At Life Insurance Strategies Group, we are increasingly engaged to help plan the acquisition of life insurance for affluent Canadian tax residents who are planning to emigrate from Canada. Given the high tax rates in Canada – both at the federal and province levels – the number of Canadians paying an exit tax and cutting (most) ties is growing.
Life Insurance
From a life insurance perspective, this move can open the door to a broader range of available products and companies. Canadian tax residents are required to purchase Canadian tax-compliant life insurance policies. This means purchasing:
Life insurance from domestic insurers in Canada like Sun Life, Great West and Manulife, or,
Policies from other jurisdictions that meet the Revenue Canada’s definition of being tax compliant.
If the life insurance is purchased from a non-Canadian insurer, not only must the policy be Canadian tax-compliant, but there needs to be an actuarial assessment and resulting letter to attest to that compliance every year. Even skipping a year could, technically, give cause to Revenue Canada not considering the policy Canadian tax-compliant…even if it structurally is.
If the policy fails compliance, the inside build-up is subject to taxation.
For example, most U.S. tax-compliant life insurance policies are Canadian tax-compliant. Unfortunately, Canadian tax-residents who buy U.S. policies will fail to obtain the annual letter mentioned. Sometimes, these clients think that buy buying policies inside an irrevocable life insurance trust domiciled in a U.S. state where the policyholder is the trust, make a difference. They do not. Revenue Canada will look through a U.S. trust structure to the Canadian tax resident involved and Canadian tax-compliance of the policy is required.
Once someone has given up their Canadian tax residence status, they are free to purchase policies elsewhere. For example, many of the former Canadian tax residents we work with at Life Insurance Strategies Group rotate living between Canada, the United States and Grand Cayman, where there is a growing Canadian expatriate community. The time spent in the United States and Canada does not trigger any tax residency connection.
These clients may then purchase policies from Bermuda, Cayman, Barbados and other jurisdictions. Sometimes, depending upon financial ties, from the United States. Many of these policies can be purchased U.S. tax-compliant and that can be helpful if someone eventually settles in the U.S., perhaps to be around adult children and grandchildren.
In addition, many of these policies purchased ‘offshore’, can be Canadian tax compliant. Since some Canadians who emigrate may decide to permanently return to Canada someday, it is advised these folks get written, annual confirmation of Canadian tax-compliance. The portability of many ‘offshore’ policies make them a good fit for a wide range of stateless nomads.
Taxes
When you decide to leave Canada and transition into a non-resident status, it's important to be aware of the tax implications that accompany this decision. Departing from Canada triggers what is known as a departure tax, which involves the deemed disposal of all your assets at their fair market value and subsequent reacquisition of these assets at the same value. This process can lead to capital gains on these assets.
Several types of properties are exempt from this rule, including:
Canadian real or immovable property, such as land and buildings.
Canadian business property, including inventory, provided the business operates through a permanent establishment in Canada.
Pension plans.
RRSP (Registered Retirement Savings Plan).
RESP (Registered Education Savings Plan).
If you own shares in a corporation and are departing from Canada, these shares may also fall under the deemed disposition rules. However, you have options to manage the tax implications effectively. One option is to apply for a tax payment deferral by providing security, like shares of the company, to the Canada Revenue Agency (CRA). This deferral allows you to postpone the tax payment until you actually sell the property.
Alternatively, you might be eligible to claim the lifetime capital gains exemption on the deemed disposition of your shares. This exemption permits a deduction on the gain from your corporate shares, up to a maximum of $971,190 (as of 2023, indexed annually). To qualify, the shares must belong to a Qualified Small Business Corporation. Deciding to claim the lifetime capital gains exemption can be advantageous if you plan to sell the shares to a third party later or if the combined withholding tax and taxes in your new country are lower than those in Canada.
It's important to note that the deemed disposition can result in double taxation. The first level of tax is when paying the departure tax, and the second occurs when you extract the value through dividends, even if security is pledged or a lifetime capital gains exemption is claimed. To mitigate double taxation, you can work with our a tax expert to implement strategic planning.
For instance, suppose you have shares in a company worth $2,500,000 when leaving Canada. In this scenario, you would encounter the following tax payments:
Departure tax when leaving Canada: $620,000
Withholding tax on dividends: $625,000
Total tax paid in Canada: $1,245,000
Various strategies can be employed to help alleviate the burden of double taxation, such as optimizing dividends or making use of the lifetime capital gains exemption.
Renting Real Estate as a Non-Resident
While Canadian real estate is not subject to the deemed disposition rules, non-resident property owners must navigate specific rules and taxation when it comes to real estate holdings. If you are a non-resident owning real estate in Canada, you will be subject to withholding taxes. A Canadian agent is required to withhold and remit these taxes to the CRA on a monthly basis. In cases where you do not have a Canadian agent, your tenant may become responsible for these obligations.
The withholding tax is typically 25% of the gross rental income, but you can file an NR-6 form to request that the withholding tax be calculated based on 25% of the net income instead. Your agent will also provide you with an NR4 statement, detailing the amount of tax remitted.
Moreover, you have the option to file a section 216 return, which enables you to pay tax on your net Canadian rental income rather than the gross amount. If the non-resident tax withheld by the agent exceeds the tax payable on your Section 216 return (especially if you filed an NR6 and received CRA approval), you may be eligible for a refund of the difference.
Underused Housing Tax (UHT)
Starting in 2022, a new tax called the Underused Housing Tax (UHT) was introduced in Canada. This tax targets underused homes and levies a fee equivalent to 1% of the taxable value of the property or 1% of its most recent sale price, whichever is greater. Some exceptions apply, notably for Canadian citizens and permanent residents.
If you are departing Canada, it's essential to determine whether the UHT applies to your situation.
Goodbye Canada
Taxes and life insurance are only two of the numerous areas for which to plan when emigrating from Canada. Healthcare, property, investments and many others also need to be considered. This means assembling a team of experts, including Life Insurance Strategies Group, who can help make leaving Canada go smoothly.
At Life Insurance Strategies Group, we do not sell products. We help our individual and institutional clients make decisions involving complex life insurance transactions.