Do I HAVE TO declare myself as a non-resident(Cdn purposes)?

[Totalnewbie]

I just moved to the US a few months ago. I have read up on cutting ties to Canada in order to be deemed a non-resident for tax purposes. A few loaded questions below...I hope someone can help me!

I am a permanent resident in the US now (green card). We don't plan to move back to Canada anytime in the near future. However, I still have property in Canada, bank accounts, credit cards etc. I'm not working right now so I don't have any US income. I don't think I'm obligated to declare myself a non-resident for Cdn tax right now, am I? (i.e. the Canadian government won't MAKE ME, will they?)

My understanding is that the advantage of declaring oneself a non-resident is so Canada won't tax you on your worldwide income. In my case, I don't have any income from outside Canada now so I think I can keep my resident status. And won't it be better for tax withholding purposes (i.e. interest from bank accounts) if I stay a "resident" for Cdn tax until I have US income, and then change to non-resident?

Second question: when I EVENTUALLY do declare myself a "non-resident", I read in another post that there is a 25% withholding tax (from Canada) for the interest from RRSPs left in Canada. I don't plan on taking out any of that money before I retire (we plan on moving back to Canada to retire eventually).

So how will the withholding tax work? Say I make $100/year from the interest in my RRSP. I assume that the bank will automatically take off $25, and deposit $75 into my RRSP account. So how do I get the $25 back? Is there a way to avoid the withholding tax (while still being a non-resident) if I don't remove the money before retirement?

Thanks for all the help!

[Reba]

Steven will have more in depth info for you, he seems to actually understand taxes and whatnot. About the only thing I can say is how can you be a resident of both the US and Canada? You would obviously have to be filing US taxes as a resident, so you can't also be a tax resident of Canada.

As for the RRSPs you'd only be subject to the 25% tax if you were to withdraw funds from it or close it out while you're still resident of the US. If you leave it alone and don't touch it until you are retired and back living in Canada, you'd only be subject to whatever tax bracket would be current for the time period (bound to change between now and retirement, that's for sure!) for a resident of Canada.

[Steven]

You don't have a choice if you're an LPR. Under the tax treaty you HAVE to move your tax home to the US. As soon as you were granted the status your tax home became the US, because a claim of permanent residency is exactly that. If you fail to move your tax home to the US it can cause you to lose your LPR status.

I think you have a misunderstanding of how the tax works when you leave as well, RRSPs are not affected and the 2008 tax treaty means they're treated as a tax shelter for US purposes as well, essentially like an IRA although as a practical matter once your tax home is in the US, you cannot contribute to your RRSP because of the way the banks and the financial system works. But there's no point withdrawing the money and subjecting it to US income taxes. You must file Form 8891 with your 1040 to declare your RRSP to the IRS.

You may however be subject to departure tax on assets that are not inside of a US tax shelter, most average Joes are not but have a read of: http://www.cra-arc.gc.ca/tx/nnrsdnts/nd ... n-eng.html

Because your tax home is now in the US, you need to cut residential ties to Canada, such as your DL, healthcare card and so on. You must tell your Canadian bank(s) that you are non-resident for tax purposes so they can withhold Part XIII tax from your bank interest (this is the 25% you're on about - I have to admit I'm not sure what the rate is on RRSPs since the 2008 tax treaty, but there probably is at least a 10% rate). This bit is really important - otherwise the CRA can deem you resident and you end up getting taxed twice. If they do withhold too much Part XIII tax you can claim it back by filing NR-7R (and good luck with that - it took me two years to get mine back).

You can have real estate in Canada, however it becomes subject to capital gains tax from the date it ceased to be your principal residence (obviously at the moment values are going down so this is not a big problem in the short-term).

Depending on when you became an LPR, (i.e. if it wasn't the start of the year) you'll probably have to file dual-status in the US, you also have to pro-rate your final T1 to the portion of the year you were in Canada (i.e. reduce your deductions, personal exemptions, RRSP contribution limit, etc.) Read IRS publication 519 for how to file dual-status in the US. The general guide for the T1 explains how to pro-rate your return, and you must state the date you left on page 1 of the return.

And finally, most assets valued over US$10,000 outside the US have to be declared to the Dept. of the Treasury on the FinCEN FBAR form - this is not a tax form, it's a criminal law and the penalties are quite severe for not doing it.

[Totalnewbie]

You must tell your Canadian bank(s) that you are non-resident for tax purposes so they can withhold Part XIII tax from your bank interest (this is the 25% you're on about - I have to admit I'm not sure what the rate is on RRSPs since the 2008 tax treaty, but there probably is at least a 10% rate). This bit is really important - otherwise the CRA can deem you resident and you end up getting taxed twice. If they do withhold too much Part XIII tax you can claim it back by filing NR-7R (and good luck with that - it took me two years to get mine back).

Thank you Reba and Steve for that explanation. I do have a few followup questions on what Steve mentioned above though.

1. After I have told my Cdn bank that I am a non-resident, they will withhold something on my RRSP interest? Can I get that $ back later? How?

2. I don't understand why they would withhold on my interest in my RRSP. If I were a resident, I would get all my interest. I would only be taxed when I withdrew the money (based on my tax bracket that year). For a non-resident, they would need to keep a certain % even though I'm not taking any money out of the RRSP account?? Why?

3. Even with the withholding of 10% or whatever % for RRSP, in your opinion, do you think I will still do better financially if I left my RRSP in Canada and didn't touch it, rather than cash them out and be taxed at 25%? (I have no U.S. income now).

4. If it is best for me not to maintain a Cdn bank account while a non-resident (to avoid the withholding), do I need to appoint someone to act as a property manager to take care of bills/condo fees associated with my property etc? Does that mean I just give them some $ and all transactions can go through their bank account (and not mine since I will close my account)?

thank you so so much for your help!

[Steven]

1) Yes, I think it's subject to Part XIII non-resident tax, but I haven't done it personally, you'd have to check with the CRA;
2) It's not income tax, it's Part XIII withholding. Canada has a specific tax that applies to interest earned on accounts by people who are non-resident, the amount withheld is a percentage, which is based on tax treaty provisions and basically an arbitrary decision by the Finance Dept.;
3) You won't get taxed at 25% necessarily, when you cash it out it's treated like income, so it will be subject to income tax, whatever band that puts you in based on what you take out. It's the interest on the RRSP that is subject to Part XIII withholding, whereas the actual capital itself would be subject to income tax if you withdraw it;
4) The withholding is only on the interest, so if you simply have a chequing account that doesn't pay interest, then there is no tax. Even if there is, you still get most of it, just not all of it. Under normal circumstances you would pay income tax on the interest, and you still have to pay income tax on the remaining interest on your US tax return, even after the Part XIII withholding.

The best solution is to simply leave a minimal amount in your Canadian account to cover your expenses, but it depends on what interest rate you get on your equivalent US account as well. Obviously if the Canadian account has a higher rate than your US account, then minus the Part XIII tax it may still be better off leaving it in Canada (although I have to say you'll do well to pull that off).

Like I said, you'll have to check with the bank and the CRA to see what the actual % rate is, or even if it applies to RRSPs as they are a tax shelter (but it definitely will apply to your bank account). I think it does but I'm not sure what the rate is for US residents, either 10 or 25% I think. It does also depend on what the investment is in, IIRC. Different things are taxed at different rates under Part XIII.

It's all explained on the CRA non-resident website.

The important thing is to actually tell the people you have the accounts with that you're non-resident for tax purposes, otherwise you can end up in a real mess (which happened to me).

[Totalnewbie]

The important thing is to actually tell the people you have the accounts with that you're non-resident for tax purposes, otherwise you can end up in a real mess (which happened to me).

If you don't mind speaking just in general terms, how would they know you were a non-resident?

[Steven]

They don't, that's the problem, so the bank spits out a T5 and the CRA gets a copy and then the CRA thinks you are resident even though you aren't. And then once you've convinced the CRA the T5 is an error you owe them back taxes.

You need to tell them so they issue an NR4 instead with the Part XIII tax deducted. The problem is that the banks don't bother to ask the question, if you change your address to a foreign address, that means nothing to them, you have to specifically tell them you're non-resident for tax purposes.

And then also sometimes the banks get the Part XIII rate wrong, which is why I hesitate to tell you what it is based on my experience. Sometimes they deduct 25% when in fact it's only 10% or vice versa and you end up owing money.

[Totalnewbie]

Thought I'd pass this along.

I just found out that there have been changed to the tax laws. Banks and such are no longer required to withhold a non-resident's interest. Sorry, I can't post the link...but it's on the CRA website, non-resident section.

"Major changes to paragraph 212(1)(b) – Elimination of withholding tax on arm's length interest paid or credited to non-residents effective January 1st, 2008.

Prior to the amendments, paragraph 212(1)(b) was structured so that interest payments were taxable, other than those set out in a series of subparagraphs. In a significant revision of the non-resident withholding tax, paragraph 212(1)(b) of the Act was amended. "