Settle down in the tropical sun to work remotely – with your feet in the sand – while reducing your tax rate. It's a dream that many self-employed people have had since the start of the pandemic when they realized they could work from anywhere, as long as the internet connection was strong. But is it realistic?
IT consultant in finance, Sylvie * earns a gross annual income of approximately $ 300,000. This 50-year-old bachelor has no dependent children. To reduce her tax bill, she maximized her RRSP and has just incorporated to be able to pay herself dividends as income. For 2021, she plans to pay herself $ 40,000 in this way. She plans to retire at 60 while continuing to take a few mandates to work part-time. She is now wondering if she could move to a country like Panama or Bermuda to have a lower tax rate. Or, work from another Canadian province. As her clients are in the North American market, she wishes to stay in a time zone not too far from that of Quebec.
Income from foreign sources
When someone decides to settle abroad, the big decision is whether or not to cut their ties with Canada. For example, snowbirds will generally carefully calculate the days they spend outside the province (maximum 182 days) to ensure they are still eligible for Quebec health insurance.
“Yes, we pay tax in Quebec, but we have services that come with that in health, education and we have security,” says Mathieu Guilbault, financial planner and tax expert at Altitude Financial Advice.
Going for good?
For Sylvie to benefit from the advantageous tax rate in her adopted country, she would have to cease to be a Canadian resident. And it is not that simple. For example, Mathieu Guilbault indicates that the loss of Canadian residence is not automatic when one becomes a resident of another country.
“To determine if a person is no longer considered a resident of Canada, you have to look at several facts and consider them as a whole,” he explains. Among other things, Sylvie should make sure that she sever her important and secondary ties with Canada, such as her property, her driver's license, her bank account, her credit card, etc. “
In addition, it would be necessary to ensure that the host country has a tax treaty with Canada, in order to avoid double taxation.
“You should also know that several countries have inheritance rights, while there are none in Quebec,” adds Mr Guilbault. This means that you have to pay tax on the value of the property you own in that country when you die. “
When leaving Canada, Sylvie would also have to pay a departure tax; it would be deemed to have disposed of all of its property at fair market value. It should also take into account certain specificities for the RRSP, the TFSA, the HBP, the Quebec Pension Plan and the Old Age Security pension, in particular.
Sylvie would also have to decide what she would do with her joint-stock company: close it, or continue to operate it from abroad and be taxed as a non-resident on her future dividends.
“Canada has specific rules for non-residents since they must pay their taxes on their Canadian income,” says Mathieu Guilbault. In particular, the authorities provide for withholding taxes on Canadian income for non-residents. “
In addition, the corporation would lose certain tax benefits, such as the small business deduction and the capital gains exemption, since the business would no longer be considered a Canadian-controlled private corporation.
Moving to another province, such as Alberta or the Yukon, which has a lower tax rate than that of Quebec for high earners, would be easier. “But, you have to settle there for real, so cut ties with Quebec,” he adds. Her tax residency on December 31 would determine in which province she would have to pay her tax for the year. But again, we are not embarking on this operation to reduce its annual tax rate by 5% for a few years. Sylvie must be wondering where she will be happy for years to come. “
Other ways to maximize your assets
By analyzing her entire situation with a financial planner, Sylvie could however find ways to reduce her tax bill and optimize her situation by staying in Quebec. For example, Mathieu Guilbault is not convinced, at first glance, that incorporation is financially advantageous in his case. By creating her joint-stock company, Sylvie wants to accumulate all her income there and pay herself only what she will need to live in order to benefit from a lower marginal tax rate.
“But to qualify for the provincial small business deduction, employees must have reached 5,500 paid hours for the tax year,” he explains. That's the equivalent of three full-time employees, which she doesn't have. Without this deduction, his business tax rate will be 20.5%. In addition, creating and operating a joint-stock company incurs recurring accounting and legal costs. “Other strategies could be interesting for Sylvie, such as the individual retirement plan (IPP), the executive health savings plan (REES) or flow-through shares, according to the financial planner.
“But at the same time, paying taxes is a necessary evil,” he says. It is certain that when we look at the maximum marginal tax rate of 53.31%, we find that high. But assuming Sylvie is not incorporated and her taxable income is $ 200,000 after business expenses and deductions, her average tax rate would be less than 40%. It is not the end of the world considering all the services in Quebec. “