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Tax Season

Canada Tax Planning for the Middle Class

Working class people need not do tax planning - they don’t have anything and don’t pay anything.  Rich people hire accountants to keep track of it all.  The rest of us, need to do tax planning.

As Joe Walsh put it:

I have a mansion, forget the price
I've never been there, they tell me it's nice
I live in hotels, I stare at the walls
I have accountants who pay for it all. 

The general solution to tax problems is to use corporate law to your advantage.  Corporate law changes very slowly and is fairly uniform across the world.  Large companies do not like it when governments touch corporate law, so politicians mostly keep their hands off it, since it can be political suicide.  Don't rely on Trusts.  Trust law is very hazy and therefore dangerous and changed for the worse recently, causing many tax problems. The worst thing is personal tax law - it changes with every budget, so it is hopeless to do long term planning for personal taxes.

I started to read up on tax and corporate law during the dotcom boom, when I suddenly got hit with a $25,000 extra tax bill and could not figure out how to reduce it.  That could have been a nice new car or a down payment on another little apartment.  Instead, I had to get a loan to pay my tax - bah, humbug.  Ever since then, I have been trying my best to claw my 25k back little by little.  One year, I paid only $11 personal tax.

The downside was that I also had to eat a lot of macaroni and cheese, because I did not earn a salary and my money stayed in my company.  The last few years, I am blissfully non-resident, living in the UAE, but then I ran into the non-resident rental income tax problem and had to cough up another unexpected few thousand, so one needs to stay vigilant and clued up and I had to start reading tax laws again.

Medical treatment keeps improving.  For middle class people, the average life span now, is 85 years.  Most people live ten years longer than they thought they would.  So, if you don’t want to die of hunger when you are 80, then you got to do a little thinking now.

The conventional wisdom is to get into the real estate rat race as soon as possible and then keep upgrading, and one day when you want to retire, downgrade to free up some capital and slowly consume it.

However, keeping all your eggs in one basket is risky and the above only works if the population is growing.  What if everyone is old, wants to sell and prices are down?  Then you either have to take the loss, or wait another five to ten years, while on a macaroni and cheese diet and once you consumed your capital, you are doomed.

Different Strategy - Cash Flow

I suggest a slightly modified strategy:  Don’t build Capital.  Build Cash Flow.

A big diamond is a capital investment.  It may be fantastic looking, but you cannot eat it.  To do anything useful with it, you have to sell it and diamonds seem to halve in value every ten years, so diamonds are a particularly bad investment actually, but it makes the point.

In contrast to useless fixed capital, if you have cash flow and you need more money - then you just wait a few weeks and then you have more money.

That first little apartment you bought?  Don’t sell it when you upgrade to a house, keep it, mortgage it, use it as collateral, let it.  Let the renter pay the mortgage.  Build your own small private real estate business starting on day one.

If you want to live somewhere else, then you can either buy or rent.  Depending on your citizenship, you can more easily buy property in certain countries, but you can rent anywhere in the world.  If you own five apartments in Canada, then you can rent one on a Greek island and live happily ever after.  You don’t have to buy an apartment in Greece.

OK, so you didn’t do all that and now want to sell your mini mansion?  Go ahead, but immediately buy four or five little apartments and let them.  Now, you have cash flow.  You also still have the capital, so if you want to buy something else, then you have collateral and cash flow and can negotiate a very low interest rate on your new mortgage, because you are a low risk lender with a profitable real estate business.


The only certainties in life are death and taxes.  It is important to manage your tax liability from day one, since at 15%, it is your biggest single expense.

Did I say 15%?  You are paying 33%?   The way to get 15% is to register a private company.

That first little apartment?  Register a company and transfer the apartment to the company before you start letting it.  If you really have to sell the apartment - don’t!  Sell the shares in the company instead.  That way, you only pay about 12% tax effectively while you rent it out and you don’t incur capital gains tax when you sell it, due to the lifetime capital gains exemption (about $800,000) on selling shares in small companies. (The apartment belongs to the company and doesn’t actually get sold - it still belongs to the same company - so no real-estate registration fees and taxes).

Non-resident Status

There is another problem with taxes for non-residents.  One day when you are old and grumpy, you may want to live somewhere else with a milder climate, which could make you a Non-Resident Canadian.   The effective tax rate for non-residents is higher than for residents.  The way to side step that to some degree, is to register a private company in BC (one of the provinces where a non-resident citizen is allowed to own a private company).  Then transfer whatever you owned to the company.  If you own multiple properties, register one company for each property - so that you can sell one, without affecting your other properties.

To become non-resident, first, don’t have an available residence.  If you do own a house, rent it to someone else, not a family member and don't let it sit empty either - because then it is 'available'.   The best solution is to transfer the house to a company and let the company rent it.  (Note that in Canada, a non-resident citizen is allowed to have a RRSP, but can only get further contribution headroom from Canadian earnings.  So when you leave Canada, you don't have to wind up your RRSP and you don't have to sell your house to become non-resident.)

Then, get on a plane, go somewhere far away, rent a little place on a beach and stay there.  Preferably do this in late December - it makes the taxes easier, since you need not prorate.  Don’t go back.  You are now non-resident - don’t ruin it.  The next year, file a Non-Resident Tax Return (5013-R T1 and Guide T4058) before 30 April.  Simple as that.

There is a special form NR74, which one can use to ask Revenue Canada to rule on your tax resident status.  That is not a good idea.  What if they rule against you?  It is likely best to assume that you have non-resident status and simply file the non-resident tax return.   Then, if they want to dispute your assumed tax status, they have to prove their case, which would be impossible for them to do after you already lived overseas for a year or two.

If you are non-resident, you have to pay 25% tax on gross rent received - no expense deductions allowed.  A small company pays about 15% on the net profit after expenses, so about 12% on average.  Therefore registering a company to handle your real estate is a no brainer if ever there was one.

When you need to take money out of the company, pay yourself a dividend, not a salary and file a T5.  A dividend, up to about $48,000, is not taxed again in your hands.

Why do small companies pay so little tax?

Small companies create employment.  Large companies destroy employment - that is called increasing productivity.  The government doesn’t want unemployed youths rioting in the streets.  Your little real estate company will employ young people to fix the plumbing, service the furnaces, replace the carpets, paint the walls, collect the rent, do the contracts and file your tax return, while you are in your canoe, fishing.  That is why.

See the nice beach volley ball court behind my car?  That is what a front yard lawn looks like in the UAE and those little bonzai trees are five years old already.  Al Ain has the widest beaches in the world.  We have 150 km of sand between us and the water.  It isn't quite walking or portage distance - so I got to stick my Bic canoe (Yes, of ballpoint pen fame - I'm a writer, eh?) on the car.

Why would you want to be a Non-resident Canadian?

Non-residents pay higher tax in Canada than residents, they don’t get the personal exemption of $11,000 and they don’t get free health care, so for some people, it is not a good idea to be non-resident.  If you or your wife has dual citizenship, then it may be a good idea though, since you may get better health care elsewhere (Canadian health care is neither the best, nor the worst in the world - Europe is probably the best). 

If you live and work in a low/tax free country for an extended period, then it is best to be non-resident Canadian, else you need to pay tax in Canada on your foreign income.

Only taxpayers resident in Canada have to file Form T1135 - Foreign Income Verification Statement.  So one day when you move back, you may have some explaining to do.

Further, if you go and live somewhere else for more than 6 months, then you could become non-resident, whether you wanted to be or not and if you live on a yacht, or always travel between 3 countries, then you may be non-resident everywhere.  So you need to be aware of the rules and it is possible to structure your tax obligations such that it works best no matter where you live and then you won’t get hit with an unexpected tax bill.

Lastly, be careful when you return!  It is best to return in the second half of the year, so that you are deemed non-resident the whole year, otherwise foreign earned income from the first half of the year may become taxable in Canada, saddling you with a bill, while it may have been much nicer to use that money for a holiday until the end of June.


If you have RRSP headroom when you leave Canada (who doesn't?), then you could stuff your rental income in there and thereby defer the 25% tax due, until the previously earned headroom is all used.  However,  one day when you retire and draw money, you may have to pay about 22% tax on the withdrawals, so it won't necessarily make much difference and you would need a lot of headroom, which you may not have.   Registering a company is still better by a good margin and you also avoid an ever growing capital gains tax problem.

If you end up living elsewhere and want to withdraw from your RRSP, then it will cost you 15% to 25%, depending on the tax treaty with your country of residence and whether it is a lump sum or a periodic withdrawal.  It may be a good idea to settle down in the ex-communist Central Europe - many hot springs, nice lakes and rivers, good health care and 15% withdrawal rates for most of them.


If you are a masochist/bored, read up and do it all yourself at a registry shop, or find a young lawyer to do it all for you.  Your lawyer should be 30 years younger than you, so he/she can still do it for you when you are old and grumpy...

Notice of Assessment

I just received my Notice of Assessment - $0.00 due.  That is the way I like it.


The British exit from the EU in 2017 is a new wrinkle/opportunity.  In order to be non-resident everywhere and pay personal income tax nowhere - you need to travel between three countries every year, so that you spend less than 6 months in any one tax jurisdiction.  That is why there are so many yachts rotting in marinas in and around Croatia.  With the UK exiting the EU, that trick may become a little easier again for some people and it could drive a new boom in the UK yachting business.

La Voila!



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