Avoiding Canadian Departure Tax

[tichuot]

I'm in a very similar (if not exact) situation as WorldCitizen99 as he posted at Can I use a tax treaty to strip my company of assets and avoid departure tax?

My wife and I own and operate a Canadian-controlled private corporation (CCPC). It's an IT consulting company, and we can operate it 99% remotely (we may have to see our clients once in a blue moon). For simplicity, say we have about 2 mil retained earnings in cash.

We want to move from Canada to the USA (for family reasons) within the next 5 years. Obviously, when we move, we get dinged with a huge departure tax. Something similar to what WorldCitizen99 posted:

47% - take the cash out as dividend before departure tax

As mentioned earlier, we can run our company 99% remotely and can move anywhere in the world (assuming there's a means to, e.g. digital nomad visa, investment, forming a company..etc). We would like to continue operating our company for the foreseeable years.

To avoid the dreaded Canadian departure tax, will the following strategy work?

TLDR version: my wife stays a Canadian tax resident, and I become UAT tax resident; her company pays me

1) As per Asset Transfers, Gifts and Taxation | 2023 TurboTax® Canada Tips, I gift my spouse all of my shares without acquiring capital gain.
2) We cut as much ties as we can in Canada
3) We both move to Dubai (e.g. digital nomad or forming a company).
4) After 6 months, I will apply for the Taxation Residency Certificate (TRC) but my wife does not
5) Since my wife has not become a tax resident in another country, she will continue to be a "deemed tax resident" in Canada indefinitely and therefore will not trigger the departure tax
6) However, I will "aim" to become a "non-resident" tax resident. This will trigger a deemed disposition/departure tax for me. As I don't have any shares, it's not a problem
7) My wife's company will pay me an income (as I technically DO work for her company),
8) As per Non-Resident Tax Calculator - Canada.ca, a CCPC needs to withhold 10% when paying a non-resident since I'm considered to be a UAT tax resident (tax treaty)
9) Once in Dubai, I will form an offshore company (RKK or something similar)
10) My wife's Canadian company will subcontract to my UAE offshore company which should be 0% in tax (I believe)

Long story short, I will pay 10% in tax vs 47%. Is it too good to be true? Am I missing something?

 

[banafinfodafuggiano]

Following.

 

[Larin]

There seems to be a number of inaccuracies in your post that are worth mentioning and if your company is worth about 2m, then you may be better off taking advantage of the lifetime capital gains exemption, which stands at close to 1m right now.

In any case, to your points:


1) As per Asset Transfers, Gifts and Taxation | 2023 TurboTax® Canada Tips, I gift my spouse all of my shares without acquiring capital gain.

If you scroll down to the link you posted you will see that although receiving gifts is tax free, giving gifts might not be. You will be considered to have sold your share when you gift it to your wife and will be expected to pay CG, offset by the LCGE (see your link).

2) We cut as much ties as we can in Canada
3) We both move to Dubai (e.g. digital nomad or forming a company).
4) After 6 months, I will apply for the Taxation Residency Certificate (TRC) but my wife does not

UAE <> Canada tax treaty only applies for UAE nationals who move back to UAE. Unless you are one, TRC will be worthless to you.
(It used to be that UAE wouldn't even issue one to Canadians, but that seems to have changed)

5) Since my wife has not become a tax resident in another country, she will continue to be a "deemed tax resident" in Canada indefinitely and therefore will not trigger the departure tax

Canada does not care if you are a tax resident elsewhere (unless there is a double tax treaty), which in this case as mentioned above will not help.

6) However, I will "aim" to become a "non-resident" tax resident. This will trigger a deemed disposition/departure tax for me. As I don't have any shares, it's not a problem

As mentioned disposition will occur as you gift the shares.


7) My wife's company will pay me an income (as I technically DO work for her company),
8) As per Non-Resident Tax Calculator - Canada.ca, a CCPC needs to withhold 10% when paying a non-resident since I'm considered to be a UAT tax resident (tax treaty)
9) Once in Dubai, I will form an offshore company (RKK or something similar)
10) My wife's Canadian company will subcontract to my UAE offshore company which should be 0% in tax (I believe)

The rest can be considered aggressive tax avoidance and may be unvound by a judge if audited. But, I suspect that would be the least of your worries at that point.

 

[jafo]

Following.

Me too.

PS. In my case, it's more for the rewards that come from the learning experience more than anything else.

 

[tichuot]

I am aware of LCGE. Unfortunately my company won't qualify for QSB (Qualified Small Business) and my active business asset is below 90%.

 

[Larin]

I am aware of LCGE. Unfortunately my company won't qualify for QSB (Qualified Small Business) and my active business asset is below 90%.

In that case you will need to pay CGT when you dispose (gift) your shares. Effective CGT in Canada is 25%.

Your other alternative is to set up a trust and see if you can minimize taxes that way. There would still probably be some disposition on trust creation, but maybe a good accountant can advise you on how to minimize that.