Non-Resident Shareholder Dividends: Pay Before Leaving Canada?

Dividends to a non-resident shareholder: before or after you leave Canada?

The date you stop being resident splits the answer. A dividend paid on or before that date goes on your final Canadian return, grossed up (15% for a non-eligible dividend, 38% for an eligible one) and taxed at graduated federal and provincial rates with the dividend tax credit. A dividend paid after that date is subject to Part XIII tax (Canada's flat withholding tax on payments to non-residents) of 25%, or the lower rate in the tax treaty with your new country (Income Tax Act s. 212(2); CRA guide T4061).

Dividends are not part of the income a non-resident reports on a Canadian return (s. 115(1)), so the withholding is usually the whole Canadian tax on them. Neither choice is cheaper for everyone. The answer turns on your province's rates on the final return, your treaty rate, how your new country taxes the dividend, and the departure tax on your shares.

What makes a case not simple:

• Large retained earnings. Departure tax and later dividends can tax the same earnings twice (next section).
• A holding company, a spouse who stays, or other shareholders. Who owns which shares changes who is taxed and where.
• Running the company from abroad. The corporation itself may stop being resident in Canada.
• Books not current. Retained earnings, paid-up capital and the capital dividend account must be known before the date.
• Payments since you left with nothing withheld. The company can be assessed the missed tax plus a 10% penalty and interest, and may recover the tax from you (s. 215(6); s. 227(8)).

What to gather before deciding: the company's balance sheet and retained earnings, a share valuation near the departure date, paid-up capital (roughly, what shareholders paid for their shares) and shareholder loan balances, the capital dividend account balance (amounts the company can pay residents tax-free), your planned departure date, and the treaty with your new country.

Why can retained earnings be taxed twice when you leave?

Because the same profit can be counted twice. When you leave, you are deemed to sell your shares at fair market value (s. 128.1(4)(b)), and that value includes the company's retained earnings. If the company later pays out those earnings, Part XIII tax applies to the dividend as well.

Canada's relief is narrow. A former resident can get a credit for Part XIII tax on later dividends only for shares that stayed taxable Canadian property and were later sold for less than their departure value (s. 119; s. 40(3.7)). Shares of an ordinary operating company usually are not taxable Canadian property; shares whose value comes mainly from Canadian real estate may be. The test and the credit are in departure tax on private company shares.

The double tax may not arise at all. If the shares qualify as qualified small business corporation shares at departure, the lifetime capital gains deduction (up to $1.275 million) can shelter the deemed gain, because someone resident all of the previous year is treated as resident for the whole departure year (s. 110.6(5)). Then a dividend before leaving only adds resident tax. But a large claim usually triggers minimum tax, recoverable only against Canadian tax in the next seven years, which a non-resident paid only in dividends may never have (s. 127.52; s. 120.2). See using the capital gains exemption before leaving Canada.

Paying a dividend before you leave lowers the share value, so less gain is deemed. That dividend is then taxed at resident rates instead. Departure tax on shares can be deferred with Form T1244, filed by April 30 of the year after departure; security is required when the federal tax on the deemed dispositions is more than $16,500 ($13,777.50 for former Quebec residents) (CRA: Dispositions of property). If the shares later fall in value, see shares that fell after you left.

Salary from a Canadian corporation while living abroad: how is each payment taxed?

Each way of paying yourself has its own Canadian rule once you are a non-resident:

The non-resident withholding mechanics (Form NR301, NR4 slips due the last day of March after the payment year, remittances, director liability) are in non-resident owners of a Canadian corporation. Treaty rates by country are in non-resident tax rates in Canada.

Is salary for work you do abroad taxed in Canada?

Usually not. A non-resident is taxed on employment income only for duties performed in Canada (s. 115(1)(a)(i)). Director's fees follow the same idea: the CRA apportions a flat fee by the meetings and duties done in Canada (CRA: Directors' fees).

There is one trap, starting the year after you leave. If a tax treaty exempts your Canadian-paid salary from tax in your new country, s. 115(2)(c) and (e) treat it as taxable in Canada. Salary for work abroad is not pulled in if your new country taxes it, or if it pays you for selling, negotiating contracts or delivering services in the ordinary course of the company's business (s. 115(2)(e)(i)).

The salary must also be real pay for real work, set at a reasonable amount. Whether the company still deducts tax, CPP and EI, and which slip it issues, is in working for a Canadian employer from abroad.

Can the company repay money you lent it, or return your share capital, tax-free?

Yes, within limits. Repaying the principal of a loan you made to the company is a return of your own money, not income, and it is not one of the payments Part XIII taxes. Interest the company pays you on that loan is different: interest to a non-resident who does not deal at arm's length with the company, such as its owner, is subject to Part XIII (s. 212(1)(b)).

A return of paid-up capital is not a dividend to the extent it matches the reduction in paid-up capital. Any amount paid above that, on a share redemption or a capital reduction, is a deemed dividend and faces Part XIII (s. 84(3), (4)). Paid-up capital is often small in an owner-managed company, and the figure for tax can be lower than the stated capital in the minute book after a share reorganization, so have it confirmed before the company pays. Records that prove the loan and the repayment, and the case where you owe the company instead, are in shareholder loans when you leave Canada.

Does the country you move to change the Canadian rate?

Yes. The treaty's dividend article caps Canada's Part XIII rate below the 25% statutory rate, and some treaties also change how employment and director's fees are taxed. Rates differ by country and sometimes by how much of the company you own. Country pages: the United States, Hong Kong, Taiwan, the UK, Australia, Spain, Singapore; others are in non-resident tax rates in Canada. Tax in the new country is outside this page.

Does paying yourself from abroad affect the company's own tax?

Yes. Salary and director's fees are deductible to the company only to the extent they are reasonable (s. 67). Dividends, loan repayments and returns of capital are not deductible. Interest on money you lent the company can lose its deduction under the thin capitalization rule once you are a non-resident owning 25% or more of the shares and its debts to you exceed 1.5:1 times its equity; the denied part is treated as a dividend for Part XIII (s. 18(4); s. 214(16)). A separate question is whether the company stays resident in Canada and keeps its CCPC status once its owner lives abroad; see corporation residency after the owner moves abroad.

What should you decide and record before the departure date?

Decide before the date, because some choices only work while you are resident:

1. Fix the departure date and get a share valuation as of that date.
2. Decide whether to pay a dividend before leaving, and declare and pay it before that date.
3. If the company has a capital dividend account balance, consider paying it out as a capital dividend before you leave. Paid while you are resident, with the company's election filed by the time it becomes payable or is first paid, it is not taxable; paid after, it faces Part XIII (s. 83(2); s. 212(2)(b)).
4. Confirm the paid-up capital, the capital dividend account and the shareholder loan balance, in writing.
5. Decide whether to defer departure tax with Form T1244 and how to give security.
6. If you will draw a salary, write down what work you will do, where, and the pay.
7. Plan who will make the company's decisions, and where, so corporate residency is not lost by accident.
8. Weigh whether to keep, wind up or sell the company: close or keep your corporation and selling after you move.

Example

These examples are illustrative, in Canadian dollars, and ignore tax in the new country.

Retained earnings of C$400,000, moving to Spain

An owner's shares cost C$100 and are worth about C$400,000, all retained earnings. Treaty dividend rate assumed: 15%.

Half of a capital gain is taxable. In the first column the same C$400,000 is counted in the departure gain and again in later dividends; in the second, only C$250,000 is. Which column costs less depends on the province's dividend rates, the departure tax, whether the shares qualify for the lifetime capital gains deduction or are taxable Canadian property, and Spain's tax.

Salary for work done in Singapore

A consultant moves to Singapore and keeps billing through her Ontario corporation. It pays her a C$60,000 salary for work done entirely in Singapore. Canada does not tax it under s. 115(1)(a)(i). Even if a treaty exempted it in Singapore, s. 115(2) would not reach pay for delivering the company's own services to clients; it reaches treaty-exempt pay for other duties from the year after she left.

Repaying an old shareholder loan

An owner lent his company C$50,000 years ago. After he moves abroad, the company repays the C$50,000. That is a loan repayment, not a dividend, so no Part XIII tax applies. Interest paid on the loan would be subject to Part XIII.

Different for you?

• You already left and the company paid you without withholding: the company can be assessed the missed tax plus a 10% penalty; get corporate tax help to correct past years.
• Books behind, or retained earnings, paid-up capital or the capital dividend account not known: every number on this page depends on them; get bookkeeping help to bring the books current before the departure date.
• Retained earnings well above a year's pay: the double-tax trap is biggest here; get corporate tax help before the departure date.
• A holding company owns your operating company: dividends and share values move through two companies; get corporate tax help.
• Your spouse stays in Canada and owns shares: each spouse is taxed on a different basis; get corporate tax help.
• You will run the company from abroad: whether it stays resident is in corporation residency after the owner moves abroad; if it may not, get corporate tax help before the move.
• Withholding forms, NR4 slips and remittances: non-resident owners of a Canadian corporation.
• Paying yourself as a resident: salary or dividends and tax on dividends from your corporation.
• Everything else about leaving: leaving Canada.