Watch: 7 BIG Tax Mistakes NRIs Make When Leaving Canada | Back to India
Avoid costly tax mistakes when leaving Canada for India. Exit tax, RRSP/TFSA rules, tax residency & India-Canada tax treaty explained.
The full write-up, with the numbers and the links.
What this conversation covers
- ⚠️ Critical Warning
- 🔴 Mistake 1: Not Understanding Tax Residency
- 🔴 Mistake 2: Not Properly Informing CRA
- 🔴 Mistake 3: Ignoring Exit Tax (Departure Tax)
- 🔴 Mistake 4: Not Using the India-Canada Tax Treaty
- 🔴 Mistake 5: Not Understanding Tax Withholding
- 🔴 Mistake 6: Assuming TFSA/RRSP Are Tax-Free in India
- 🔴 Mistake 7: Not Establishing Clear Tax Residency in India
- 📋 Summary: The DesiReturn Exit Plan from Canada
Transcript
Auto-generated captions, lightly cleaned
0:02 Hey everyone, welcome back to Desi Return, your go-to channel for cross-border living and planning your move back to India. Are you moving to India after living in Canada for several years? Sounds exciting. But it comes with traps. The Canadian Revenue Agency doesn't say goodbye easily. If you don't check the right boxes, submit the right forms, you could start paying tax in Canada even after you have landed in India. In this video, I will walk you through seven major tax mistakes to avoid when leaving Canada. These mistakes could cost you thousands in taxes, penalties, and endless paperwork. Let's get right into it.
0:51 First, let's talk about the tax residency, not to be confused with immigration status. There are four tax residential status as per CRA, Canada Revenue Agency. First, factual resident. You live in Canada and you have strong residential ties. You have a home, spouse and kids live in Canada, you have a driver's license, bank accounts, etc. Deemed resident. You live outside Canada, but you spend 183 plus days in Canada and you're not considered a resident of another country with a tax treaty. Third, non-resident. You don't have residential ties and you don't qualify as a deemed resident, then you will be a non-resident. Last, deemed non-resident.
1:43 You have strong residential ties, but you're considered a resident of another country with tax treaty. This treaty overrides your Canadian residency. Now, let's talk about these residential ties. Just because you canceled your PR or fly back permanently, it doesn't mean you are a non-resident for tax purpose. CRA uses three types of ties to determine if you're still a resident. First, primary tie. Do you have a home in Canada? Does your spouse or kids live in Canada? Secondary ties. Do you have a bank account? Do you have a health card, membership, driver's license? All these will play a role.
2:32 Finally, the duration and the intent. Are you leaving temporarily or permanently? If you don't officially break those ties, CRA may still think you are a resident and tax in Canada for your worldwide income, including the income while that you earn in India. So, cut all the ties, cancel health cards, surrender your driver's license, close your bank accounts, except the essential ones like RRSP. Leaving Canada? Tell CRA. It's not optional. Many people mistakenly think they must file form NR73, Determination of Residency Status, to inform CRA that they left.
Read the full transcript (9 more sections)
3:25 But, it's not required. This form is used by CRA to determine residency status if there is a dispute. Filing this form can backfire if you haven't properly cut your ties yet. But, you must file your final T1 General Tax Return and check the date of immigration field and include the date you become non-resident. Update your CRA account with your Indian address. If you're unsure, talk to a cross-border tax advisor before submitting anything. Let's talk about exit tax, Canada's final tax hit.
4:12 When you leave, CRA assumes you sold most of your non-registered accounts at fair market value. Even though you haven't sold, and tax you on the unrealized capital gains. That's right. You haven't sold anything, but you have to pay tax as if you did, and that's called departure tax or exit tax. So, what's included in this exit tax? It's your investments, real estate outside Canada, business interest, and finally, any personal property. What is excluded from this exit tax is real estate in Canada, registered accounts like RRSPs, Canadian pension plans, and bank accounts. So, it's important to understand this exit tax when you're leaving Canada. So, what can you do?
5:06 Sell your low gain or assets that have lost value before leaving. Use form T1243, deemed disposition, and form T1161, list of properties, if the total value is more than 25,000 Canadian dollars. Consider using form T1244 to defer your tax. Keep in mind, you need collateral for this. So, this one can easily cost you thousands if you haven't planned properly. The India-Canada tax treaty is super useful, but most people don't use it to their benefit.
5:54 Here is how it would help. First, it prevents double taxation on pensions, rental income, capital gains. Second, it lowers the tax withholding, especially on RRSPs, RRIF withdrawals. It can drop from 25% to 15%. And finally, it allows you to claim foreign tax credit in India for the Canadian tax you paid. But there is a process. First, in Canada, you need to inform the financial institutions that you are a non-resident and apply for reduced withholding. In India, you need to obtain a tax residency certificate, which is DRC, from Indian tax authorities and file form 67 to claim foreign tax credits. So, this is important to understand the treaty and utilize it for the tax filing.
6:52 So, even when you are a non-resident, Canadian income is subject to tax withholding. These are the incomes that are affected: rental income, dividends, RRSP withdrawals, and much more. For rental income, the tax withholding is based on your gross rental income, and it is a 25% of the gross rent. However, if you file form NR6 and with section 216 filing, the tax is based on net rental income and not on the gross rental income. So, please keep that in mind. Also, many people assume their TFSA and RESP accounts are tax-free even if after they move back to India.
7:40 These are tax-free in Canada, but India doesn't recognize TFSA or RESP accounts. TFSA growth is fully taxable in India. RES RESP gains are maybe taxable based on the structure. Also note, you can't contribute to these accounts once you become a non-resident. So, what can you do? Consider withdrawing and investing in tax-efficient vehicles in India. Or close these accounts before your departure. Or if you keep them, keep in mind you need to report and pay tax in India. One thing, always consult a cross-border tax advisor to help you on the best route on this one.
8:30 It's not just about leaving Canada. You also need to establish clear tax residency status in new country like India. Otherwise, you end up paying taxes in both countries. In India, file your tax returns as resident if applicable. Second, apply for tax residency certificate to use treaty benefits. And finally, leverage RNOR, resident but not ordinary resident, where you don't have to pay taxes on foreign income for up to 3 years. What to do? Register with all Indian tax authorities as you have permanently moved to India. Don't be in the gray zone. Make the shift officially, legally, and financially.
9:21 Most people think, "I will leave Canada when my lease ends or when the school year ends." But tax planner think, "How can I optimize my tax residency status to avoid double taxation?" Some examples, Not converting RRSPs before departure or in a tax-efficient way. Ignoring RNOR, resident but not ordinary resident status in India. RNOR gives the benefit of not paying tax in India for your foreign income for up to 3 years. So, what can you do? You can time your exit around tax years so that you're maximizing the benefit of RNOR period.
10:07 This is about strategy and not about paperwork. So, that's the Desi Return Exit Plan from Canada. Avoiding these seven tax mistakes can save you thousands in taxes, penalties, and let you settle in India with a peace of mind. Subscribe for more in-depth guides for NRIs moving back to India. Consider checking out our resource page as well as joining our WhatsApp group to mingle and network with like-minded people. Until next time, take care.
