Tax issues for Canadian expats
âIâm leaving, Iâm taking everything with me, and Iâm never coming back!!â
The parting shot of an ex-girlfriend? You to your old boss at McDonalds?
No. This is the attitude you need to cop towards the Canadian tax system if you want to avoid paying Canadian income tax on your salary as a teacher in Korea.
Itâs all about being a ânon-residentâ of Canada. Canadians are required to pay Canadian tax on income from anywhere in the world, including Korea, unless we can prove weâre no longer residents of Canada.
This isnât unreasonable, particularly for a country like Canada where 90 percent of the population lives within an hour of the US border. It wouldnât make sense for a Canadian resident citizen be able to work in Detroit in the day, drive back home to Windsor over the border at suppertime, and avoid Canadian tax responsibilities because they earn their income outside of Canada. So the government wants residents to pay income tax, regardless of where on the planet they earn it.
Tax Issues for Canadian Teachers in Korea â the stuff of legend
But whatâs a âresidentâ? Surprisingly, the Canadian tax laws donât define the term. Youâd think itâd just be a matter of saying, âlook, I donât live in Burnaby anymore, I live in Daeguâ, and the fact of our not-being-residents-of-Canada-anymore would be self-evident.
However, itâs not that easy. And the misinformation related to this subject is legendary among expats in online forums, in foreigner bars and in staff rooms.
The number one myth is the notion of âdeclaring non-residencyâ through a form. There is simply no such declaration, and anyone who claims otherwise is misinformed. Also, there is also no period of time abroad that makes you a non-resident (anymore). There used to be â two years â but this was abandoned several years ago by the Canadian government.
The governments of Canada and South Korea signed an updated Tax Treaty in 2006, and this may affect you. See below for details.
Residency (and non-residency) status is determined by Canadian tax officials using two sets of criteria â âprimary tiesâ and âsecondary tiesâ.
In a nutshell, if you own anything in Canada (a car, a home), sell it before you go. If you have dependents, they need to go to Korea with you, or else the Canadian governmentâs tax agency, the CCRA, can say youâre still a Canadian resident, particularly if youâre sending money back to Canada to support someone. And if you have a spouse, they need to be with you in Korea, too.
These three things (home, spouse, dependents), are what the CCRA calls âprimary tiesâ. If you have any of these, you run a great risk of being considered a resident of Canada for tax purposes, and the CCRA can come a-calling looking for a big hunk of your income. There are exceptions (renting out a dwelling you own, for example) that may allow you to escape this, and further research will be necessary on your part to determine where you stand. But for most Canadian teachers in Korea, in their 20s or 30s and not yet at the homeowning stage, this isnât a big issue.
There are a whole bunch of these, and nearly every Canadian citizen working abroad has at least a couple of them. Thatâs fine â the CCRA doesnât make you a âresidentâ and want income tax from you just because of a couple of secondary ties. Instead, they consider the secondary ties collectively, and if you have too many, you could be in tax trouble. The solution is to get rid of as many of these ties as you can. Here they are:
- Personal Property (Your stuff. Donât put it in self-storage.)
- Social Ties (club memberships)
- Economic Ties (RRSPs, Canadian bank accounts and credit cards)
- Landed Immigrant Status or Work Permits (not relevant for Canadians working abroad)
- Hospitalization and Medical Insurance (provincial health cards)
- Provincial Drivers License
- A vehicle
- a seasonal residence (cottage)
- a Canadian Passport
- Union or Professional memberships
There may be good reasons to retain some of these secondary ties and be a non-resident. For example, you may live in a country where your Canadian drivers license is a requirement to have a local one, or else theyâd make you take a local driving test. And you may be in a country that wonât give you a credit card, so youâre keeping your Canadian one. If you do retain some secondary ties, come up with a good argument that holding them doesnât constitute a tie that would mean you intend to return to Canada someday. Remember âIâm leaving, Iâm taking everything with me, and Iâm never coming back!!â ?
The âI was Granted Non-residency!!!â Myth
There is no form-filling process that makes you a non-resident in the CCRAâs view. Itâs like being a virgin - you either are, or you arenât. And you could be screwed if you believe you are but youâre really not.
So whatâs all the talk of a form? The CCRA has a form that you can fill out voluntarily, the NR-73, that provides information about your circumstance, and the CCRA looks it over and issues a non-binding opinion about your tax status based on what you told them.
There is no agreement among expatriates about the worth of submitting this form to the CCRA.
Those in favour: the form is effective because the CRA, your accountant, your Canadian banks and possibly investment broker know your declared status whenever questions arise. Just make sure to pay with-holding tax (ask the accountant) on any dividends, capital gains, etc. There is no need to file an income tax return once your declaration of non-residency is accepted. (The billionaire Canadian Irving family is officially non-resident and do well by it.)Advocates of declaring your status find a positive response from CCRA reassuring. This form is also helpful in preventing the government from seeking back taxes from you.
Those opposed: it is significant that many tax experts advise their clients to NOT submit this form:
- Prospective emigrants often puzzle over whether to complete form NR73, CCRAâs Determination of Residency questionnaire. Since the NR73 is a voluntary filing, we recommend that you not complete the form unless requested to do so by CCRA, your employer or another institution.
(Source: Canadian Residents Abroad)
Reasons for this advice focus on the concern that the form could put you on the CCRAâs radar screen, attracting unwelcome attention to yourself. Instead, if you believe youâre a non-resident according to the CCRAâs rules and have done all the tie-severing you're supposed to, just leave the country and stop submitting tax returns. If Canadian income (royalties, dividends, old wages from before you left Canada) requires you to still submit returns even though youâve left, be sure to check the ânon-residentâ box on the return.
The âKorea has a tax treaty with Canada!!â myth
I don't think it's a myth. There's strong evidence to believe that the tax treaty effectively means if your schoolâs owner in Korea is deducting Korean income tax from your wages (and actually passing it on to the Korean government rather than using it for soju with the bus drivers), you don't need to pay Canadian income tax on your Korean income.
Here's the 2006 updated tax treaty: http://www.fin.gc.ca/treaties/Korea_2e.html
The key section is Article 15, "Dependent Personal Services", ie, Working For Mr. Kim.
It's wise to get a more authoritative opinion on this from a qualified expert.
Disclaimer / Further reading
This article was not written by a tax lawyer or an expert, and the author welcomes corrections and augmentations. As in anything as important as taxes, your best bet is to talk to a lawyer or accountant who deals with expat tax issues for a living. The next best thing is to further your education on the issue. Fortunately, many guides and government documents make it possible to do so in an hour or two from the comfort of a PC bang. Here are some resources to get you started:
IT221R3 â Determination of an individuals residence status 
This CCRA document should be your first stop. It provides in detail what's been summarized briefly here. Itâs surprisingly intelligible and readable for a government document.
A guide by an expat living in Bermuda that offers a good overview on the subject. Some doesnât apply to teachers in Korea, but itâs worth a look.
Free online, offering informed news about how the CCRA has been recently applying their non-resident criteria.
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