Taxes: Canadians in Mexico

As a Canadian citizen who is a permanent resident in another country, such as Mexico, there are several legal ways to avoid or reduce paying Canadian income tax. Unlike the United States, Canada does not tax worldwide income if you have successfully severed tax residency with Canada. Below are the steps you can take to ensure that you are no longer liable for Canadian income tax while living as a permanent resident in another country.

1. Establish Non-Residency Status with Canada

To avoid paying income tax to Canada, it is essential to establish yourself as a non-resident for tax purposes. This means you need to demonstrate that you no longer have significant residential ties to Canada. Here are the steps involved:

Steps to Establish Non-Residency:

1. Sever Primary Residential Ties:
   • Sell or Rent Out Your Home: If you own property in Canada, it is advisable to sell it or rent it out to sever primary residential ties.
   • Move Family Members: If possible, ensure that your spouse and dependents also move out of Canada.
   • Cancel Health Care and Driver’s License: Cancel your provincial health insurance card, driver’s license, and other provincial services.
2. Sever Secondary Residential Ties:
   • Close Canadian Bank Accounts (if not required) or reduce their activity.
   • Cancel Memberships: Cancel memberships, such as gym or club memberships, that demonstrate ongoing ties to Canada.
   • Change Mailing Address: Redirect all your mail to your address abroad.
3. File Form NR73 (Optional):
   • You can file Form NR73 (“Determination of Residency Status”) with the Canada Revenue Agency (CRA) to receive a determination of your non-residency status. However, this is optional, and you may wish to consult a tax professional before doing so.

2. Demonstrate Strong Residential Ties Abroad

The CRA will consider whether you have established significant residential ties in your new country of residence. To strengthen your case for non-residency:

Steps to Establish Ties Abroad:

1. Lease or Buy Property: Lease or buy a home in your new country (e.g., Mexico).
2. Residency Permit: Obtain a Permanent Residency Permit or visa in the new country.
3. Local Bank Accounts: Open bank accounts, establish utility accounts, and get local health insurance in Mexico to show you intend to live there permanently.
4. Social and Economic Integration: Register for local services, join clubs, and participate in community activities in Mexico.

3. Avoid Residential Ties to Canada

The CRA will review your ties to Canada when determining your residency status. You should avoid:

• Spending extended periods in Canada, as this may trigger questions about your residency status.
• Owning property or maintaining a rental property that suggests an intention to return.
• Keeping dependents or close family members in Canada.

4. File a Departure Tax Return

The year you become a non-resident, you will need to file a final departure tax return in Canada.

Steps to File a Departure Tax Return:

1. Identify Your Date of Departure: Report the date you left Canada for tax purposes.
2. Capital Gains on Departure: Canada may tax certain assets as if they were sold on the date of departure. This is known as departure tax. Not all assets are subject to this tax (e.g., Canadian retirement savings plans are excluded).
3. Form T1161: File Form T1161 (“List of Properties by an Emigrant of Canada”) if the value of your property exceeds the reporting threshold.

5. Avoid Returning to Canada for Extended Periods

After establishing non-residency, you should be careful about spending too much time in Canada. If you spend over 183 days in Canada during a calendar year, the CRA may deem you a resident for tax purposes.

6. Canadian Pensions and Investment Income

If you receive pension or investment income from Canada, withholding taxes will apply, but these are often less than regular income tax rates.

Steps to Manage Canadian Income:

1. Canada Pension Plan (CPP) and Old Age Security (OAS):
   • As a non-resident, CPP and OAS payments are subject to a 25% withholding tax, unless a tax treaty applies a lower rate. In the case of Mexico, the Canada-Mexico Tax Treaty might reduce the rate to 15%.
2. RRSP Withdrawals:
   • Withdrawals from an RRSP are also subject to a 25% withholding tax. If you withdraw gradually, you can sometimes minimize the tax impact.
3. Investment Income:
   • Dividend and interest income from Canadian sources are also subject to withholding tax, typically at 15-25% depending on the type of income.

7. Take Advantage of the Canada-Mexico Tax Treaty

The Canada-Mexico Tax Treaty helps to avoid double taxation. Under the treaty, you may be able to reduce withholding tax rates on pensions, dividends, and interest earned in Canada.

Steps to Use the Tax Treaty:

1. Apply for Reduced Withholding Rates:
   • Use Form NR301 to claim the benefits of the treaty and request reduced withholding tax on eligible income.
2. File Taxes in Mexico:
   • File and pay taxes in Mexico on your worldwide income to show that you are a tax resident there, which helps establish non-residency in Canada.

8. Consult a Tax Professional

Tax residency and avoiding tax liability in Canada can be complex, especially as CRA may challenge claims of non-residency. Consult a tax professional with experience in cross-border taxation to ensure all steps are completed correctly.

Summary

To legally avoid paying income tax as a Canadian citizen living in Mexico, you must sever your residential ties with Canada and establish ties in Mexico. Here are the steps summarized:

1. Establish Non-Residency Status: Sever ties to Canada, including property and family.
2. Establish Residency in Mexico: Create strong residential, economic, and social ties in Mexico.
3. File a Departure Tax Return: Declare your final date of residency in Canada and pay any applicable departure tax.
4. Limit Visits to Canada: Avoid spending more than 183 days per year in Canada.
5. Manage Income from Canadian Sources: Pay withholding tax on pensions and investments instead of full income tax.
6. Use the Canada-Mexico Tax Treaty: To reduce withholding tax rates and avoid double taxation.
7. Consult a Professional: To navigate complex residency and tax issues.

Taking these steps will legally establish you as a non-resident for tax purposes, allowing you to minimize or avoid paying income tax in Canada while residing permanently in Mexico.

Disclaimer:

The information provided here is for general informational purposes only and is not intended to be legal, financial, or tax advice. Tax laws and residency regulations are complex and subject to frequent changes. Each individual’s circumstances are unique, and the application of tax rules may vary based on personal details.

You should consult with a qualified tax advisor or legal professional experienced in cross-border taxation before making any decisions about your tax status or financial planning. The author of this post assumes no responsibility for any errors, omissions, or outcomes resulting from the use of this information.