich proposals, such as the June 25, 2024, increase in their capital gains tax burden.

Specifically, individuals with capital gains of more than $250,000 will now be subject to an inclusion rate of 67 percent, up from 50 percent before. For corporations, all capital gains are now subject to the two-thirds inclusion rate.

This tax change applies to profits from selling secondary properties or investments, including stocks or bonds and family cottages. The new inclusion rate does not change the tax rate itself, which will continue to be an individual or corporation’s marginal rate, but increases the taxable portion of that gain.

The new measures will not impact capital gains on tax-sheltered savings that are currently exempt such as the capital gains from selling a principal residence, income earned in tax-sheltered savings accounts, like tax-free savings accounts (TFSA), First Home Savings Accounts (FHSA), registered retirement savings plans (RRSP) or registered education savings plans (RESP), and pension income or capital gains earned by registered pension plans.

This update to capital gains tax is the first major change, but probably not the last; tax-the-rich proposals will become a reality.

Other policies, such as a limit on the principal residence capital gain exemption, new increases in capital gains rates, wealth tax, and even citizenship-based taxation, have all been discussed in Parliament.

For all these reasons, Canadians are increasingly acquiring “fire insurance” in the form of a second residence and/or citizenship and then integrating it into a customized fire escape plan that meets their family needs and anticipates and minimizes or eliminates the exit tax upon their relocation. When combined, the fire insurance and fire escape strategies constitute what I call backup plans, which fall into two categories:

1. Get out or “Go Bag” plan: This allows for instantaneous temporary relocation as a result of natural disasters (e.g., ice storm) or regular seasonal absences. The key is that they are not absent from Canada to become non-residents for tax purposes; or
2. Canadian citizens living abroad: This plan is a complete legal departure from the Canadian tax system.

What are the tax consequences for Canadians living abroad?

The main decision that a Canadian needs to consider is whether or not they want to continue to be a tax resident in Canada. If they choose not to, they must do the following three things:

• Spend fewer than 183 days annually in Canada from the point at which they claim non-residence;
• Sever all significant residential ties and, if possible, all secondary residential ties; and
• Acquire residential ties in another jurisdiction (a vital consideration is whether to acquire tax residence in a country that has a tax treaty with Canada). Several countries allow HNW Canadians to reproduce their lifestyle at a fraction of the total global tax burden, but pre-immigration tax planning is critical to achieving that feat.

In going through this process, the client needs to look at all their assets in Canada, including home, RRSP, other Retirement/Savings plans, business, financial assets, vacation properties, etc., and figure out a strategy for dealing with each one.

They must also consider lifestyle requirements for themselves and their families (e.g., medical insurance, education, driver’s license, etc.) and choose a new destination to fulfill all these needs.

To succeed, the whole departure and relocation strategy must be solid and accepted, not only on a financial basis but also at the family dining table. It has to be simple to understand and implement by all stakeholders and meet the liveability needs of all family members.

These individuals also need to consider the exit tax issues that arise when they become non-residents. Strategies to deal with exit tax may include insurance, estate freezes, capital gains exemptions, deferral, and borrowing against assets to have the liquidity to pay the tax.

Finally, there is also the issue of whether the individual should seek a ruling from the CRA regarding their pending non-residence. Tax professionals debate whether or not an individual should file an NR-73E under all circumstances.

As Canadian readers can now appreciate, moving outside Canada is much more than deciding where you want to live in the future. Failure to recognize Canadian tax issues almost guarantees disaster from the outset.

Failure to plan is planning to fail.