Episode 35 - How to Avoid Tax Surprises When Leaving or Returning to Canada with Areet Kaila
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In this episode of Your Estate Matters, Nicole and Greg delve into the complexities of estate planning and tax matters, particularly for Canadians with cross-border interests. They are joined by Areet Kaila, a principal at Legacy Tax + Trust Lawyers, who shares her extensive experience in personal and corporate tax issues. Areet discusses her career journey, approaches to tax planning, and the intricacies of cross-border tax issues, including departure tax for Canadians. The episode provides valuable insights into navigating the tax landscape, emphasizing the importance of tailored strategies and proactive planning.
Transcript:
Nicole 00:00:02 Hello and welcome to Your Estate Matters with your hosts, my colleague Greg Brennand and myself, Nicole Garton of Heritage Trust.
Greg 00:00:09 Your Estate Matters is a podcast dedicated to everything estates, including building and preserving your legacy.
Nicole 00:00:16 If it's estate related, we'll be talking about it. We're having the conversations today that will help Canadians protect their families, their assets and their legacies tomorrow.
With us today on Your Estate Matters is Areet Kaila, a principal with Legacy Tax + Trust lawyers. She assists clients with personal and corporate tax matters, including corporate reorganizations, estate freezes and restructurings for business succession purposes. Areet also provides clients with advice regarding tax driven trust and estate planning matters, including assistance setting up trusts, family trusts, alter ego and joint spousal trusts and advising on trust transactions, including restructuring and winding up. Areet also advises charities and nonprofit organizations on registration, tax compliance and restructuring matters. Thank you so much for being here with us today. Would you like to tell us about your journey to becoming a partner at Legacy?
Areet 00:01:23 Absolutely.
Areet 00:01:24 So I started my career in tax about 15 years ago. I started at a regional tax, a business tax firm, full service firm. And as an article student, you're kind of thrown into all areas of the law and you get exposed to a lot of different things. And I found I really liked so many different things, and I found a lot of areas of law very interesting. And what I liked about tax at the time was it kind of touched everything else, you know, every individual, every business, every industry like it. Tax is relevant for everything that goes on. And so that was very appealing to me. And I also liked that it was challenging and complicated and, you know, changing all the time. It never got boring, which is probably the worst thing about the area of law, but also something that keeps it interesting. And so I'm still practicing exclusively in the tax area and now at Legacy Tax and Trusts, which is a boutique tax firm that focuses on tax planning, estate planning, cross-border planning and tax and estate litigation.
Greg 00:02:29 Going from the big idea of legacy. But down to your own practice, what's your general approach to personal and corporate tax matters?
Areet 00:02:37 Yeah, so I deal, you know, with a range of tax matters that come up for individuals and private companies and estates and trusts. And in my practice I deal a lot with business succession planning, family succession planning that kind of like intergenerational transfer of wealth and assets. And I think in that area really in all areas of tax planning, but especially in that area, starting with an understanding of the client's priorities and goals is really the most important thing. So knowing is tax minimization above all else important to them, or do they want to make sure that their structure is as simple as possible going forward? Are they looking to leave a legacy for their children, or is that not as much of a priority? Do they want to transfer control and ownership and responsibility to the next generation sooner rather than later, or is kind of keeping that control to themselves during their lifetime? Very important.
Areet 00:03:35 So really having a feel for all of that, because there's definitely not a one size fits all type of tax plan. And so having a good understanding of those priorities really can help make sure that you come up with the best tax plan.
Nicole 00:03:51 So what about families that have cross-border issues or international assets. How do you approach that?
Areet 00:03:57 Yeah. So this comes up a lot. And I think, you know, maybe part of it is just the way we live these days. A cross-border element comes up in so many tax planning files. Canadians that have interests and assets in other countries or children living in other countries or vice versa, you know, foreign individuals, non-residents that have property in Canada, children here, businesses here. So I think the first thing that's really important is just understanding what is where and how those assets are owned, which sounds simple, but when it's a complicated structure, sometimes just getting a lay of the land and really having a clear picture of everything can sometimes be challenging. And, you know, in terms of my approach, I think on those types of files, it's really critical to know and be connected to the advisors in other jurisdictions, because you can come up with a plan that works from a Canadian perspective, and it might create all of these, you know, consequences in another jurisdiction that you're just not aware of and vice versa.
Areet 00:05:04 So kind of having communication between all the advisors is very important.
Greg 00:05:11 So how do tax treaties impact the overall tax pictures for individuals moving between Canada and treaty countries?
Areet 00:05:19 Yeah. So treaties can have a big impact on the overall tax landscape. I guess how important they are depends a bit on the specific facts and kind of the asset mix. But often they come up in a couple of different ways. One is with Canadian withholding rates that comes up regularly. So if you have somebody who is departing Canada but they're continuing to earn Canadian source income, they would be subject to Canadian withholding and our default rate is 25%. But most of our treaties reduce that quite a bit. So for example, somebody leaves Canada and they have an interest in a Canadian company and they receive dividends through that company instead of the 25% default rate. It might be 15% or even 5%. And that can have a significant impact, especially where the dividend income is maybe a major source of income for that individual going forward. And the other way that tax treaties can really have a big impact is kind of dealing with the issues around double taxation, because if you're a resident of Canada and you're also subject to tax in another jurisdiction, for example, as a citizen of the US, which is the scenario that comes up a lot here, you're subject to tax in both countries, and you can be taxed on the same asset and the same income stream.
Areet 00:06:44 So the treaty has different provisions that kind of help with that double tax situation. And also to help with the timing mismatch that can sometimes come up because you might be subject to tax in Canada at a certain time, possibly because of some sort of deeming event that arises under our tax rules. But there may not be an equivalent under the US rules. So you don't get a step up in cost basis. You maybe don't have the ability to use foreign tax credits. So that can create issues. So for people that are subject to tax in more than one jurisdiction, the treaty can be very advantageous.
Nicole 00:07:22 So we're in an environment of a lot of uncertainty. There were potential tariff threats. We've got a pause. Some Canadians might be thinking about emigrating from Canada if it makes sense for their business. Can you talk to us about departure tax and what is some planning Canadians can do to reduce what that might be?
Areet 00:07:45 So when somebody departs Canada, the big tax consideration is the departure tax that you mention. And essentially that's a deeming rule that provides that for Canadian tax purposes.
Areet 00:07:57 It's as if you sold most of your assets immediately before you left the country for fair market value at the time. And the reason for this rule is to ensure that Canada can tax you on the increase in the value of your assets that accrued during your time as a resident of Canada. Of course, there are certain exceptions to this rule, so the one that comes up often is real estate in Canada. If you continue to own properties here, it's not going to be the ownership of that asset is not subject to departure tax. And the reason for that is because Canada is always going to have a continued right and ability to tax real estate in Canada. And we have mechanisms kind of built into our tax rules that will make sure that when you do sell that asset in the future, even though you're a non-resident, there's an ability to collect tax at that time.
Nicole 00:08:53 Is that the section 116 certificate?
Areet 00:08:55 Okay. Yes.
Nicole 00:08:56 Want to tell listeners what that is?
Areet 00:08:58 Yeah. So section 116 is a provision that requires a purchaser of real estate who's buying property from a non-resident to withhold and remit a certain portion of the purchase price to CRA on account of the non-residents tax liability.
Areet 00:09:19 And that's really the mechanism that ensures that when a non-resident sells real estate, the government is going to get their share of the tax that they're owed. And so with the departure planning, really the first step is kind of figuring out what are your assets, what are their values at the time of your departure, and what is your exposure for departure tax. And then there are different strategies and ways of potentially minimizing or mitigating the tax depending on the type of assets that you have. And the other part of the planning is really looking at, you know, what assets are you continuing to have in Canada, and does it still make sense to have these assets, or to have the structure that you have in Canada and kind of working through the effective tax rate, once you become a non-resident and looking at what the compliance is going to look like, to figure out if there's any planning you should do before you depart to kind of, you know, make things better for you once you're a non-resident.
Nicole 00:10:17 What about registered assets like RRSPs and TFSA? What do people do with those?
Areet 00:10:22 RRSPs and TFSA would be assets that are not subject to the departure tax.
Areet 00:10:26 So there's no immediate tax liability associated with having that asset. Once you depart, to the extent you make a withdrawal as a non-resident, there is withholding that applies to that withdrawal. And again, that's where treaties can be relevant. The withholding rate may be reduced under a treaty, but once you are a non-resident, there's also no more contribution room. And there can be significant penalties. If you tried to add to your RSP once you depart. With TFSA, there's no withholding. That applies to future withdrawals, but there is a similar penalty. If you tried to contribute further to your TFSA after you departed. And then there's also the question of maybe those types of assets still make sense from a Canadian perspective when you work through the rules. But looking at in your new jurisdiction, how will that asset be taxed? And for example, TFS in the US are not taxed the same way. So generally we would recommend someone with a TFSA moving to the US to maybe wind that up before they do.
Greg 00:11:31 Now, what are the main considerations tax wise, for Canadians that are returning home after having lived abroad for a number of years.
Areet 00:11:38 Yeah. So when you come back to Canada, it's almost kind of the reverse planning in some ways, because now in whatever country you were living in, they may have their own version of the departure tax or exit tax. So kind of working through what that looks like and then looking at, you know, the assets you've accumulated while you were a non-resident, the structures that you have and whether those are still going to make sense for you once you become a resident of Canada again. For example, if you are in the US and you set up an LLC, that's generally not going to be a tax effective vehicle for a Canadian resident. So we'd probably look to kind of winding that up or restructuring before you come to Canada. And then for Canadian purposes, we again have that same type of deeming rule. So you're deemed to dispose of your assets and reacquire them at fair market value immediately before you come to Canada or return to Canada. And this time it doesn't cause any tax to be payable. It really just resets your cost base to ensure that you are only now subject to tax in Canada based on the value that accrues after you resume residency.
Areet 00:12:51 But it is important to ensure you have a record of the value of your assets at the time that you become a resident again, because that is now going to be your cost base going forward.
Nicole 00:13:04 What are some interesting immigration and immigration issues you see in your practice?
Areet 00:13:09 Well, 2024 was kind of an interesting year because, as you know, our government proposed to change the capital gains inclusion rate as of June 24th, 2024. And so there was a lot of planning being done to crystallise capital gains in advance of that date. And of course, the inclusion rate is also, you know, very relevant if you're departing Canada. So, you know, we did see a lot of clients that already had plans in the works to depart, and they had estimated a departure tax exposure to be of a certain value, and all of a sudden that may have changed dramatically. So people looking to kind of accelerate their move date. So a lot of planning happening quite quickly. And that had quite a bit of challenge associated with it.
Areet 00:14:00 Even just obtaining valuations quickly can be hard, especially where there's foreign assets and you're trying to coordinate evaluations of shares in different companies or property in different countries. So that was quite an interesting time. The other thing that's interesting that we haven't really talked about yet, that I think is maybe coming up more and more is kind of just the concept of residency, because of course, you know, when you immigrate out of the country or return and resume residency, it's all dependent on when you become a resident for tax purposes, or when you cease to be a resident for tax purposes. And, you know, in most cases, that's really obvious when that happens, because you have an intention to move or you have an intention to come to Canada. But we do have more and more scenarios where it isn't obvious. You know, you have a strong connection to more than one jurisdiction, especially kind of in this post-Covid world where you're maybe living in one place and working for an entity in another jurisdiction and traveling between and, you know, family and business interests in multiple places.
Areet 00:15:07 And so we have seen some situations where people come to Canada and they don't consider themselves resident for tax purposes. But based on our test for residency, which is really just based on, you know, your ties to the country, your connection to the country, they actually are resident. And that can be quite a mess when you didn't anticipate that, especially where that same person might control a company. And there may be implications for the company because of their residency change, or they may be the trustee of a family trust. And now there's a question around. Did the residents of this trust also change? So when that's kind of not thought through and it happens without planning, it can create some interesting situations and some complexity.
Nicole 00:15:56 So who's leaving Canada? I think our concern is that because of our tax regime, that we're losing hiring professionals and physicians and things like that, are you seeing that in your practice?
Areet 00:16:10 Yes. Yeah, I mean, I definitely do see some of that. But then there's also the reverse, like we do see people from the US coming to Canada that are, you know, high net worth individuals and deciding to settle in Canada for various reasons.
Areet 00:16:28 And, you know, maybe with the current environment in the US, we might see more of that. Who knows?
Nicole 00:16:33 So there's not this vacuum of highly skilled professionals, I think. We're concerned about losing.
Areet 00:16:39 I wouldn't say that.
Greg 00:16:41 Would you have any final tips for the listeners?
Areet 00:16:45 I mean, I think I probably already made this point, but obviously kind of planning in advance for any type of departure or when you're coming to Canada and really doing your research to understand, like, what does the tax landscape look like, especially for people coming to Canada, because we do have a very high tax rate environment and it can be surprising. So figuring out, you know, what things are going to look like in your new jurisdiction, ensuring that you're connected with the proper tax advisors in both places so that you can get the best advice and ensure that there's no surprises once you make your move.
Nicole 00:17:19 Right. So how can our listeners find you to learn more?
Areet 00:17:22 Our website is LegacyLawyers.com and my contact information is on our website, including my email address and my phone number.
Areet 00:17:30 And I'm also on LinkedIn.
Nicole 00:17:33 Thank you so much.
Areet 00:17:34 Thank you. Thanks for having me.
Nicole 00:17:36 This podcast is for informational purposes only and should not be considered individual, legal, financial, or tax advice. Make sure to consult the advisor of your choice to advise you on your own circumstances. Thank you for joining us for this episode of Your Estate Matters. If you like this podcast, make sure to follow it on your podcast platform of choice.
Greg 00:17:58 Whether you are planning your own estate or you're acting as executor for somebody else's. Heritage trust can help partner with Heritage Trust to protect your family, your assets, and your legacy.
Nicole 00:18:09 If you would like more information about Heritage Trust, please visit our website at Heritage Trust Company.
Greg 00:18:22 This podcast is produced by Podfather Creative.