This article identifies some of the tax issues non-resident Canadians may face when living abroad. Since tax implications will vary with each individual’s specific circumstances, professional tax advice should be sought before acting on any information provided in this article.
By Wayne Bewick, CA, CFP, CPA
Edited By C. Todd Trowbridge, CA, Arun (Ernie) Nagratha, CA, CPA |
You have left Canada and you are fortunate enough to be considered a non-resident of Canada for tax purposes. Among the joys of being a non-resident of Canada for tax purposes are the benefits of not having to pay tax in Canada on your world-wide income and potentially not having to file a Canadian tax return on an annual basis (unless you have a Canadian rental property or other Canadian source income). This is a joy not to be taken lightly as there are millions of Canadians who would love not to be subject to Canadian tax every year! This article is about the option of being able to file a tax return in circumstances where it can result in an overall tax savings on certain Canadian source income even when you are not required to file a Canadian tax return.
Election by a Non-Resident to file a Canadian Tax Return under Section 217
Although it seems like a rare thing when the Canadian Income Tax Act (ITA) actually helps Canadians save tax, section 217 of the ITA permits non-residents of Canada to elect to a file Canadian tax return if it is beneficial for them to do so. This is completely voluntary. If there is no benefit from filing a tax return there is no requirement to do so, making it a win-win situation (besides the ultimate win-win situation of non-residents not having to pay any tax!) The basic premise is that the Section 217 election allows a non-resident to voluntarily file a tax return so that they will not be in a worse tax position than if the taxpayer was a resident of Canada. Thus, the non-resident is able to claim the same deductions and credits that a normal Canadian taxpayer would. As you can imagine, there are limited situations where the section 217 filing will be beneficial but when it is, the tax savings can be substantial. Put another way, in exchange for the non-resident declaring their worldwide income on the elective return the non-resident is able to benefit from the non-refundable personal tax credits and deductions that normal Canadian tax payers receive. Examples of these non-refundable credits are the personal amount which is approximately $10,000 per year, the age amount which is currently approximately $5,000 per year, the pension income amount which is currently $2,000 per year and some potential other non-refundable credits and deductions. As you can see, if an individual is aged 65 or older and has the right type of qualified income (listed below) they can earn up to $17,000 or more every year without incurring Canadian tax. Depending on the treaty withholding rate for the country the individual lives in, the taxpayer could have paid withholding tax of 25% of this amount. By filing this elective return, tax savings of approximately $4,250 a year could be achieved. (Although this might not seem like a large tax savings, this can translate into savings of over $20,000 for someone who is abroad for 5 years). Not all types of income are eligible for the section 217 election but if any of the income items below do apply to your situation then you should give this further consideration.
Qualifying Income
Items below are the income items eligible for the section 217 election, which when paid or credited to a non-resident of Canada, are normally subject to non-resident withholding tax:
Pension benefits
Retiring allowances
Employment insurance ("EI") benefits and supplementary EI benefits
RRSP payments
RRIF payments
DPSP payments
Death benefits
Retirement compensation arrangement benefits
Prescribed benefits under government assistance programs
I have seen a lot of instances where individuals have read over this list and failed to recognize an instance where they can benefit from the election and as such I have included some examples for when using the 217 election works.
Non-Working Spouse with RRSP’s
For example, a non working spouse with $50,000 in RRSP’s could withdraw the RRSP tax free over 5 years without paying a single dollar of Canadian tax. On the other hand if the taxpayer simply withdrew this money in a lump sum as a non-resident there would be a 25% withholding tax resulting in tax of $12,500 if they did not file the elective tax return on an annual basis.
Retirement Benefits
A senior receiving CPP, RRIF or other retirement payments such as a retiring allowance could receive approximately $17,000 a year tax free. If 100% of the individual’s worldwide income was from Canadian retirement benefits there would be a benefit even if the taxpayer had retirement benefit income of close to $75,000 assuming the Canadian withholding rate would be 25%. Please note the potential savings also depend on how the income is taxed in the respective country of residence.
Employment Insurance Benefits
An individual abroad receiving maternity or parental benefits or other EI benefits could use the Section 217 election to reduce or eliminate any Canadian tax on the employment insurance benefits received if the circumstances of the situation made the individual eligible to claim the aforementioned benefits. There are other situations so again if you are receiving any of the income items above, and most or all of your income is coming from Canadian sources, you should give serious consideration to the 217 election.
Filing Requirements and Deadline
A Canadian tax return must be filed on an annual basis and the 217 return must be filed within 6 months of the tax year end in order for the election to be valid so it is important for the non-resident to be diligent with their filing requirements. If there is any tax liability, this must be remitted by April 30th of the year following the year of receipt of the s.217 eligible income.
Reduced Withholding Requirements etc
The income items mentioned are subject to withholding tax and in order to qualify under the section 217 election the non-resident must file a Canadian income tax return. If the non-resident is able to show the Canada Revenue Agency (CRA) that their tax liability will be zero or lower than the applicable withholding rate when a tax return is filed, the taxpayer can request a reduction in withholdings. This allows the taxpayer to make a determination regarding whether, on the basis of his or her estimated Canadian and world tax liability, he or she will benefit from a section 217 election for the current or coming year. If CRA agrees with the taxpayer’s request, it will authorize the payers of their Canadian benefits to reduce or eliminate withholding to match their estimated liability under the election. Form NR5 is designated for this purpose.
One issue that always comes to clients’ minds is whether or not voluntarily filing this tax return will potentially jeopardize their status as a non-resident of Canada for tax purposes. I take the position that there is no harm in filing 217 return and I take this position because residency for tax purposes is determined based on each individual’s residential ties and the particular facts of their situation and filing an elective tax return does not change the particular facts of the situation. Clearly, voluntarily filing a Canadian tax return should not be done without ensuring the tax savings will outweigh the costs and potential taxes owing. As always, seeking professional tax advice in dealing with these issues is imperative.
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