Expatriating with Justin Abrams | E064
The tax implications of leaving Canada.
In this episode host, Jason Pereira, talks with Justin Abrams who is a partner with Kraft Berger LLP. Justin is a tax expert, and he is here to talk about the implication of expatriates.
Episode Highlights:
1.10: Justin says he is a tax partner at Kraft Berger LLP in Toronto, advising and managing clients.
2.38: Jason asks Justin, “From your standpoint what is the first thing people need to consider when leaving the country?”
2.40: Justin says that leaving a country depends on what asset you own from a tax point of view.
2.54: Canada has a regime that if you owned property when you were a resident, the value accrued should be taxed in Canada. If you were to leave Canada, it has a worldwide taxation system.
5.22: Justin talks about the unique tax system that Canada has.
6.00: When you leave Canada, everything you own is subject to tax except Canadian Real Property. The reason is non-resident is subject to tax when they sell their property.
08.26: One of the interesting things to note is that if you are moving to the United States, one thing that the immigrant can do is sell their property in RSP and then buy it back.
10.35: Justin throws light in tax exemption for people who stay and owns property in Canada for less than 5 years.
11.17: Jason says, “If you are an individual, then implications aren’t harsh in Canada.”
14.34: Jason and Justin talk about “What happens to business owners when they decide to leave Canada?”
15.47: If it is a Canada Corporation, nothing happens to the corporation, it remains. Even though you are a resident of United States or Spain. When a non-resident wants to take out the company, there is going to be gains in the underlying value in the corporation.
19.52: Justin shares detailed classifications of Canadian Tax Systems and Rates.
20.27: Jason inquires, “What are the steps involved in mitigation?”
21.20: Justin gives valuable insights on Capital Dividend Account. As part of the mitigation strategy, he also suggests reducing your company’s value before selling it out.
24.26: Justin gives real-life examples about how to best save tax.
28.04: Jason talks about the triple tax situation that one might fall into.
28.14: Jason is curious to know “What happens when people decide to come back to Canada?”
29.01: “If you are planning to come back to Canada, you can un-wind or defer to pay tax.”, says Justin. If you are planning to come back, pledge some valuable asset before leaving.
31.38: Justin talks about unwinding the departure tax.
32.45: Justin says when you leave, Canada any gains in the property would have been subject to tax in Canada.
35.44: Jason talks about the importance of planning your exit from Canada properly.
37.54: When you leave Canada, make sure the country where you are moving to gives you a cost base.
3 Key Points:
Jason and Justin talk about the serious tax implications when one decides to leave Canada.
If you are a business owner or shareholder and you decide to leave the country. Canada would want the Accrued Value.
Jason shares the key takeaway from this episode. If you are leaving the country, you may or may not have tax implications. But if you have substantial wealth, then you will have to pay tax when leaving the country.
Tweetable Quotes:
“When you leave Canada, everything you own is subject to tax except Canadian Real Property.”- Justin Abrams
“You can pledge private company shares if those are the shares that gave rise to the tax.” - Justin Abrams
“If we leave the country, we will have to pay 27% tax.” - Justin Abrams
“If you are coming back to Canada, you can make it a cashless endeavor.” - Justin Abrams
“Taxable Canadian property is taxable if you are a non-resident or not.” - Justin Abrams
Resources Mentioned
Facebook – Jason Pereira’s Facebook
LinkedIn – Jason Pereira’s LinkedIn
Woodgate.com – Sponsor
LinkedIn – Jason Pereira’s LinkedIn
Transcript:
Producer: Welcome to the Financial Planning for Canadian Business Owners Podcast. You will hear about industry insights with award-winning financial planner and entrepreneur, Jason Pereira. Through the interviews with different experts, with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success and make the most of your business and life. And now your host, Jason Pereira.
Jason Pereira: Hello and welcome. Today in the show I have Justin Abrams, Tax Partner at Kraft Berger LLP in Toronto. Justin is a tax expert, and I brought him in today to specifically talk about the implications of expatriate. That is when you decide to leave Canada. Unfortunately, people like to think that the border is just this imaginary line to cross. We need a passport for it, and that's all there is, but Oh no, there are serious tax implications for what happens when you want to leave Canada. And with that, here's my interview with Justin. Justin, thanks for taking the time today.
Justin Abrams: Yeah. Thanks, Jason. My pleasure. Thanks for having me.
Jason Pereira: So, Justin Abrams, tell us about who it is you are and what it is you do.
Justin Abrams: Yeah. So I'm a Tax Partner at the Kraft Berger LLP in Toronto, primarily advising owner-managed clients, self-employed individuals, people who have businesses, people who are employed, high net worth people, estate planning, tax planning, estate planning, dispute resolutions, purchase and sale of businesses. So, anything in the realm of tax, the firm is a multi-service, full service firm, audits, reviews, valuations, tax, of course. So yeah, been here eight years, partner for four. It's going well.
Jason Pereira: Excellent. So, I mean, I brought you on the podcast, because we're working on a case together right now, an expatriation and it's funny. So, I've often said, and as I said in the intro, that people treat changing countries as if it's this [inaudible 00:01:47], "So, let me just pack it up and go." It's amazing how many people do that without ever stopping to think of the tax implications. And on more than one occasion, I've seen people stop entirely and rethink their entire plans.
Jason Pereira: There's certain times this happens, more often than not, around US election time. People look to move to Canada, we're everybody's plan B country. And then, when something goes wrong in Canada, whether it be botched COVID rollouts or potential tax increases, everybody starts talking about moving to the States or just a really hard winter, those things happen.
Jason Pereira: So, basically, but it's not as simple as, "I'm just going to pack it up and go." I mean, if you have nothing, it is that simple, but if it isn't that simple, then there's this real tax implications to anyone who's got any kind of wealth in this country. So, what I wanted to do was talk about what that means from a tax standpoint, both personally and corporately for an individual as a business owner. So, from your standpoint, what is the first thing people need to understand about leaving the country?
Justin Abrams: Okay. From a tax point of view, leaving the country, it depends what assets you own. So broadly speaking, let's start with what the concern is that Jason was just referring to. So, basically Canada has a regime that if you own property here, while you were a Canadian resident, and we'll get to the exceptions and all that, that value that accrued here in Canada, while you were a Canadian resident, should be taxed in Canada. If you were to leave Canada, Canada has a worldwide taxation system, meaning if you're a resident of Canada, and resident of Canada for an individual generally means, for most of us who live here, it means that we make our lives here, we're ordinarily resident. Some people talk about this 183 day test. Yeah, that is there for people who sort of sojourned in Canada. They're not ordinarily resident here on the facts, but we're talking to Canadians like you and me, who are here, we're resident here, we pay tax on our worldwide income.
Justin Abrams: So, if we live here for 20 years, whatever it is, and we're owning a property, shares of Bell Canada that go up, up, up, up, up, up, up, up, up in value. If we leave the Canadian tax system and move to the British Virgin Islands, if we sell it in the British Virgin Islands, Canada doesn't get to tax that property.
Justin Abrams: So, what Canada does is, it says, "Okay, all of that growth for 20 years that you accrued. When you leave Canada, you're going to owe us tax on that gain." Now, if you have a million dollar capital gain, just to pick a number, that could be $270,000 of cash taxes that you have to pay. A lot of people don't have that type of liquid cash.
Justin Abrams: So, we'll get into the mechanisms to deal with that. But broadly speaking, that is the problem that people are dealing with. They call it the departure tax. From my knowledge, I don't know if any other countries have it. I could be mistaken, but it's very small. The United States doesn't have a departure tax per se. If you're a US citizen, you're going to pay tax when you die, there's an estate tax and there's a tax if you renounce and that kind of thing. But if you don't have a Green Card, you don't have US citizenship
Jason Pereira: But in fairness, there's a key reason for that. And that's because the Americans tax differently than we do. We tax based on residency, like most of the world, with the exception of the US and Eritrea, the US and Eritrea, good luck enforcing that, they tax with tax based on citizenship. So, as far as they're concerned, they don't care where you live. You're filing with the IRS either way.
Justin Abrams: That's true. But I mean, if you come to the US, what I was saying, you come to the US and you don't have, you don't obtain citizenship nor Green Card, if you just live there for five, six, seven years, and then you leave, well, you're not a US citizen or a Green Card holder, so you wouldn't necessarily fall under any of those rubrics. So, it's possible, I guess, that you could, I don't want to speak, I'm not a US tax expert, although the firm does have them, should anybody need it? But Canada's departure tax system is somewhat unique from my experience.
Jason Pereira: So, at the end of the day, the crux of it is that there are certain assets where it's, what's known as a deemed disposition, essentially it's as if you sold it at the time. And there are certain assets that are, for lack of better term, exempt from that, or aren't impacted from that. So, basically for anyone sitting on, I'll pick on real estate, given the current market, you have that investment property for 20 years, and it's now congratulations gone up dramatic amounts, I'm putting 20% last year. And you're like, "Okay, I think I'm going to retire in Florida now and spend all my days down there." That is going to be one honking tax bill on the capital gains as if you sold it, you are going to have to pay it.
Justin Abrams: Yeah. So, when you leave Canada, we'll go just reiterate what Jason said there. So, the properties that are... So let's start it like this, everything you own is subject to this deemed disposition tax, except, and here are the kind of notable ones, Canadian Real Property. Canadian Real Property is not subject to the deemed disposition rule. The logic for that is if you move to... You can move to Mars, the fact is, if you sell it from Mars, the Canadian government can come tax that property. They just got to put a padlock on the door.
Jason Pereira: Because [inaudible 00:06:25] is there.
Justin Abrams: Right, it's there. So Canadian Real Property is totally fine, the reason is non-residents are subject to tax on the sales of Canadian Real Property. So, if you leave Canada, you go in and up, Canada doesn't care, because they're going to get that tax.
Jason Pereira: Apologies. I got confused, because I was just thinking about the case we're dealing on, but they're properties owned corporately. So, that's the issue. Yes, you're right. Personally-owned property. So, to clarify, personally-owned property is not an issue largely because the property is in Canada, somebody is here.
Justin Abrams:
Personal or investment property in Canada is not a problem. Now, if the property is in a corporation, that is subject to the departure tax, so it's
Jason Pereira: And we'll come back to [inaudible 00:07:01] shortly.
Justin Abrams: So, we'll come back to that. So, Canadian real estate is not a problem. So, the house you lived in, your rental properties in Canada, not an issue. You can leave, you don't have to pay taxes.
Jason Pereira: But I said, the house you live in is tax exempt in the first place. But the bigger issue here comes down to the investment property.
Justin Abrams: Rental properties.
Jason Pereira: Now, that said, something to be aware of is that when you're not resident in Canada, you no longer qualify for the principal residence exemption from that point forward. So, any gains on where you were living before, after you leave, that is now up for grabs.
Justin Abrams: That's right. Yeah. Yeah. So, noticeable ones would be, assuming that, life insurance policies, RRSPs TFSAs, RESPs. Those pensions, DPSPs, RRIFs, those kinds of things are not subject to deemed disposition, because when you're a non-resident, and a Canadian custodian pays you those amounts, there will be a withholding tax. So, that could actually be very favorable if somebody moves to a Bermuda or a British Virgin Islands or something like that, or a Bahamas, when they made the contribution to the RRSP, they're getting a deduction at 54%. If they now live in the Bahamas and the custodian is paying, let's say, the RRIF of their RRSP to them, there's only a 25% withholding tax, potentially reduced by a treaty, but we usually don't have a treaty with those type of countries. So, you could get a deduction at 54% and pay tax at 25% if there's no tax in your new home country, all you're going to pay is the Canadian withholding tax. There's no withholding tax on TFSAs, that can come back tax-free.
Justin Abrams: And one of the interesting things to keep a note, if you're moving to the United States, about RRSPs, one of the typical planning things that we'll do is we'll have the emigrants, somebody who's leaving Canada, we call an emigrant, the emigrant will say, "Okay, sell all your property in your RRSP, buy it back." And the reason for that is for Canadian tax purposes, that's a nothing, we all know we can sell and buy back in our RRSP, it's tax free, tax neutral, tax deferred, whatever you want to call it.
Justin Abrams: But for the US, there's a specific rule that it steps up the cost of those properties for US purposes. So, when you extract it, while a resident of the United States, you can actually get that back without... You can actually take that to the United States without tax. So that's a very common thing that we'll do if somebody is emigrating with respect to their RRSPs.
Justin Abrams: For TFSAs, we'll just tell people, specifically if they're moving to the United States, just collapse your TFSA. The reason is, you can take it out without withholding tax and if you maintain the TFSA while you're a US person, let's say, treat it like a trust that's looked through, it's taxable, the income in there is not tax deferred.
Justin Abrams: So, while you're a US citizen, Green Card holder resident, there's really no point in having the TFSA. If you're going to another country, it's possible to still maintain it, get the tax-deferred growth. You can't make contributions. But you can, subject to a penalty, but that's with the TFSA. So, the RRSP, that's the thing that's often overlooked if you're moving to the United States, we want to crystallize that before we move.
Jason Pereira: So, just to clarify, TFSAs, they're basically not recognized for tax shelter by the US altogether. So, cash them out. If you ever come back to Canada, you get that room back anyway, so there's no harm there. And then the RRSPs, again, this is something that a lot of people don't understand in the US, there's something called, they actually track cost base within RRSP, within qualified accounts in the US. When you go to the US and you have a Canadian RRSP, they apply the same set of rules to it, more or less. That's what Justin's getting at is that if you [inaudible 00:10:12] your cost base before you go to the US, then the US will base whatever amount you have in the RRSP, let's call it $300,000. That amount will be able to come out of your RRSP when you pay taxes in the US, it will come out, from their standpoint, tax free. Yes, you will pay withholding tax in Canada, but you will pay no additional taxes in the US plus you'll get credit for that.
Justin Abrams: Exactly. One other very important exemption that most people don't think about is if you come to Canada and you're only here for a short time. So if you owned property, came to Canada, and you're here for, I'll generalize the rule, kind of less than five years out of 10 years, less than five years out of 10 years. So, you're in and out of Canada, but you're here for less than 60 months out of 120 months. If you bring property to Canada and it explodes, when you leave Canada, that property is also exempt from the departure tax. That property is also exempt.
Justin Abrams: So, we call that a short-term residents, let's say short-term resident. So something to keep in mind, if you are leaving Canada and have been here, call it less than 60 months out of the last 120 months. If you brought property to Canada, the property that you bought, you brought to Canada, is exempt when you leave. If you acquire property in Canada though
Jason Pereira: So, all said and done, bottom line, when you're an individual leaving, the implications aren't too harsh. Again, the savings accounts are, well, the registered accounts are not an issue. It depends on the country you're going into how you should do before them, before that, principal residence, real estate property, not an issue. It's more so investment properties. So, other investment property is an issue, and that will trigger gain, which can be significant depending on the individual situation.
Jason Pereira: But for the most part, for most people, it's not a big deal, I'd say it's a bigger deal when you move from the US to Canada, but that's a different story. The other thing to be aware of too, is that you mentioned the 183 day test. So, often the tie breaker in most cross-border tax treaties is basically the half year.
Jason Pereira: Are you spending more than half a year in one country or the other? As to who you're resident with. One thing to be aware of what the US, it's not 183 days. It's 183 days on a rolling schedule. So, a certain number of days carry over for a year, and then the following year. So, if you go 183 days in the first year, you can spend fewer than that in the second year, and even fewer than that in the third. So, just be very careful and aware of that.
Jason Pereira: It is possible that two countries think you're a resident, in which case they deny your foreign tax credits. So, it can be a mess if that happens. So, try to stay outside. Anything to add there?
Justin Abrams: Yeah, yeah, just to comment on that. Yeah. Yeah. The United States, Canada, you can be resident in two ways, you can be resident like Jason and I, we're resident not because we're here for more than 183 days, we're resident, because our
Jason Pereira: Physically present.
Justin Abrams: ... Ordinarily resident here, our houses are here, our spouses, families, all this stuff. So, we could technically arguably spend more than 183 days abroad. Canada would likely consider us resident, because we have our primary ties here and our secondary ties. So we have our house, our family, those are primary ones. And then we have passports, driver's license, bank accounts, all that stuff in Canada.
Justin Abrams: Second, if you're kind of visiting here Canada, you can be here if you're sojourning, sojourning is sort of a temporary flowing status, more than 183 days. United States, as Jason mentioned
Jason Pereira: Students, that applies to students quite frequently, too. You come here for school and you're not considered resident of the country.
Justin Abrams: Yeah. You might have to look to a tax treaty. We'll talk about in a sec. But yeah, that's right. Second, the United States, like Jason mentioned, if you are there, if you're there more than 183 days in the year, they don't go by factual, they have a substantial presence test, Jason was talking about, based on days. That's it. And the states and the federal government might have slightly different rules, but from a federal point of view, if you move there, if you're there more than 183 days in the year, you're a resident. If you are there 120 days a year for a three-year rolling period, which Jason was alluding to, if you do the math, there's a formula. If you do 120 in one year, 120, 120, that'll sort of equal, according to this formula, call it 182, 183, and you'll meet the substantial presence.
Justin Abrams: So, if you meet it under that, that rolling period, there's a form that Canadians can file. This happens all the time to snowbirds, they moved down to Florida for four or five months of the year. They are going to be considered residents of the United States. They can file what's called an 8840 Closer Connection Form. They don't have to go to the treaty. And the United States says, "Hey, you're not a resident here. No problem." I don't know if you want to get into the US residency stuff.
Jason Pereira: No, we actually covered that in a previous episode. Anyone wants to hear about that, go back and listen to my episode with Terry Richie. But let's jump into where the bigger problems happen, which is, simply put
Justin Abrams: How to pay the tax, posting security, maybe.
Jason Pereira: ... essentially, we'll talk about a way to pay the tax, but typically with business owners. So, let's talk about what happens with business owners to them when they decide to leave the country.
Justin Abrams: We talked about before property that is deemed to be disposed of. So, if you are a shareholder of a company, you leave Canada, we talked about public securities, talked about that as deemed to be disposed of, but that also applies to private company shares. So, you own a business, family business, you have shares in a company. You leave Canada, well, it's no different, Canada is going to want that accrued value. Doesn't matter that it's a private share.
Justin Abrams: So, if you leave Canada and you have a huge business, I mean, let's take some multi-millionaires, one of the reasons that maybe certain people who you would have thought would have otherwise left Canada, pretty rich people who don't like our taxes, having them left is because they own shares in these family businesses and there's no dollar test. If you own a small one, same thing.
Justin Abrams: But if you own shares in a company, you got to pay that departure tax and using the highest rates in Ontario in this year, let's call it 27%. So, now those shares might not be liquid, but you got to come up with the money anyway. And maybe in this segment, we'll talk about posting security, but you got to come up with the money. Talk about this, but not only do you have to come up with the money here, now you're going to be a non-resident owning the share.
Justin Abrams: So, when you leave Canada, if it's a Canadian corporation, I should mention, nothing happens to the corporation itself, because it's incorporated in Canada, it remains a Canadian corporation, even though you, controlling person, might be a resident of the United States or Spain. So, nothing happens to the corporation.
Justin Abrams: Now, you might say, "Well, it's a good thing." Well, yeah, it is a good thing in the sense that, I guess, maybe the tax is initially lower, but when the now non-resident, who has left Canada, wants to take the money out of the company, there's going to be gains in the underlying value in the corporation and withholding tax, because now a Canadian company is paying a now non-resident. So, you could get 27% tax when you leave, you could get depending... Let's say 25%, if not reduced by treaty withholding tax, when Canada pays dividends, and you could have a tax when the property is sold.
Justin Abrams: So, if you don't take any proactive steps, you could have a few layers of tax there. So, it is a problem. And that's what Jason and I were working on, a plan to mitigate that.
Jason Pereira: Yeah. So, let's talk about the posting a security. Explain to me what that is. How does that work? And does it work every time?
Justin Abrams: Okay. Posting a security is the CRA has the authority, has the discretion to accept adequate security in lieu of money. If you leave the country and you have a $10 million gain on your shares, which is very common, I mean, accrued gain on your shares. Who's going to have $2.5 million unless they sell those shares? A lot of people don't want to, they want to hold onto it. So, if you don't have $2.5 million, you can do a few things.
Justin Abrams: We're talking about private company shares. You can pledge shares themselves. Now, CRA doesn't love taking private company shares as they're just that, they're not liquid, they don't have a ready market, value is sort of arbitrary, it's not listed anywhere. So, not only is it not liquid, it's not readily valued at a day's notice, like Bell Canada is.
Justin Abrams: So, if you have a private company share, you can post it, but they make it you [inaudible 00:17:39] books, and you got to give them the minute book, shareholders, you're going to ask them permission to pay dividends. All of these things, it's pretty crazy
Jason Pereira: You now have a partner.
Justin Abrams: Yeah. Financial statements, copies of the articles. They got to have everything. There's also going to be a two to one ratio. Like if you owe 100 grand of tax, the shares have to be worth at least 200,000. So, there's all of these different tests. And you can only pledge private company shares if those are the shares that gave rise to the tax. Everything else, you can basically post anything else for. So, for example, you have public company securities, they used to take that, I'm not sure anymore if they take the public company securities, but a letter of credit is the most standard, a mortgage on your house, they'll give you up to 75% of the appraised equity. Those are pretty, pretty standard. If you can get those things, those are good. You can use those to post security for anything.
Justin Abrams: So, you could use those to post security for your private company shares. It's only if you want to post private company shares, you can't post private company shares to cover your bill on a rental property. You have to post private company shares for those private company shares. So, if you're doing a mortgage, if you're posting security that's a mortgage or letter credit, those will generally get accepted pretty easily.
Justin Abrams: Security has to be in place, whatever you're posting, by April 30th of the year after you incur the tax. So if you leave 2021, by April 2022, you got to have the security there. And there's no interest that ticks once security is in place, because the CRA, they can tax that, deems it that you have actually paid. It's like you paid money. It's like you paid it to them. You can't do that for your normal income taxes, but for deemed departure tax, you can post security.
Justin Abrams: I don't think that there's anything else that's relevant for the security, but from my experience, private company shares, you got to start well in advance if you want to do that, because it takes a few months. For the other stuff, pretty straightforward. You need an appraisal from a third party if you're posting your house, you need a land title search, third-party statements for all mortgages. And the CRA will take second position. They don't have to be on first position. I mean, obviously, I mean
Jason Pereira: They don't care. Just they'll enforce it regardless.
Justin Abrams: Yeah. I mean, that's the thing. They will... And I have the whole list in a file somewhere, but those are basically the highlights of posting security. If your gain is 100,000 or less, there's something called deemed security. So, if your gain is 100,000, if you times it by 25%, which is sort of a Canadian federalized tax rate, that's 25,000 of departure gains. You don't have to post any security, it's covered automatically. So 100,000 or less, you're covered automatically for security. Anything more than that, you got to pay up or post security.
Jason Pereira: So, at the end of the day, if there's a liquidity issue, there are options as long as there's value to be had there. Of course, CRA does have to basically do that. So, we talked about mitigation. What kind of steps are typically involved in mitigation?
Justin Abrams: So, some mitigation techniques. So, [inaudible 00:20:29] say, don't have do anything just because there's no deemed departure, just want to cash it out RRSP if we're moving to the US, crystallization and we leave Canada. No problem there. Canadian Real Property really nothing, not deemed to be disposed of. So let's talk about private company shares. You leave Canada, you get these private company shares, you post security, or don't post security.
Justin Abrams: Let's say you just want to do some planning and you want to make sure that you basically pay your tax now, and you don't have any double tax, because with private company shares, that's where the double tax can kick in, as I mentioned before. So, what you can do is, I mean, you could do it a few different ways, but one common way might be, if there is... You want to reduce the value of the company before you leave, that's what you want to do.
Justin Abrams: How do we do that? So, if we have an investment company, we might have a capital dividend account. Capital dividend account is a basically tax-free account within a corporation from selling capital gains. I mean, as we might know, capital gains are only half tax in Canada. So, the non-taxable portion goes into the special account in the company. Let's pay that out. That's going to reduce the value of the company.
Justin Abrams: If we have something called the refundable taxes, these are taxes on investment income a corporation pays, a Canadian controlled corporation pays. We should pay those out, because we can basically pay those out in a tax neutral manner, reduces the value of the company. Anything we can do to reduce the value of the company will reduce the value when we leave.
Justin Abrams: Now, let's say we've done all that, you still have a few million dollars or whatever it is that we're going to be on the hook for. So, sure we can post security, okay. But let's say we just want it one and done with, if we leave the country, we're going to pay 27% tax. We know that. So, why don't we do something before we leave to trigger that 27% tax, but do so in a manner that there won't be any further tax when the money comes out to the now non-resident?
Justin Abrams: So, what we can do is we can do something where we, if the property is mostly retained earnings, meaning it's not based on accrued assets in the company, it's based on sort of income you've accumulated over the years.
Jason Pereira: Accrued income is actually not just investment, yeah.
Justin Abrams: Exactly. You've earned, I'm going to make an example, $5 million a year over the last five years. So, you got 5 million bucks, paid your taxes, have $5 million in there. You don't have any assets, you just have the cash. So, the company is worth $5 million. We can basically do something called a surplus strip, strip out the money before you leave, it's important that you do this before you leave. If you do it after you leave, then it doesn't achieve its objective. We realize the 27% and we are basically able to create a debt on the company that will enable the company to pay that debt out of $5 million tax-free to the now non resident and we're done.
Justin Abrams: So, we paid the tax one time. We really generally [inaudible 00:23:11] problem with paying the tax one time, that's we have to do. We want to avoid paying it more than once. So that's a way to do it.
Justin Abrams: Another very simple way. If instead of having value of the company comprised of retained earnings income, let's say, just to make it easy, there's one asset in there, call it a share, cost of a dollar, value of a million. If we leave the country and do nothing, so we paid our 27%. If we then sell, that corporation sells that asset, we're going to have that tax again.
Justin Abrams: So, what we're going to want to do is kind of the same thing we did in the first iteration, the surplus strip. But instead of doing that, we're going to want to do something to bump up the cost base of that Bell Canada share inside the company, not getting into the details, but we will basically, through the capital dividend account, refundable tax account, we'll be able to pay 27% tax, bring the cost inside the company of that Bell Canada share from a dollar to a million. And when the company then sells that Bell Canada share, well, there's no tax on that value, because we've bumped it up and we can pay it out tax free to the now non-resident.
Justin Abrams: So, those are the two main ways to do it. Another way that Jason and I are dealing with, which is a little more maybe on the aggressive side, depending on your share structure, I'm just going to name one real life example. It's not the one Jason and I did, but you also have to look at the country that you're moving to or to where you might have shareholders already.
Justin Abrams: So, for example, I had a company, this guy had retained earnings of, let's say, a million dollars. He was a former doctor, but all his kids moved to, I believe it was Israel, they moved to Israel. And Israel has, other countries have this too, but Israel has a rule if you move there, I believe it's 10 years, you get a tax holiday on foreign investment income, investment income from United States, Canada, all this stuff.
Justin Abrams: So, this guy had one of his shareholders owned a class of shares that were dividend-paying shares. We could pay this guy dividend. So, I looked at the company, I said, "A million dollars here." Whatever the number is, "Your son, where does he live?" He said, "Oh, Israel, he's been there nine years. He's got one more year left to this tax holiday." So what did we do? Corporate law permitted it, you have to look at the corporate law in Canada to make sure you can do this. But we paid this guy a dividend of nearly the whole million dollars. This is really a resident. We have 15% withholding tax. Because it's 25 reduced by the treaty. The guy paid 0% tax in Israel.
Jason Pereira: In Israel.
Justin Abrams: So, what did we do? We got away with 15% basically departure tax, which is a good result. Jason and I are doing a
Jason Pereira: Fantastic result, quite honestly.
Justin Abrams: Yeah. Came to me at the last minute, I was sort of looking and said, "Oh, where's this guy live?" Jason and I are doing a similar thing, where we are trying to reduce the value of the company in a pretty tax free-ish manner by paying a dividend. So, you have to look at the whole picture.
Jason Pereira: And I'll add to that. They're looking at the whole picture too, especially when you may have family in different countries. So, one of the things about the implications of what we're working on is one child is involved in the business. Another one is not. Equalization is a definitive concern. And equalization, given the fact that there's assets in multiple countries, and one of those countries has forced heirship rules, has thrown quite a curve ball into this.
Jason Pereira: Now, that said, it's completely doable, but it's one of these things where, I'll go back to your point about, you have to contemplate the laws of the country in which you're going to, not just the cross-border treaty, but how they tax things, and I'll go back to the one wild card on this one, is how estates work in those countries. And for those who are unaware, there are many countries that have forced heirship rules that say, "Guess what? The default is you're giving X percent, you're giving this to your wife, this to your kids," or whatever it is. And that [inaudible 00:26:40]. That's what you're going to do. It's not like there's lots of countries where wills are not necessary, quite honestly.
Justin Abrams: Yeah. Good point. I didn't know that about Portugal when we did this, we started this project together, you said, "Well yeah, you can do that, but we got to think about the Portuguese aspects." And I was like, "Okay. That's true. Something I know nothing about." But yeah, absolutely right. I think France and a lot of those countries like that under the civil law have stuff like that, that does have to be taken into account 100%.
Jason Pereira: Yeah. Napoleonic Code is big on that.
Justin Abrams: Napoleonic, yeah, that's right.
Jason Pereira: Japan is also big on that. My understanding is less than 10% of people even get a will done in Japan, because essentially the forced heirship rules are so strong over there. I mean, that's something I was told years ago. I think I looked it up at the time. But it seemed to be right. So, overall, I mean, this is kind of a bit of a dive and a rundown, but at the end of the day, I think the key takeaways are, if you leave this country, there may or may not be tax implications. But if you have substantial wealth, the probability of that happening increases pretty substantially.
Jason Pereira: And you can get, as you said, the case with the... When you used this example of the private company shares, potential triple taxation, the capital gain on the exit, the withholding tax on money coming out, which may or may not be in line with whatever [inaudible 00:27:51] we're doing. And then of course the eventual sale within the corporation. So, anyone who dies with private company shares already has possibility of double taxation, we covered that quite heavily in the post-mortem planning episode, but you throw in expatriation and now you have a triple taxation situation. So, as always, get the right help is what I'm saying. So, we've covered all that. I want to talk about one last thing. It's people coming back to Canada after expatriating. What does that look like?
Justin Abrams: So that is a whole other regime, but it can be boiled down to kind of like this, if you are coming back to Canada, you can basically, depending on the facts, make it a cashless endeavor. So, if you leave Canada, we know you have a departure tax. So, let's just use a very simple example. You leave Canada and you, I don't want to use rental property for now, but you have private company shares, that are not derived from real estate, Canadian real estate, just private company shares. So you leave.
Justin Abrams: Now, if you have an idea that you're going for four or five years, but you're going to be back. What you can do is, well, you don't want to pay tax in money because you know you're coming back. So, Canada has this regime that when you're coming back to Canada, you can sort of unwind or defer the departure tax you would have otherwise been required to pay when you left, let me give you an example.
Justin Abrams: Leave Canada. You have a million dollar accrued gain in private company shares. You know you're coming back in four years, you pledge your house as security, CRA takes it. No problem. So ,you leave, okay, you're in the United States... Then, you decide to come back. Now, assuming the value of those shares has not declined. You can actually, let's say, now it's gone up to $10 million. When you left, it was worth one, coming back, those shares are worth 10.
Justin Abrams: Now, when you come back to Canada, the normal rule is when you take up residency in Canada, you actually get an increase in cost base of the property you're bringing in to the fair market value at the time you're bringing it in. So, if we were to move back to Canada, I would now get a bump up in my private company shares from, call it a million, $10 million.
Justin Abrams: So, my cost for Canadian tax purposes going forward is actually $10 million. Logic is, you were outside Canada when that gain accrued, Canada shouldn't get to tax it. But when you left Canada, you owed the government a million dollars, there was a million dollar game. So, you owed them 27% of that, but there was a million dollars. So, what you can do is now that you've come back to Canada, the government of Canada will say, "Okay, well now you're back here. All right. We're going to let you basically, instead of having a cost base of $10 million that you would normally have, we're going to let you have a cost base of $9 million on that property."
Justin Abrams: What that reduction of a million is, this is an election you could choose, is to say that million dollar gain that I incurred when I left, I'm going to basically pay tax on it later in the form of a reduced cost base of the property I'm bringing into Canada.
Justin Abrams: So, you have two choices when you come back, you pay the tax on the million dollars, million dollar gain that you incurred when you left Canada, or you say, "I would normally have a $10 million cost base in the property in bringing in, let's call it 9 million." That's a great way to basically leave Canada, post a security, get the security back, and then you kick that million dollar departure tax down the road to when you eventually actually do sell for money those private company shares. So, that's one big advantage.
Justin Abrams: Now, if the shares were taxable Canadian property when you left, meaning they were, let's say you had a real estate property, a Canadian real estate property, in a corporation when you left Canada. So, you can post those shares of security. When you come back, if those shares are still taxable Canadian property, meaning comprised of more than 50% of real estate, you can actually completely unwind your departure tax.
Justin Abrams: So, I'm not talking about just taking that million dollar gain and reducing the cost base of the property you brought in and, in effect, paying that $1 million gain later. You can actually unwind it like it never happened. You get your security back and completely unwind it. There's reasons for that, I'm not going to get into the logic for that rule.
Jason Pereira: I mean, let's talk about that. Let's imagine for whatever reason. I mean, that could be a number of things. What if I have to go move to another country to take care of an ailing parent for a couple of years?
Justin Abrams: No, the logic [inaudible 00:32:06], what I mean is the logic of if it's taxable Canadian property versus not taxable Canadian property, why in the ladder, with taxable Canadian property, you can completely unwind your departure gain. It's like it didn't happen. Versus if it was just say private company shares when he left, private company shares when he came back, you can take that million dollar departure gain, you will have to pay it, but only when you eventually sell the property that you brought back into Canada.
Justin Abrams: The difference there is that taxable Canadian property, it's taxable whether you were a non-resident of Canada or not. So if you come back to Canada, they basically say, "Okay, we're going to let you completely unwind this, because when you leave Canada, any gains on that property, or losses, would have been subject to tax in Canada. So, if you come back to Canada, we're going to basically," it's like the departure tax never happened, because Canada would've always got tax on that. But if it's-
Jason Pereira: Yeah. I mean, what they're basically saying is that we're just going to ignore this period, but the tax is then basically going to still apply for when you do eventually sell.
Justin Abrams: Yeah. Contrasted with if it was just normal private company shares. Well, you left Canada, Canada gets no further increase or decrease on that property while you're a non-resident. So, Canada says, "Hey, that million you left with, we're getting it. Might not be now. We'll let you choose for us to get it later, but we're getting it."
Justin Abrams: Now, if you leave, here's another thing we should probably just cover. If you leave and the property is a million dollars, and while you're in the US, plummets to zero, what happens then?
Jason Pereira: Well, that's an interesting point. So, you come back, go on.
Justin Abrams: So, now it's worth zero. You've posted security. Now, in all reality, if the property went to zero, as long as your security is adequately covering it, fine. If your security no longer is covering it, they're just going to call the security. But let's say you have adequate security so that you leave with a million dollar gain, you post security, and it goes down to zero, or a buck. You come back to Canada. If the property is not taxable Canadian property, meaning it wasn't derived from real estate. So just shares of your private company. It doesn't matter, you're out of luck. You're going to pay that million dollars. You can't post emigration losses, you're out of luck for, Canada says, "Hey, no, when you left, you owed me a million dollars. I don't care that the property declined in value, pay up."
Justin Abrams: So, that is a risk that you do take. Now, if it's taxable Canadian property, you can actually basically get credit for that, write down that loss that declined in value. And the logic is taxable Canadian property, as the name might imply, is taxable to non-residents because it's derived from Real Property, Canada can basically enforce it. So, if you have a increase or decrease while you're abroad, that would be the tax result that Canada would eventually realize.
Justin Abrams: So, if you leave Canada, I'm just going to say like you had a rental... Let's say you had a Canadian rental property. It's not deemed to be disposed of when you leave Canada. We talked about this [inaudible 00:35:02] for Canadian Real Property. But let's say it's worth a million dollars. If it goes down to a buck and you sell it, that's what Canada gets. So, if you have a taxable Canadian property, that's why post emigration declines in value, Canada gives you a recognition for. Stuff like Bell Canada shares, private company shares that are not taxable Canadian property, that declines in value while you're overseas, tough luck. You're stuck with that. So, a lot of words there, I know it's hard to convey it, but be careful when posting security, because depending on the property, you might just be on the hook for it either way.
Jason Pereira: Lovely. So, let's go over the quick Coles Notes on this and make sure we've got this covered. So, you leave, the less you have, the less likely there's going to be an implication. But if you specifically have taxable investments, and even if you don't have taxable investments, you need to plan your exit. So, things like if you're moving to the States, bumping up your basis for your RRSPs and liquidating your TFSAs. Also, I would also say that RESPs could be an issue depending what country you're going to as well, RDSPs, Oh boy, talk about a new thing that no one's ever touched. So, these all have implications that need to be explored, especially depending on what country you're going into.
Jason Pereira: But when you start involving small business shares, we have a challenge, like I said, potential for triple taxation. Then the question becomes, I think we've stated earlier, are your intentions to potentially ever move back to Canada? If that's the case, then there is plenty that can be done around that, in particular, that can potentially make this yes, an exercise in leaving properly, but then coming back and creating what is essentially a no impact to your situation.
Jason Pereira: But this is if... There's two messages with this podcast, in general, in today's episode. One, this is a complex and convoluted space. It never ceases to amaze me how many people think that borders just don't somehow apply to random stuff. I've got into a situation the other day with a new client who basically moved to Canada years ago and just never filed with Canadian tax authorities and all kinds of other stuff. And he's just like, "Well, why would that matter?" It's just like, because it does, it's called law. And people get these ideas in their heads as to when people care and when people don't, but governments have their own ideas.
Jason Pereira: And the second piece is get help. This is anyone who thinks they could go through what Justin just went through, what we've been talking about on most of these podcasts, you're deluding yourself. The reality is, is that there's a reason why trained professionals, especially experts in narrow fields get paid what they do, it's because this is complex stuff and you're going to need to do this properly. If you don't do it properly, the most common, I'm sure you've heard this before, "None of my buddies who moved overseas did any of this."
Jason Pereira: It's like, that's fine. That's called an audit risk, because they catch you and then they go back and they automatically start... They start assessing you and telling you what it is you owe them and then you got to go fight them. So, good luck to you on that one is what I always [inaudible 00:37:40] for that. So any last thoughts? Sorry, go ahead.
Justin Abrams: Yeah, no, my last thoughts would be, we're not going to talk about it now, but there are other additional avenues you can use to reduce your tax. If your shares qualify for the lifetime capital gains exemption when you leave, there's about 900,000 that's tax-free, you can get that when you leave on departure. Also have to make sure that when you leave Canada, if you paid a deemed tax of a million dollars, you want to make sure the country you're going to maybe gives you a cost base to start with a million dollars, so you're not paying the tax twice.
Justin Abrams: In the United States, there's something in the treaty, which allows for that at the federal level. States don't always follow the treaty, California doesn't follow the treaty, New York doesn't follow the treaty.
Jason Pereira: No.
Justin Abrams: So, in a lot of other states, probably about half of them, maybe more. I mean, a whole list of stuff that don't follow the treaty, because every state's going to secede from the union and they all have their own rules, [inaudible 00:38:26] touch about that. Then, the thing you were talking about, and people might say, "Well, how are they going to get me? How are they going to get me in this departure tax? What are they going to do?"
Justin Abrams: So, not having seen it myself, but just trying to infer, it depends on the property. If you have a Canadian building in a corporation, we all know how they can get it. They just go put a padlock on the door. I mean, it's very easy. If it's something in the United States or that they know about, you, depending on what it is, there's agreements between the United States in terms of information sharing, could possibly come up that way.
Justin Abrams: If you have a Questrade in a personal or a corporate bank account, I suppose if they find out that you didn't cause any indisposition when you left Canada, ostensibly, if you would've told Questrade, even if you didn't, if they find out about it, I guess they could go put a lien on that or stop trading, or they could do probably a whole host of things to get their piece of the pie. I guess there could be instances where it might be very difficult for them to get anything. If you held shares in some Greek bank account, and then you leave Canada, unless they have some sharing agreement with Greece, it might be difficult for them to actually enforce that mechanism.
Justin Abrams: But the moral of the story is the law is law. You got to pay the tax. And Jason rightly said, it's audit risk if you don't want to do it. There's a lot of things people will tell me, "Justin, I don't want to do it." But then I can't be their advisor. I don't want to report this, go ahead. But I just can't do your tax return. I know about it. If it's something
Jason Pereira: It's like I tell everybody, "You can do whatever the heck you want, but good luck defending it."
Justin Abrams: If it's something that we want it to... If we can take a position on it, even if it's a weak position that you want to take, but it's not illegal. Sure. Let's do it if it's viable.
Jason Pereira: Just don't take the Wesley Snipes' position of, "I shouldn't pay taxes," that didn't work out so well for him.
Justin Abrams: Yeah. If it's illegal, obviously we can't do it and then you're taking your own audit risk. So, yeah.
Jason Pereira: So, anyway, thank you very much, Justin. Very much appreciate it.
Justin Abrams: No problem.
Jason Pereira: Where can people find you?
Justin Abrams: Jabrams@kbllp.ca that's kangaroo, bob LLP, peter, dot-ca. So, jabrams kbllp.ca or just Google kbllp.ca is the website. I'm there, a bunch of my partners are on there. We're all there. So, hit us up there.
Jason Pereira: Excellent. Thank you. And thank you for taking the time to join us again for Financial Plan for Canadian Business Owners. I hope you enjoyed that. And I hope you come to understand just how convoluted this section of anything involving cross-border can be. So, get the right help. As always, if you enjoyed this podcast, please review on Apple Podcasts, Stitcher, iTunes, or wherever you get your podcasts. Until next time, take care.
Producer: This podcast was brought to you by Woodgate Financial, an award-winning financial planning firm catering to high net worth individuals, business owners, and their families. To learn more, go to woodgate.com. You can subscribe to this podcast on Apple Podcasts, Stitcher, Google Play, and Spotify, or find more episodes at jasonpereira.ca. You can even ask Siri, Alexa or Google Home to subscribe for you.