Investing in Canada as a Non-Resident for Tax Purposes
Whether it’s foreign investment in a booming housing market, a trend towards remote work and flexible employment options, or Canadian citizens looking to escape their cold winters, there are many reasons people choose to become non-resident of Canada for tax purposes. While non-resident taxpayers may be becoming more common, what is less common is an appreciation for the many tax implications associated with that designation, particularly for Canadian investments. This article will provide an overview of just that.
First and foremost, it is important to understand what it means to be a non-resident of Canada for tax purposes and the criteria for the designation. Canada uses a Tax Residency system which distinguishes between residents and non-residents of Canada. This distinction is separate from one’s citizenship status, and only requires non-residents to pay taxes on income derived from Canadian sources, rather than their global income. For the purposes of the Income Tax Act (ITA) a person is a non-resident if they:
- Normally, customarily, or routinely live in another country;
- Do not have significant residential ties in Canada; and
- live outside of Canada;
- or stay in Canada for less than 183 days in the tax year.
However, determining residency status can be more complex than this. For an in depth look at how the CRA determines tax residency, see our article.
Taxable Investments for Non-Residents
Generally, non-resident income received from sources in Canada are subject to Part XIII and Part I tax. Part XIII covers income derived from a wide swath of investment income, such as:
- Rental and royalty payments;
- Pension payments;
- Canada pension plan benefits;
- RRSP payments;
- Registered retirement income fund payments; and
- Annuity payments.
Subsection 212(1) of the ITA states non-residents must pay 25% income tax on any of the preceding amounts if they are paid or credited from a Canadian resident, barring an exception. This may be altered if Canada has a tax treaty with the country where non-resident taxpayers are actually resident.
A common source of taxable income for non-residents is that derived from Canadian real property. Here, both rental profit and the profit received from the disposition (sale) of a property are also taxable at a rate of 25% (the latter being a capital gain), assuming the appropriate filing procedures are followed.
On the topic of dispositions, Part I of the ITA defines several kinds of property dispositions subject to tax called Taxable Canadian Property (TCP). TCP includes real or immoveable property situated in Canada as previously mentioned, but also goes further to include property used or held by a business carried on in Canada.
Another important type of TCP are shares in corporations. Where shares of a corporation are not listed on a designated stock exchange, dispositions will be taxable if at any time in a 60-month period preceding the disposition, more than 50% of the fair market value of the shares was derived from real or immovable property situated in Canada, or any options or interests in such properties. This is also true of an interest in a partnership or trust that derives its value in the same way.
Where shares of corporations are listed on a designated stock exchange, the same valuation rules apply with an additional caveat: dispositions will also be taxable where if at any time in a 60-month period preceding, 25% or more of the issued shares of any class belonged to either the taxpayer or people with whom the taxpayer did not deal with at arm’s length. In essence, these rules ensure corporate shares that derive most of their value from real property remain taxable on that value.
Non-Taxable Investments for Non-Residents of Canada for Tax Purposes
The flip side of TCP is excluded property, defined in S. 116(6) of the ITA. Though fewer than their taxable counterparts, these properties are not subject to Canadian tax on disposition and include:
- A security listed on a recognized stock exchange that is also either a share of the capital stock of a corporation or a SIFT wind-up entity equity;
- A unit of a mutual fund trust;
- A bond, debenture, bill, note, mortgage, hypothecary claim or similar obligation;
- An interest or right in any of the above; and
- Treaty-exempt property.
Treaty-exempt properties are excluded from Canadian taxation based on tax the treaty of other countries, and thus vary from case to case. What this means is that non-residents of Canada for tax purposes can invest in the stock market using Canadian brokerages, and as long as the stock is excluded property, their gains are not taxable here. The reason for this is because Canada believes the gains will be taxable to the non-resident in the place that they are actually resident.
It should be noted that all of the above is dependant on whether the non-resident of Canada for tax purposes is a tax resident in a country that has a tax treaty with Canada. If there is no tax treaty the above would change. Given the complexity of non-residency, it is important to seek counsel on these matters, so do not hesitate to contact us for advice!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.