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Waving Goodbye to the CRA – Becoming Non-Resident is Creating Problems for Canadian Assignees

CompassTAX - April 2005

By Diana Matwichuk, CompassGUIDES HelpDesk Coordinator

Your most recent assignee is working on location near Dhahran, his wife and children adjusting to life in a Saudi expatriate compound, and all furniture and vehicles tidily moved or sold. Another successful transition to non-resident. Or is it? Not as far as the Canada Revenue Agency (CRA) is concerned.

The Non-Residency Paradox

There has been a growing trend for the CRA to not recognize non-residency claims, and this is causing confusion among assignees and assignment managers alike. Assignees base their decision to move abroad in part on the tax savings gleaned from becoming non-resident, and to have this status swiped from underneath their feet is a nasty surprise.

The assignment tax policies of some companies require the employee to obtain confirmation of non-resident status from the CRA before the employer will transfer the employee to a foreign location.

Not only does the scrambling that results from sorting out non-residency status drive up assignment costs, undue stress is placed on the assignee at a time when they should otherwise be productive workers.

The Lure of Untaxed Foreign Income

When assignees accept an international relocation, one of their immediate reactions is elation at the opportunity to earn foreign dollars, untaxed by the Canadian government.

In preparation for their assignments, employees set into motion their plans to sever ties to Canada in anticipation of declaring themselves non-resident.

Canadian Non-Residency

Residents of Canada are required to pay Canadian income tax on world-wide income. This holds true, regardless of citizenship or where in the world those foreign dollars are being earned. The overriding implication seems to be that Canadian expatriates are considered to be “factual tax residents” by the CRA, until proven otherwise.

Non-residency criteria focus on significant ties to Canada. The more ties that an expatriate maintains to Canada, the less likely it is that he will be considered non-resident. In general, it is important to prove to the CRA that the assignee’s ties are stronger to the host country than to Canada.

Form NR73

The Determination of Residency Status (Leaving Canada) Form NR73 was designed by the CRA to gather information and enable a comparison to be made between ties in Canada with those abroad. Assignees are not required to submit Form NR73 unless requested by the CRA.

Form NR73 merely provides a non-binding administrative opinion. There is no guarantee that non-residency status will be granted, regardless of how the form is completed.

CRA Hard-line Position

The CRA’s recent change in position appears to have become quite hard-line. Non-residency rulings that had previously been granted are even being reversed. Complicating matters further, it is impossible to speak personally to the officer who rendered the decision.

Effect on Assignees

Assignees are understandably quite stressed by the about-face. Not only does this sour the assignment for the employee, it causes more work for the assignment manager in dealing with an anxious assignee.

Given the turn of events, it is natural to question whether it is ever possible to ensure a non-residency ruling from the CRA that is binding. As assignee confidence in this tax strategy plummets, assignment managers are wondering how to adjust assignment policies and procedures, in order to maintain the attraction of international assignments, and avoid dips in assignee productivity.

What can be Done?

Assignment managers should make assignees aware of the CRA’s hard-line position on non-residency status and encourage them to discuss their non-residency steps and applications with the employer’s assignment tax service provider. Each situation is unique, and with proper tax planning, the best possible case for non-residency can be constructed, in case the CRA requests a review of non-residency or a revoked ruling sparks the need for a defense. Possible defensive strategies can be discussed with the assignment tax service provider.

Employers whose assignment tax policies require that the employee obtain confirmation of non-resident status from the CRA may wish to amend this policy and implement an alternative policy.

Contact Us

At CompassTAX™ , we assist multi-national corporations by developing Assignment Tax Programs. Contact us at (403) 531-2200 or via our on-line CompassGUIDES™ HelpDesk, your quick link for answers to international assignment tax questions. All queries posted to the HelpDesk are answered within a day by seasoned tax professionals. To access our HelpDesk, visit the CompassGUIDES website at http://www.compassguides.ca/content/helpdesk/index.php.

The author wishes to thank Cindy M. Jay, CA and Nora Weller, FCCA for their contributions to this article .