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Probate Fee Planning: Understanding the Pros and Cons

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Probate is the legal process of administering a person’s estate upon their death. One of the key aspects of probate is the payment of probate fees, which vary depending on the jurisdiction. In Alberta, Nunavut, Northwest Territories, Quebec, and the Yukon, probate fees are relatively low. However, in other jurisdictions, such as Ontario, probate fees can be quite high.  

cross border financial probate

Given the type of work that we do on behalf of clients, we have to be cognizant of the probate planning requirements that might exist for clients with property in the various provinces in Canada and states in the U.S.   It is not uncommon to have a client who is – what we would call – the traditional snowbird in Canada.  They might have their primary residence in Canada but spends time in a southern U.S. state where they might have a bank account or own U.S. real property.  Probate and estate planning for that type of client would require an understanding of the requirements of the Canadian province that they live or have property in as well as the state they spend time in or have property as well. 

From a Canadian perspective, in 2018, the Ontario Superior Court of Justice in the case of Eurig Estate confirmed that the Ontario probate fees were unconstitutional because they were a tax, not a fee, and as such had to be imposed by statute, not regulation. While the Eurig Estate escaped the tax, the Ontario government retroactively amended the legislation to protect its right to collect the tax.

Probate fee planning should never be done in isolation. There are potential problems with probate fee planning, including failure to distribute the assets of the deceased among beneficiaries in the way it was intended, increased income tax liability or missed income tax planning opportunities, and uncertainty as to the intention of the deceased for a joint account.

Strategies to reduce probate fees often have a large impact on the distribution of wealth on death. If a large portion of the assets of the deceased are passing outside the estate to avoid probate, it can be difficult, and sometimes impossible, to achieve estate equalization through the Will. A hotchpot clause in a Will is sometimes used to provide for an adjustment to the share of a beneficiary to account for property passing outside the estate. However, there must be sufficient assets in the estate to fund the adjustment.

It is not possible for a gift over for jointly held property. The multiple will strategy whereby a second will governs assets that can be transferred without a grant of probate (eg. shares of a private corporation and personal items) is approved by the courts in Ontario & British Columbia, but Nova Scotia has denied this strategy. Another option for reducing probate fees is the use of an alter ego or joint spousal trust, or an insurance trust (which can only be used to reduce probate fees on insurance proceeds).  Alter ego and joint spousal trusts can be very effective estate planning tools to avoid probate. However, the settlors have to be over the age of 65 to establish these types of trusts.

Obtaining probate has its advantages, such as third parties, such as financial institutions, land registry offices, and others controlling title to property, permit a transfer of the property of the deceased into the name of the executor or beneficiary. It also protects the executor from liability in the event the Will is subsequently found to be invalid. However, not obtaining probate also has its advantages, such as savings in probate fees, privacy as the Will is not available for public inspection, and potential savings in executor’s fees and legal fees.

In conclusion, probate fee planning is a complex process that should be approached with caution. It is essential to consider the potential impact of the distribution of wealth on death, as well as the advantages and disadvantages of obtaining probate. It is recommended to seek the advice of a professional advisor before making any decisions regarding probate fee planning. If you would like to review your estate plan and determine if strategies might exist to reduce probate fees and that are consistent with your succession intentions, please reach out to us at contact Cardinal Point.

Pension Options for the Canadian Business Owner-Managers Retirement

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Planning for retirement is an important objective for owner-managers operating their business in a Canadian-controlled private corporation (“CCPC”). In this article, we discuss three available pension options:

  1. Registered Retirement Savings Plans (“RRSPs”)
  2. Canada Pension Plan (“CPP”) or Quebec Pension Plan (“QPP”)
  3. Individual Pension Plans (“IPPs”)
business owner retirement planning

Each of these options requires a payment of salary or bonuses as part of the owner-managers annual remuneration strategy. Where corporate profits are retained within the corporation, a different strategy other than pensions must be used to fund retirement.

In general, a pension is a plan funded by an employer to provide payments to an employee once they are in retirement. Pension plans can be contributory, where the employee also contributes to the plan, or they may be fully funded by the employer. In Canada, pension plans are defined by provincial legislation and must be registered with the Minister of National Revenue to be deemed a pension plan under the Income Tax Act (ITA). Pension plans also have statutory contribution limits.

RRSPs
RRSPs share similarities with defined contribution pensions in Canada, including annual contribution limits and the tax-deductibility of contributions. Earnings within the plan, and amounts contributed, are not subject to tax until withdrawal and the plan must start to distribute funds at retirement or at a specified age. RRSPs have more flexibility than pensions, as withdrawals can be made at the discretion of the RRSP annuitant and can be made at any time − even earlier than the traditional retirement date. The ease of setting up an RRSP and its portability make it an attractive option. While pensions may only pass in a reduced form to a spouse, RRSPs can pass directly into an estate.

To make an RRSP contribution, the individual must have received in the prior taxation year “earned income,” including a salary or bonus as defined under subsection 146(1) of the ITA . The RRSP contribution is limited to the lower of 18% of earned income in that previous year, or a legislated annual limit. The annual limit for RRSP contributions in 2023 is $30,780 and in 2024 will be $31,560. To make the maximum RRSP contribution for 2023 would require a respective salary of $171,000 in 2022 and $175,333 in 2023. Unused contribution room carries forward and adds to the contribution limit calculated for the year before.  No contribution can be made to your own RRSP after December 31 of the year you turn 71 years old (at that time your RRSP must be converted into a Registered Retirement Income Fund or RRIF) . But a contribution to a younger spouse’s RRSP can still be made. In addition, contributions do not need to be deducted in the year they are made. They can be carried forward and deducted in a future year, which is helpful if you expect that you will be in a significantly higher marginal tax bracket in the future.

It is important to note that there are penalties for contributing more than your RRSP limit (contribution room), although an over-contribution of $2,000 can sit in the plan without incurring penalties. RRSPs can also be used for income averaging, which is the strategy of reducing income by contributing during high-income years and making withdrawals during low-income years. Finally, once you reach age 65, RRSP income is eligible for pension income splitting with your spouse, to help reduce the overall tax paid on RRSP withdrawals. 

CPP
As an owner-manager, making salary payments also includes contributing to the CPP. While regular employees only pay the employee portion of CPP, your corporation − as the employer − will also pay the employer portion of CPP premiums.

Owner-managers of incorporated businesses have the choice to pay either salaries or dividends to extract funds from their companies for personal use. For individuals who have close to the maximum 40 years of contributions to the CPP, paying dividends may be a good option. That can allow them to avoid the expected significantly increased CPP premiums starting in 2024, as the increased premiums will not result in any significant increase in the CPP pension. However, for younger business owners, the choice to pay or not pay salaries to avoid CPP premiums is subject to other considerations. Those include diversifying sources of retirement income, investing the savings for a higher return by not paying CPP premiums, and contributing to an RRSP if no salary is paid.

Note that it is possible to share CPP benefits with your spouse by making an application to Service Canada.

IPPs
IPPs are a form of defined benefit pension plan, and can be set up for just one person. An IPP is established by the employer corporation, funded by the corporation, and can be tailored for your individual needs. An IPP is subject to provincial pension rules and administrative requirements.

An IPP is often established in situations where the owner-manager has worked for the corporation for a long period and has not set aside retirement funds outside the company. An actuarial evaluation is required to determine the funding requirements for the pension for current and past service to the company. The most significant initial contribution will be for past service, which requires a history of paying yourself a salary/bonus from the company. Contributions set by the actuarial report are paid by the company and are deductible to the company in the year paid, or in the previous tax year if it is paid within 120 days of that tax year-end. Updated actuarial reports will be periodically required to ensure that the plan is adequately funded.

For entrepreneurs over age 50, the initial funding requirement should be significantly higher than for a younger employee and are likely more than can be paid into an RRSP. Note that participation in an IPP will almost eliminate your ability to continue contributing to an RRSP in future years. It is best to catch-up on RRSP contributions before instituting an IPP

Please contact Cardinal Point if you are a  Canadian business owner-manager and would like to discuss available pension options for funding your retirement as part of your overall financial planning. 

Canadian Business Owner-Manager Remuneration Planning

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If you are an incorporated Canadian entrepreneur or business owner, there are two general ways to pay yourself from your corporation:

  1. Salary/bonus – this is a deductible expense to your corporation, but fully taxable to you personally as employment income.
    1. Income tax, employee/employer Canada Pension Plan (CPP) contributions, and employee/employer Employment Insurance (EI) contributions (assuming no election out of EI) are withheld at their source, and must often be remitted to the Canada Revenue Agency (CRA) by the 15th day of the month following payment of the salary/bonus. 
    2. Your corporation can pay a bonus up to 180 days after your corporation’s fiscal year-end, and still deduct it for corporate tax purposes in the fiscal year for which it is declared. 
  2. Dividend – this is not a deductible expense to your corporation but is taxed at a lower overall tax rate to you personally, as a result of the dividend gross-up and dividend tax credit mechanism.
    1. There is no tax withheld at the source, and CPP and EI are not payable on dividend income. This can often lead to you having to pay tax personally on dividends received, and/or being subject to personal quarterly income tax installments. 
    2. Your corporation must at least record the dividend payment by its corporate fiscal year-end. 
Canadian business owner

The Canadian tax system is designed for integration, which aims to equalize the total tax paid − whether income is received as a salary/bonus or a dividend. However, the degree of integration varies by province/territory due to different tax rates, and there may be potential small advantages/disadvantages for total corporate and individual tax payable for each province/territory. These should be evaluated based on the current changes in tax rules and rates. 

The salary/bonus and dividend options to pay yourself from your corporation have different personal and corporate tax implications. Those will vary for each person, and each unique set of circumstances. The best approach for you to take should be discussed with a knowledgeable tax accountant and financial planner. But these are some key factors to consider:

  • The first $500,000 of active business income (ABI) earned by a Canadian-controlled private corporation (CCPC) is eligible for the small business deduction (SBD), resulting in a lower rate of tax payable. The SBD corporate tax rate is 9% federally and then ranges from 0% to 3.2% (depending on the province/territory of your corporation), for a maximum total of 12.2%. These SBD corporate tax rates are in comparison to the general corporate tax rates of 15% federally and 8% to 16% (depending on the province/territory of your corporation), for a maximum total of 31%.
    • Note that Saskatchewan’s provincial SBD rate is extended to $600,000 of active business income.
    • Assuming you do not require funds from your corporation to fund your personal lifestyle, they can be left within your corporation. That defers the personal level of tax liability until they are paid out of the corporation. This can result in years of tax deferral. and is a major advantage of using a corporate structure. 
    • Assuming you do require the funds from your corporation to fund your personal lifestyle, then you need to decide whether to pay the funds from your corporation as a salary/bonus or as a dividend. 
  • If your corporation earns more than $500,000 of ABI annually, then the amount in excess of the $500,000 SBD limit ($600K for Saskatchewan) can be paid from your corporation in the form of salary/bonus. This ensures no corporate tax is payable on ABI at the general corporate tax rates, and only the lower SBD corporate tax rate is paid.
  • The build-up of passive assets inside your corporation (assets not reinvested back into the active business) can eventually disqualify your corporation for the purposes of the Lifetime Capital Gains Exemption (“LCGE”). That can even claw back the amount of ABI eligible for the SBD. Once your corporation has a passive investment income of greater than $50,000 in any taxation year, each additional dollar of passive investment income reduces the $500,000 of ABI eligible for the SBD by a factor of $5. That fully eliminates the $500,000 of ABI eligible for the SBD at $150,000 of passive investment income per year.
    • The use of a proper corporate structure and purification transactions, to remove excess passive assets, can help ensure that your corporation continues to qualify for the LCGE.
  • Assets retained within your corporation, whether passive or reinvested back into the active business, are exposed to your corporation’s creditors. 
    • The use of a separate holding company through the proper corporate structure can help to limit the number of assets exposed to creditors. 
  • If you do not receive a salary/bonus from your corporation, it is possible that no contributions are made for you to CPP in that calendar year. This can result in receiving a lower amount of CPP income in retirement. It can also result in a loss of CPP disability benefits in the event that you become disabled before retirement. 
    • These negative consequences can be addressed through other savings strategies and adequate disability insurance coverage. You may even find that comparable disability insurance coverage is more affordable than the cost of paying the employee and employer premiums for CPP on a salary/bonus. 
  • Paying a salary/bonus is beneficial if:
    • You have a personal investment/retirement strategy that involves making contributions to your Registered Retirement Savings Plan (RRSP), a spousal RRSP, and CPP. 
    • You are paying childcare expenses and are the lower-income spouse/common-law partner. Childcare expenses are not deductible when dividend income is the only source of income.
    • You want to deduct expenses on your personal tax return related to use of your personal vehicle for business purposes.
    • You are subject to personal Alternative Minimum Tax (AMT) and would like to reduce or eliminate it.
  • It is important to pay personal expenses yourself, and keep company expenses separately paid through your corporation. If company funds are used to pay personal expenses, you will owe reimbursement in that amount to the company (i.e., it’s treated as a shareholder loan from your corporation to you). This shareholder loan needs to be repaid by you within one year of the end of your corporation’s taxation year. Otherwise, it will be considered taxable income to you as a shareholder and may not be deductible by your corporation, resulting in double-taxation.
    • If you have a shareholder loan that is from your corporation to you, this should be reviewed as soon as possible. A strategy for repayment or an offsetting salary/bonus/dividend to you from your corporation should be developed. 
  • Alternative ways to receive funds from your corporation are to 1) return paid-up capital or 2) pay-down shareholder loans from you to your corporation. However (unlike a salary/bonus or dividend), these alternatives are often not available each year. 
  • You should consider employing your spouse or partner and/or your children to take advantage of income-splitting opportunities. Their salaries must be reasonable for the work they perform. Unlike dividends, salaries are not subject to the Tax on Split Income (TOSI) rules. Also, consider whether or not your industry is subject to Workplace Safety and Insurance Board coverage in your province/territory.

Please note that if you are also a U.S. citizen, additional tax and remuneration planning will be required that is beyond the scope of this article.

Every Canadian entrepreneur or business owner with a corporation should have an integrated annual remuneration strategy as part of their holistic financial plan. To review your current strategy or discuss how to optimize your annual remuneration, investing, and retirement strategies, please reach out to Cardinal Point.

Will & Estate Planning Considerations for Canadians with U.S. Connections

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If you or someone you wish to benefit in your estate plan is a US person, estate planning strategies aimed at minimizing the potential exposure to U.S. estate taxes are advised. That is especially important when the anticipated U.S. estate tax exposure exceeds the amount that can be protected by available deductions, exclusions, and treaty credits. If you are able to minimize a beneficiary’s unnecessary exposure to U.S. estate taxes, then estate planning for U.S. estate tax is certainly worthwhile. When considering any proposed plan or strategy, it is also important to factor in the associated costs and ongoing compliance requirements.

will and estate planning

Who is a U.S. Person?
A U.S. person is anyone who meets any of the following criteria:

  1. They are a U.S. citizen
  2. They are a U.S. permanent resident (Green Card holder)
  3. They meet the “Substantial Presence Test,” which is a test based on the number of days they spend in the U.S. each year. Generally, they meet this criteria if they spent more than 30 days in the U.S. in the current year, and the sum of the days spent in the US as calculated below is greater than 182 days:
    • Days of current year
    • + 1/3 * Days of 1st previous year
    • + 1/6 * Days of 2nd previous year 

There are certain exemptions to the Substantial Presence Test; and below are a few of the most common:

  • The Commuter Exemption – can apply to residents of Canada who regularly commute to employment in the U.S.
  • The Closer Connection Exemption – can apply if they spent less than 183 days in the U.S. during the current calendar year; have a “tax home” in a country other than the U.S., and file Form 8840 – Closer Connection Exception to the Internal Revenue Service (IRS) for each applicable year, in a timely manner.
    • A non-exhaustive listing of the factors used to determine where someone’s tax home is located include: location of permanent home; location of family; location of personal belongings (e.g., vehicles, artwork, jewelry, items with sentimental value, etc.); location of social, political, cultural, or religious organizations; location of routine banking activities; and location of the jurisdiction where the individual votes and holds a driver’s license

Where Both Spouses are U.S. Persons
If both spouses are U.S. persons and the gross value of one spouse’s estate, after taking into account any gift tax exclusion used prior to death, exceeds the exclusion amount ($12.92 million USD for 2023, indexed annually), they may be exposed to U.S. estate tax. In such cases, there are several planning options that may be available for the spouse who predeceases:

  1. Unlimited marital deduction: Transfers on death from a U.S. citizen to a U.S. citizen spouse, either outright or through a special marital trust under each Will, can take advantage of an unlimited marital deduction against U.S. estate tax. This allows for a deferral of any U.S. estate tax until the death of the surviving spouse or payment of capital from the spousal trust. The unlimited marital deduction is also available for assets passing from the deceased spouse under their Will via a QTIP trust, which must meet certain legal requirements. For Canadian tax purposes, a QTIP trust may qualify as a “qualified spousal trust” under the ITA, allowing for the tax-deferred rollover of assets from the deceased spouse to the trust. The assets in the qualified spousal trust will not be subject to Canadian tax until they are either disposed of or the death of the surviving spouse
  2. Credit shelter trust (bypass trust): A bypass trust can be established under each spouse’s Will, generally funded in an amount up to the exclusion amount ($12.92 million USD for 2023, indexed annually), to ensure that a U.S. person’s estate tax credit is utilized, so that the amount allocated to the bypass trust passes to their intended beneficiaries free of U.S. estate tax.
  3. Portability of exclusion amount: For U.S. citizen spouses, the exclusion amount of approximately $12.92 million USD (2023, indexed annually) is portable, meaning that if one spouse dies, any unused exclusion of the deceased spouse may be transferred to the surviving spouse, subject to certain terms and conditions, by making certain elections. This effectively allows for up to approximately $25.84 million USD (2023, indexed annually) of assets to pass free from U.S. estate tax for a U.S. citizen couple. 
  4. Life insurance: Consideration can be given to purchasing life insurance on each spouse’s life in an amount sufficient to fund the expected U.S. estate tax liability. Life insurance owned by a person other than the insured person will not be subject to U.S. estate tax. Consideration can also be given to using a trust with special terms to own large insurance policies, rather than individual ownership, to remove the value of the proceeds from the taxable estate.

Where Only One Spouse is a U.S. Person
Non-U.S. person spouse’s Will: bypass trust to benefit a U.S. person spouse 
If a non- U.S. person’s Will transfers assets outright to a U.S. person surviving spouse, those assets will be included in the U.S. person’s worldwide estate for U.S. estate tax purposes. To avoid additional U.S. estate taxes, it is important to transfer the assets to a “bypass trust,” which will not be included in the U.S. person’s worldwide estate on death, as long as certain requirements are met, including limits on the U.S. person’s participation in discretionary decisions. If these trust limitations are not made, the assets in the bypass trust may be subject to U.S. estate tax. For Canadian tax purposes, assets with accrued capital gains may be rolled over to a “qualified spousal trust,” which will be tax-deferred until they are disposed of or the surviving spouse dies.

U.S. person spouse’s Will: plan for utilization of spousal credit under the Canada-U.S. Tax Treaty 
Under the Canada-U.S. Tax Treaty, a U.S. person spouse may take advantage of a spousal credit against U.S. estate taxes. To qualify for the spousal credit, the property must pass to the surviving non-U.S. person spouse in a manner that would otherwise qualify for the U.S. marital deduction, either outright or to a “qualified terminable interest property trust” (QTIP trust). The spousal credit is approximately equal to the lesser of: (1) the unified credit (exclusion amount up to $12.92 million USD for 2023, indexed annually) or (2) the U.S. estate taxes imposed on the qualifying property, allowing up to $25.84M USD (2023, indexed annually) of assets to pass from a U.S. person spouse to their non-U.S. person spouse, free of U.S. estate taxes.

U.S. citizen spouse’s Will: qualified domestic trust (QDOT)
A qualified domestic trust (QDOT) is a special trust that can be established in a U.S. citizen spouse’s Will. A QDOT allows the transfer of assets from a U.S. citizen spouse to a non-U.S. citizen spouse, which would not normally qualify for the U.S. spousal credit available to two U.S. citizen spouses. This allows a deferral of U.S. estate taxes until the death of the surviving U.S. citizen spouse. The U.S. estate tax that would otherwise be due on the death of a U.S. citizen spouse is instead paid upon distribution of any capital of the trust to the surviving non-U.S. citizen spouse, or upon the non-U.S. citizen surviving spouse’s death. However, the QDOT only defers U.S. estate taxes, much like the deferral of capital gains available for Canadian tax purposes for property passing between spouses. The deferred tax is generally imposed at the death of the non-U.S. citizen’s surviving spouse, based on the gross value of the property remaining in the QDOT. It is important to note that if the value of the QDOT increases, the tax at the time of the non-U.S. citizen surviving spouse’s death could be higher than if the tax had been imposed at the time when the first U.S. citizen spouse died. A QDOT must meet a number of complex requirements, including having at least one U.S. person trustee and being governed by the law of a U.S. state.

U.S. person spouse’s Will: credit shelter trust (bypass trust)
A credit shelter trust (bypass trust) can be established in a U.S. person’s Will in an amount up to the exclusion amount, in order to fully utilize the U.S. person’s estate tax exclusion. In this way, the trust assets may eventually pass to the non- U.S. person spouse free of U.S. estate taxes.

Life insurance
The non-U.S. person spouse may consider purchasing life insurance on the life of the U.S. person spouse, in an amount sufficient to fund the expected U.S. estate tax liability. Or life insurance on the life of the non-U.S. person spouse may be designated to a bypass trust for the benefit of the U.S. person spouse. The insurance may be owned through a special trust called an “irrevocable life insurance trust” as opposed to direct ownership, in order to exclude the value of the proceeds from the U.S. person spouse’s estate.

Holding assets between spouses
To minimize U.S. estate taxes, real property holdings between spouses should be carefully structured. Real property held in joint tenancy with right of survivorship is presumed to be included at its full value in the estate of the U.S. person spouse, except to the extent that the non-U.S. person spouse can establish the amount of their contribution to the purchase price. The value of any mortgage is generally not deductible from the property value. Canadian real estate may be held solely by the non-U.S. person spouse, so it’s not included in the estate of the U.S. person spouse − while any U.S. real estate might be held in the name of the U.S. person spouse. Assets of fixed value may be held in the name of the U.S. person spouse, while assets expected to appreciate may be held in the name of the non-U.S. person spouse. In that way, appreciating assets are excluded from assets subject to U.S. estate taxes.

When Intended Beneficiaries (including children/grandchildren) are U.S. Persons
If the intended beneficiaries of your estate are your children or grandchildren, who are now (or are likely to become in the future) U.S. persons, you may want to consider transferring assets to a bypass trust under your Will for their benefit. That will help  protect these assets from U.S. estate taxes. The assets in the bypass trust will not be included in the U.S. person beneficiary’s worldwide estate upon their death, as long as the bypass trust meets certain requirements. Those requirements include restrictions on the U.S. person beneficiary’s participation in certain discretionary decisions, such as the decision to pay income or capital, so that they do not have too much ownership of the assets within the bypass trust. But if these restrictions are not in place, the value of the assets in the bypass trust could be included in the U.S. person beneficiary’s estate on their death and subject to U.S. estate tax. In addition to protecting assets from U.S. estate taxes, using a trust can also provide other benefits. Those include ensuring the preservation of wealth for future generations, minimizing probate fees, and providing protection from matrimonial claims and creditors. However, it is important to assess the differences in Canadian and U.S. taxation and compliance for these potential trusts. Please consult a qualified Canada-U.S. advisor for more insight in that regard. 

Conclusion
If you aren’t sure whether you or one of your beneficiaries is a U.S. person, or if you would like a comprehensive review of your estate plan and financial plan, please contact Cardinal Point. 

Dual Tax Residency in a Canadian Context

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Dual tax residency, or having more than one country in which one is considered a resident for tax purposes, is not uncommon. In Canada, individuals such as high-net-worth individuals with a second home in a warmer location, landed immigrants who have maintained ties to their country of origin, and employees on extended foreign assignments may all find themselves in this dual-resident situation. The COVID-19 pandemic has also led to a new group of dual residents, due to decisions they made to extend their stay in Canada or abroad based on travel restrictions or health and safety considerations. Similarly, the trend for employees to work remotely (even across borders) has also increased the number of dual residents.

Dual Canada U.S. citizenship

Summary and Takeaways

If you reside or work in one country but are deemed a tax resident in other country, you have dual tax residency. For example, you may be Canadian but work remotely for a U.S. employer. Or you may have a second home in a warmer climate in another country. Whatever the case may be, dual residency carries tax obligations for Canadian taxpayers, based on rules and policies established and enforced by the Canada Revenue Agency (CRA). A lack of knowledge of those guidelines and regulations can have an adverse financial impact. But understanding your unique tax situation, and utilizing strategic tax planning, can help you minimize or even eliminate your tax liability.

Key Takeaways

  • You can file an NR73 or NR74 form to request a determination of your residency status, but there is a risk that this could trigger an unwanted audit.
  • If you are a non-resident of Canada, you are likely only taxed on certain income sourced in Canada.
  • If you earn significant income sourced from another nation, existing tax treaties between nations may help reduce your tax liability.
  • Dual taxation is complicated and every taxpayer’s situation is unique. It is strongly recommended that dual residents consult a cross-border taxation expert to ensure compliance and avoid unnecessary tax liability.

The Canada Revenue Agency (CRA) has traditionally engaged in increased audit activity on high-net-worth individuals and certain landed immigrants with multiple residences. Due to the pandemic, it can be expected that the CRA will have even more focus on residence issues. That’s because many individuals unexpectedly spent more time in Canada during the 2020 to 2022 taxation years, and now may have significant Canadian tax issues.

Dual residents should be aware of their Canadian tax compliance requirements before filing their Canadian tax returns. They should also carefully respond to any CRA inquiries, requests, and demands for tax returns. Proactively consulting a tax advisor may be beneficial.

The Canadian tax system is based on residence, and Canadian residents are taxable on their worldwide income. In the year of immigration or emigration, they are subject to tax on their worldwide income earned during the part of the year when they were Canadian residents. The concept of “residence” is not defined in Canada’s Income Tax Act, but the courts have defined it as the degree to which a person has settled into or maintains a central location for their ordinary mode of living.

The CRA provides guidance in the form of Income Tax Folio S5-F1-C1, which lists the most important factors (known as primary residential ties) as well as secondary factors used in determining whether or not an individual is a Canadian resident for tax purposes. Individuals can file an NR73 or NR74 form to request a determination of their residency status, but there is a risk that this could trigger a review or audit and that the determination may not be in their best interest. There is no legal obligation to file these forms unless they are requested by the CRA.

Dual residency, or having more than one country in which one is considered a tax resident, can happen when an individual is a tax resident of Canada as well as a tax resident of another jurisdiction that has a tax treaty with Canada. In these cases, the individual’s residence status for Canadian tax purposes may be determined through the application of subsection 250(5) of the Income Tax Act (ITA).

When subsection 250(5) applies, it can deem an individual who is otherwise a factual resident of Canada to be a non-resident of Canada if the tie-breaker rules of the applicable tax treaty identify the individual as a resident of the other country. Being a non-resident of Canada means that the individual is generally only taxable in Canada on certain Canadian-sourced income and would only be required to file a Canadian tax return under specific scenarios. This provision, therefore, is crucial for individuals with residential ties in Canada and another treaty country, who have significant sources of income earned outside Canada, such as through business, employment, or investment income.

The tie-breaker rules in most of Canada’s tax treaties utilize internationally recognized tests such as the permanent home test, center of vital interest test, place of habitual abode test, and the citizenship test. But before these tie-breaker rules can be applied, the individual must be considered a resident of both contracting nations for the purposes of the treaty. To be considered a resident of a contracting nation for treaty purposes, a person must be “liable to tax” in that nation, per the terms of the treaty. The CRA has provided guidance on the meaning of “liable to tax” in its publication, Income Tax Folio S5-F1-C1, paragraphs 1.41 to 1.45.

Individuals relying on subsection 250(5) of the ITA should expect to provide support to the CRA regarding their tax status in the other jurisdiction, such as copies of foreign tax returns and assessments. The first tie-breaker test is always the country in which the individual has a permanent home, either owned or rented, available to them. This is why proper tax planning can often ensure that the tie-breaker rules will apply in the desired way. However, in cases where the individual has a permanent home available to them in both countries during the dual resident period, the first test will not resolve the tie. Consequently, the second and third tie-breaker tests, center of vital interest and place of habitual abode, are often the tie-breaker rules that determine the individual’s residence status for purposes of the treaty. As these tests are highly subjective, it’s recommended that the individual consult a tax advisor for an opinion on the matter. In cases where the individual relies on the CRA to make the determination, the CRA may err on the side of caution and determine the individual to be a resident of Canada, when in fact they may have a valid and defendable tax filing position as a non-resident of Canada due to subsection 250(5) of the ITA and the treaty tie-breaker rules.

Taxpayers may not be bound by their initial classification as a resident of Canada if they have mistakenly filed their tax returns as such. If an individual is a dual resident and ITA subsection 250(5) applies to deem them a non-resident, they may be able to amend their prior tax returns − as long as the taxation years are not statute barred and the CRA agrees with the analysis of the tie-breaker rules. There is Canadian legal precedent supporting the idea that taxpayers are not bound by their initial mistaken tax classification as residents of Canada. This can be beneficial for taxpayers, particularly those who have significant non-Canadian sources of income and lower tax rates in their other country of residence. However, amending tax returns to identify oneself as a non-resident can also trigger negative tax implications, such as departure taxes. It’s advisable to consult with a tax advisor to understand all possible ramifications that may arise in both jurisdictions before considering amendment of tax returns.

It’s important to note that every dual resident case is unique and can trigger numerous tax issues in both countries. If an individual is a resident of Canada with significant ties to a country that has a tax treaty with Canada, they should not be subject to double taxation. If a double taxation arises, there will be a tax dispute process (Mutual Agreement Procedure) available to resolve the issue. The objective of this article is to raise awareness of Canada’s tax system and specifically, subsection 250(5) of the ITA. With an increase in dual residency cases as a result of the pandemic and the trend of remote work it’s important for taxpayers to be aware of the rules that may impact their tax situation. For more information, please consult Cardinal Point’s Canadian tax residency blog post, or if you would like to discuss your tax situation, please reach out to Cardinal Point.