Today’s blog was written by guest blogger, Kathryn Walker, Associate at Fasken LLP.
If you are considering retirement and old age in a warmer climate, keep in mind that in escaping the cold you will not necessarily escape Canadian taxes on death since Canadian non-residents remain subject to Canadian income tax on death in respect of certain types of property.
When a non-resident dies, for Canadian income tax purposes, there is a deemed disposition of all “taxable Canadian property” held by the non-resident at the time of death. This deemed disposition can trigger capital gains, which will be taxable in Canada. In simplified terms, taxable Canadian property, or “TCP” is real property situated in Canada, capital property used in carrying on a business in Canada, and certain interests in a Canadian corporation (public or private), a trust, or a partnership, at least 50% of the fair market value of which is derived from real or immovable property situated in Canada, Canadian resource property or timber resource property.
Where a non-resident is the annuitant of an RRSP, on death the non-resident will be deemed to have received the value in the plan immediately before death. This amount will be subject to withholding tax at a rate of 25%, which could be reduced or eliminated if the non-resident were a resident of a country with which Canada has a tax treaty.
Even before you make those travel arrangements to lay down roots in that sunny place, it’s worth seeing your tax advisor. When a Canadian tax resident emigrates, there is a deemed disposition of most properties at fair market value. This can result in a capital gain. In some cases, the emigrating individual may be able to defer the tax payable on this capital gain by posting a security. If this occurs and the individual dies, then the tax will be due on April 30 following the year of death.
Then even when you think you might be outside the Canadian tax system, in some cases although the deceased was a non-resident, the deceased’s estate may be deemed to be a resident of Canada for tax purposes. This can occur, for example, where the sole executor or executrix is a resident of Canada. If there are Canadian tax obligations upon the death of non-resident, some of the rules that apply to Canadian residents are not applicable thereby potentially accelerating or increasing the tax. For example, the spousal rollover that can defer the deemed disposition on death, is not available to a non-resident spouse or spouse trust unless a tax treaty provides relief (for example, Article XXIXB of the Canada-US Tax Convention).
So before you head to a place where you’re mind, body and soul will be warmed up, go see your tax advisor to make sure you understand the potential impact on your tax situation.