Going Non-Resident Before Getting a “Golden Handshake” Can Save Big Money in Tax for a Canadian!
By Michael Atlas
Michael Atlas is a Toronto-based Chartered Professional Accountant who practices as an independent consultant on high-level Canadian tax matters, with particular emphasis on international tax issues. More information regarding his practice is available at www.taxca.com. He is also the author of Canadian Taxation of Non-Residents. The 5th Edition of this highly acclaimed book is available now.
If a highly paid executive will be getting a substantial severance payment (which, for the purposes of this posting, could include damages for wrongful employment; a negotiated severance payment; or one provided in the employment contract), moving to a sunny tax-haven can cut the tax bite by more than half!
With increased tax rates starting this year, a big severance payment will be subject to even more tax than before. In Ontario, for example, the highest marginal tax rate is over 53.5%.
In addition, the days of being able to rollover any significant amounts of payments of that nature to an RRSP have been gone for years!
How does a rate of 25% sound compared to that? Not exactly as good as tax-free, but still not too bad!
Well, that would be the rate if a payment of that nature were paid to a Canadian after he or she became a non-resident.
You see, a payment of that nature would be classified as a “retiring allowance”, which would mean that, for a non-resident, it would be taxed under Part XIII of the Income Tax Act (“the Act”)—see paragraph 212(1)(j.1). That means a tax rate of only 25%, as opposed to much higher rates that apply under Part I.
But what if the would-be expat already has the deal signed before he or she gets on the plane? What about some “departure tax” for the value of that “right”? Won’t there be a deemed gain that could lead to either higher or additional taxes while still resident? Fortunately, the answer is “no” —such a “right” should be an “excluded right or interest” under paragraph “d” of the definition thereof in subsection 128.1(10) of the Act.
Caveat: In order for Part XIII, as opposed to Part I, to apply, the facts must support the conclusion that the payment is a “retiring allowance”, which is defined in subsection 248(1) of the Act as follows:
“an amount (other than a superannuation or pension benefit, an amount received as a consequence of the death of an employee or a benefit described in subparagraph 6(1)(a)(iv)) received
(a)on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer’s long service, or
(b)in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal,
by the taxpayer or, after the taxpayer’s death, by a dependant or a relation of the taxpayer or by the legal representative of the taxpayer”
If, in fact, the payment is actually deferred compensation that relates to work done by the expat while he or she was still resident, it will be taxed under Part I, not Part XIII, as “taxable income earned in Canada” (see subparagraph 115(1)(a)(i) of the Act).