ESL in Korea
|Chapter One- The Job|
“I’m leaving, I’m taking everything with me, and I’m never coming back!!”
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.
It’s all about being a “non-resident” of Canada. Canadians are required to pay Canadian tax on income from anywhere in the world, including Korea, unless we can prove we’re no longer residents of Canada.
This isn’t unreasonable, particularly for a country like Canada where 90 percent of the population lives within an hour of the US border. It wouldn’t 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.
But what’s a “resident”? Surprisingly, the Canadian tax laws don’t define the term. You’d think it’d just be a matter of saying, “look, I don’t live in Burnaby anymore, I live in Daegu”, and the fact of our not-being-residents-of-Canada-anymore would be self-evident.
However, it’s 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 “declaring non-residency” 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 – two years – 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 – “primary ties” and “secondary ties”.
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 government’s tax agency, the CCRA, can say you’re still a Canadian resident, particularly if you’re 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 “primary ties”. 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 isn’t a big issue.
There are a whole bunch of these, and nearly every Canadian citizen working abroad has at least a couple of them. That’s fine – the CCRA doesn’t make you a “resident” 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:
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 they’d make you take a local driving test. And you may be in a country that won’t give you a credit card, so you’re keeping your Canadian one. If you do retain some secondary ties, come up with a good argument that holding them doesn’t constitute a tie that would mean you intend to return to Canada someday. Remember “I’m leaving, I’m taking everything with me, and I’m never coming back!!” ?
There is no form-filling process that makes you a non-resident in the CCRA’s view. It’s like being a virgin - you either are, or you aren’t. And you could be screwed if you believe you are but you’re really not.
So what’s 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:
(Source: Canadian Residents Abroad)
Reasons for this advice focus on the concern that the form could put you on the CCRA’s radar screen, attracting unwelcome attention to yourself. Instead, if you believe you’re a non-resident according to the CCRA’s 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 you’ve left, be sure to check the “non-resident” box on the return.
I don't think it's a myth. There's strong evidence to believe that the tax treaty effectively means if your school’s 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.
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 – Determination of an individuals residence status 
This CCRA document should be your first stop. It provides in detail what's been summarized briefly here. It’s 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 doesn’t apply to teachers in Korea, but it’s worth a look.
Free online, offering informed news about how the CCRA has been recently applying their non-resident criteria.
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