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243: Tax Implications of Leaving Canada · Wealth On Main Street

• 0:11
  Speaker A: Welcome to wealth on Main street where conversations about growing your wealth are fun and entertaining. Wealth isn't just about money. It's the skills and the knowledge that we develop to pass on to future generations. Tune in each week to grow your mindset and your net worth at the same time.
• 0:36
  Speaker B: That's it.
• 0:37
  Speaker A: I'm out of here. I'm leaving Canada. I just can't take it anymore. I'm ready to flip this table right over. Perhaps that's you. Maybe you're feeling like that you've had it up to here with a number of things going on. Or maybe you're being called and beckoned to some brighter shores and warmer waters and thinking maybe it's time that you pack up the family and the kids and the dog and take off and leave Canada. Well, we've got some great information for you. I'm joined with my friend Henry Wong here. We're going to unpack. What are some of the implications that you need to be aware of if you're considering becoming a non resident of Canada and or considering maybe giving up your citizenship? So there's a lot to know, a lot to unpack. We're going to do our best to uncover many of those things and we're going to make some references of course to anyone who has cash value insurance policies. So as an example, perhaps you have a whole life contract. Maybe you're practicing the concept of infinite banking in your family and you want to understand a little bit about how that might progress for you if you decided to leave the country. So where should we begin? Let's start with maybe a bit of an overview of things that people should know and the general structure of how taxation works when we, when you are a resident, et cetera, versus a non resident. And then we'll start to unpack all the little pieces along the way.
• 1:51
  Speaker B: Yeah, I mean definitely there's a rising trend, obviously the sentiment of people who are in Canada and experiencing the challenges that are going on. And a lot of people definitely don't see the things you probably, you probably don't see the same things what you used to know Canada as is. And the important thing I want to highlight in terms of our discussion today is leaving Canada isn't really a simple decision. There's definitely a lot of content and information out there to say all the benefits of multiple citizenship and being a non resident and all that stuff and just want to make sure that we're adding value to your journey and ultimately you are building wealth. However, it's just making sure you're not making emotional decisions, especially with the kind of climate that we're dealing with. So part of what we're going to dive into is not meant.
• 2:43
  Speaker A: This isn't the climate change that everyone's talking about, is it?
• 2:46
  Speaker B: Oh, not this.
• 2:47
  Speaker A: Just checking.
• 2:49
  Speaker B: So the main thing is, the purpose of this is we're not going to dive into all of the nuances because everyone's specific individual situation is so different. And what's also important is to highlight that when you're making this type of decision, I really want to encourage you find the right tax and legal professional that specializes specifically on the implications of becoming in becoming someone who's at. In a different location or even including giving up your citizenship. So there's a lot of factors that are involved and is not just also the financial and legal components around it, but even family. And so thinking about those concept contexts so that you're just not looking at it from the more, you know, emotional standpoint. So everyone's likely accumulated a lot of their wealth in Canada and what can you do to maximize the best of your situation? So the key thing that I kind of first want to start off with is we're unfortunately or fortunately part of a matrix of systems. And all of those systems is actually designed by someone else and controlled by someone or a party of someone. And the tax system is actually one of those systems. And if we kind of think about it, the system as it relates to the tax system, I would just say if you ever run into tax situations that gets escalated to the highest of the course, the one that you're actually in battle with is the King. The King of England, really. So if you kind of take a step back and think about it, we actually haven't really upgraded from the medieval times. The packaging looks different, but it actually kind of is the same.
• 4:34
  Speaker A: Well, I like when you mention that, because when you think about taxation in England, like I go to, you know, Robin Hood and I think about the Sheriff of Nottingham who's chasing everyone down and trying to collect, you know, bags of coins to pay for taxation. And fundamentally because of the Commonwealth nation that we are, that's, that's why we're still tied to fundamentally that that particular individual. It's also weird saying the King because for the longest time it was the Queen and now it's not. So it's kind of interesting from a Canadian perspective, but given everything you're indicating here, Henry, what we're talking about from a system standpoint, you mentioned the matrix. I mean, I've often felt Like a Neo myself, I mean, don't have the same moves that he does. But I think it's important to recognize that all of this stuff is integrated in some way. And there's, there's a lot of like, I'll call it bloat around the edges, especially around the tax system. And it's so nebulous to try to figure out and understand what are all those inner workings. So the importance of working with a key professional, someone who specializes in this niche is really important. Doing a lot of research, not making a decision like this lightly in any way, and getting really clear on weighing the pros and cons of making a decision to become, let's say, a non resident or you know, perhaps giving up citizenship, et cetera.
• 5:47
  Speaker B: Yeah. So there's, there's three things we're going to dive into. The first one is what's called taxation status. So what do what, what qualifies you to be taxed in Canada? And then how do you actually even detach certain components or all of those components as it relates to it? The second is just kind of reviving and talking about the Income Tax Code or Income Tax act as it relates to Canada and what attracts taxes. So if Income Tax act, it means there's income components and then there's for those who accumulate income into some other form like property or assets, that's also another base in which we'll attract tax. So those are the three components we're going to talk about specifically so that you at least have a good idea of the context of how it relates to Canada. So what I'm just going to share my screen with is a very simplified view as it relates to taxation status. So let's just use a really simple example and walk through that. You are watching this and you see that there is you. And when it comes to taxation status, there's three components. Generally in terms of the status, you would look at a factual resident, a non, sorry, a resident, a non resident, and someone who's cut ties. So this is again, whether you're, if you're not part of the system anymore, you've cut ties. And the way that I also think about it is in Canada you're in a corporation, you're part of a, you're in that business, you're an employee, what happens when you leave the company? What are those commitments, whether you know it or not? So that's the way that I want to just say, say it from that vantage point. So when you're a resident, there's a factual Resident. So right now, as an example, Richard, you and I are factually residents of Canada and those attract specific sections of the Income Tax act and how we pay tax, what we pay tax on, and everything related to tax. Then there's deemed residents. And then so that's kind of like there's some rules that you may fall into being a deemed residence, but you, and you therefore fall into the bigger umbrella of a resident and pay the taxes as a resident. And then there's non resident. So if you are just say geographically no longer in Canada, then you are not a resident anymore. And then the last one is you've cut ties and said goodbye. And what are the components as it relates to taxation status from there? So just to kind of separate.
• 8:19
  Speaker A: Whoops.
• 8:20
  Speaker B: In a way, it's a crude way of saying it. The US Owns you no matter where you go in that direction. So they own, they own what you earn no matter what place, jurisdiction you go to. So just to kind of just a.
• 8:33
  Speaker A: Recap on that, Henry, what I think I heard you say was that if you're a US citizen, they tax you on worldwide income based on your citizenship, not based on residency. Whereas in Canada they tax you based on primarily residency, not based on citizenship. So that's correct. If you were a dual citizen, let's say of U.S. and Canada, or a U.S. citizen in some way, and you're working in any country on planet Earth, you have to report and fill in an IRS tax form to indicate like worldwide income, and then they're going to tax you accordingly based on IRS rules.
• 9:07
  Speaker B: Yes, that is correct. Whereas in Canada, if I'm not in Canada, then I could fall into non residents or I could be someone who's cut ties as an example. So there's a little bit of some more broad availabilities when I am holding a Canadian citizenship. And in that standpoint, so what, when it comes to determining residency, there's two primary ties. Now, it's not the complete list, okay? But this is just some easy common factors that people can relate to and understand. There's two components to it. There's the primary ties and then there's the secondary ties. And then there's actually something called what's called a tiebreaker, if you want to say. But just to keep it real, again, really simple, because this process is very complex and it's very individualized on a situation. There's primary ties, like if you own a dwelling or home in Canada and if your spouse or partner is in Canada, and there are dependents like your Children, these are factors in which the King will want to make sure you are associated to Canada so he can get your tax revenue. Okay. Now if there's, if you don't have those components, however, you can still be attached, maybe. So this is where the gray area of subjectivity comes in is bank accounts. Okay, you have one bank account. Does that mean you are a resident or vehicles or whatever. So they're going to have to take a multi dimensional fact, multidimensional factors of putting together. And the King is going to try to build his case to say, Richard, you are still a resident of Canada, so I can tax you for it. Okay. So this is not.
• 10:59
  Speaker A: Each of these things are looked at like if you're in the primary category, it's kind of like there's not much you can do about it. You're. It's pretty easy to make the case by the King that, yeah, you're a resident in the secondary category. There is a little bit more leeway and it's going to be kind of a combination of factors to determine. Yeah, we can reasonably say, yeah, technically, Richard, I know you're living over here in like Ecuador, but actually, because you've got a vehicle registered in Canada, some insurance policies, and you've got, you know, three bank accounts, you know, you're actually still Canadian.
• 11:30
  Speaker B: Yes, that's, that's precisely it. So there's going to be a multiple factor set that comes in. And again, when you decide to cut ties, there's a very clear and different approach to things and we'll dive into that afterwards. But it's just kind of making sure that you understand the first part of the part. We were going to talk about the status, how you end up being a resident. These are those most common factors that they will put together to say, okay, Richard is a resident of Canada, therefore he files and pays taxes to Canada. Now there's another component as it relates to the residency ties because remember, Canada is based on residency. So they're going to count the amount of days that you are in Canada. And the main thing that they're going to count aside from those ties factors is the amount of days you've been in Canada or days out of Canada. So this one is 183 days. Basically it's roughly above six months. And that's when they will say, okay, maybe you might not be a resident anymore. And then there's still again the residential ties. They're still going to try to find ways to keep you into Canada. And so the amount of days is part of that consideration or calculation. So when it comes to residents. So now this is the second component we're talking about is the when you become a resident just to we all know this, but we don't actually have awareness to the specificity of it is when you are a resident, the first thing as it comes to income sources is they are going to tax you on your worldwide income. So if you earn income predominantly in Canada and you have other sources from Singapore and China and UK or you know, I'm just throwing random countries out there and you are having other income sources, those are going to be included as part of your income pool that gets taxed now. So it's just important to take inventory individually that you have employment income, you have business income and then you have investment income. So again you could have investment income in various locations and other sources. But they're all going to attract the income tax rules as it relates to Canada, irrespective of where they're coming from. Now the main part I still want to highlight is if you now have multi jurisdiction income that has now availabilities to what's called tax treaties. And again that's if you think the Income Tax act is hard now try diving into the tax treaties because each of those relationships that they have with those countries have their own rules and what they agree to in terms of the taxation implications related to it. So just to be very mindful of, if there's international income sources, there's tax treaty involvement to prevent double taxation. Now the other one now is let's just say you're a non resident. So again I haven't talked about the cutting ties component but the non residents, this is where again the same income sources that you may have, except there's a curtain or something that's preventing the taxation in the sense of now whatever you earn internationally, if you are now a non resident, the only elements exposed to tax now is related to only your Canadian income sources. So your employment income, your business income and your investment income. So that's why, yep, you move to.
• 15:03
  Speaker A: Another country, you're gainfully employed or have a, have a, or perhaps even just like you're retired or something, let's just say and you're maybe developing some income in that, that jurisdiction, you're in Mexico, let's just say, but you still have stuff some assets in Canada, you have a couple of, maybe you have an RSP account and you're taking withdrawals off of it. So that income is inside of Canada. It's going to be taxed in Canada. Maybe you still have a business that's running or whatever, some other type of investment. So all of that is going to be. And again, like cpp, oas, these types of entitlements that you'd have, those are all going to be taxed essentially in Canada because they're Canadian sources of income.
• 15:46
  Speaker B: Yeah. And the rules and how all of these tax implications apply again will be very specific to the situation. So that's why, you know, we can't really dive into something that will serve everyone. So it's just focused on the broad scoped category that there's roughly, it's roughly about a 25% flat tax, which you know, is pretty, actually pretty good from the.
• 16:09
  Speaker A: Compared to some of the other things that we have to deal with in Canada. Yes.
• 16:13
  Speaker B: The next thing is we're going to talk about the third component, which is assets. So assets can generate income or you can have assets that are being held at the moment. And this is where it may feel like there's a lot to take on because there is a lot to take on. It's not just cutting ties or it's not just, let's say, transferring residency. The part that, you know, the main reason to record and talk about this is it's not about the emotional decision because what can happen is if it's done incorrectly, you will fall into. And that's whether it's deliberately designed or not. The tax code has these particular things that ends up you will pay more taxes for things if you don't properly strategically plan for it. So you can either use time to plan for it and in combination, in my opinion, with the right professionals to help guide you in the right places to not make rash decisions on the decision that you want to make, as for example, to cut ties.
• 17:19
  Speaker A: So one of the things I would apply to this, Henry, and I'm just curious, we've done another episode where we talked about minimum, minimum alternative tax.
• 17:28
  Speaker B: Yeah.
• 17:29
  Speaker A: So, you know, potentially with this type of a disposition of assets, that's the type of thing that would trigger, you know, the calculations of this alternate tax system that we have in Canada, which most people don't know about. Granted, we have another episode where we, where you unveiled such the system to me realizing like, oh man, that's a great way to get another good straight kick in the butt. So. So that's kind of one of the things you're alluding to as part of this and those setting up the appropriate timing and procedures to make sure that you're maximizing what you can retain as the individual and the family before you exit the country.
• 18:06
  Speaker B: Yeah, and for most people who's listening to this will have accumulated and built their wealth or their assets in Canada. And if you make such a big draw on things right away, one, you fall into a con, you fall into the progressive tax bracket. So your concentration of income is all happening at once. If you have desires to actually leave Canada, then you have to, I would suggest, build a plan in place to know that timing what makes sense. Again, you can't force the timing. Sometimes there isn't that. But it's better to not act emotionally. Or maybe it's a strategic component to take it step by step. Richard, as you mentioned, alternative minimum tax, most recently, potentially again the new capital gains tax, there's a whole bunch of other things that have been just most recently introduced in the last 10 years that you will fall into these traps and trip wires that essentially have been created or been put in place that maybe this impact of leaving Canada is a byproduct of it, but you know, it's part of the concept that you would end up losing more financially if you made an emotional decision immediately. So that's just something to put that out there. The next thing is, because assets are part of the Income Tax act, the more assets you have, this is where it becomes a lot more complex because each asset has its own characteristic and its own intricacies and therefore they also fall into different components of the Income Tax Act. So real estate property as an example, attracts different asset or tax rules as it relates to private company or RRSPs or TFSAs, so on and so forth. So each of those component asset classes will have different tax attributions to them. So cash is relatively straightforward. Government accounts, one of the things most people will realize when they have their partnership with the government and they've built their wealth a lot in these registered accounts, they start realizing the limitations related to them. And these are the things that we, you know, share and talk about with a lot of our clients. But you know, like as an RRSP as an example, there's already limitations related to it. But one of the things related to as an example, for tfsa, if you are no longer a resident, you still are a citizen, but you're not a resident. As an example, your tfsa, the contribution room that you thought you had, it actually stops. So the time you finally become a non resident, if there's a gap year from now until five years later, that five year extra contribution room doesn't Follow you with you, you start back to what you originally had. So there's very particular rules that people are not aware of. As an example, if you're a non resident, then there's real estate. So again attracts a different set of rules related to real estate and then permanent insurance. Because of what we do with our clients and high cash value insurance, we're going to dive into a lot more specific details on permanent insurance. Again, still not the same specificity at the level of each individual situation, but want to provide a little bit more technical content around that. Private company shares are actually quite complex. So there's shares which is an asset and then it's what also the value of those shares and what those shares hold. So inside of your company you may have other assets too. You may have other components that add to the layer of the complexity. So private company shares are pretty complex to deal with other assets. So some people are collections, you know, vehicles, art, stuff like that. There's other assets just on a broad scope there. What about those pensions that you've been earning and contributing to? How are those going to be dealt with in terms of the situation? Depending on the decision that you make. And then also same with the government entitlements like the cpp, OAS and gis. So this is kind of like a very common group of assets. Not exclusively all of it, but these are. The key thing is why I'm showing it this way is this is not an easy decision of I just want to cut ties, I want all the paperwork that I need. But what is the trickle effect by making some decision that you make either as a non resident or as a, as someone who's cut ties. And the key part of why I've highlighted is each of these individual components will have its approach and how it needs to be handled. And then depending on the complexity of it. So now I'll dive into something like real estate or insurance or private company shares. These you might need something, what's called a clearance certificate. It's essentially you want to have that documentation to basically recognize that the government agreed to cut ties here and not to follow you any further, if any, if there's any further misunderstandings or discrepancies, not saying it's done intentionally, not to.
• 23:27
  Speaker A: Be confused with like the clearance rack or the clearance sale that you might see somewhere because that might indicate you're, you're, you're, you're getting rid of that asset right now and fire sailing it in some way and then paying a tax. You're, you're talking about getting a, a specific tax document so that you can minimize future problems that could occur down the road because you've now clear, clearly indicated, hey, I've declared this, this item, this piece of real estate, here's the value at the time I left Canada. And, and kind of then on a future date you can see what the future would hold with that. Is that kind of what I'm getting at is am I on the right track?
• 24:05
  Speaker B: Yeah, yeah, exactly. So there's the, you're going to declare that value and it could be a deemed value or it could be a full liquidation value. And what in order, as an example step to get the clearance certificate is you would pay the taxes upfront or if you don't, I'll kind of share about the life insurance side of things. But if you don't, then there's going to be, could be a withholding tax that's much more penalizing to deal with and you'd rather not deal with the withholding tax. So there's again, if you decide to, and we'll talk about the tax implications next. But in order to get the clearance certificate, you want to have similarly the clear either some form of clean ties and some documented proof to essentially say and hold back to defend yourself in case the CRA questions you. But you're like, I've got the clearance certificate. This is my sign off that I'm, I'm, you know, I'm free for that, for that specific thing. So again, these are just kind of making sure the procedures and the parts of all of this is included as part of the thought process, let's say.
• 25:10
  Speaker A: So as an example, let's say you had a property rental property in Ontario near the general Toronto marketplace, give or take, still up pretty high in the real estate values relative to where they were, let's say about a decade ago. And you've experienced a large rise in equity there. Now you want to leave Canada and let's just say the property is worth, worth today $1 million, but you paid 250,000 for it, let's call it 300,000. So there's a, there's a $700,000 gain. And in order to get that clearance certificate, you would have to essentially, even if you weren't selling the property, pay the capital gains tax owed at that million dollar valuation today so that you can exit and be kind of wipe your hands of it and say, okay, I've paid the tax now it's as though I sold the property while I was still in Canada. Even though I still have it now I've left the country.
• 26:06
  Speaker B: Yes, got it.
• 26:08
  Speaker A: And that would just be like a small tax bill anyway. So it's not a big deal.
• 26:13
  Speaker B: Small one, a little micro, just a little one.
• 26:16
  Speaker A: I don't know, maybe, maybe a couple hundred grand, like no big deal.
• 26:20
  Speaker B: So that's part of the part that most people may not fully think about because they may not have the liquidity actually to cut the ties and pay for those type of things. So again, that's why you need to have planning in place to be very cognizant of, I think in terms of how long I've been in this professional space working with privileged to work with people is the tax liability for a lot of people, they're not always aware about that from a deemed disposition at death standpoint or even at a deemed disposition for maybe a cancellation of citizenship. That's part of, you know, what gets monitored, gets managed. And that way you can at least go through the approach of addressing it. And the part I want to add into it is the clearance certificate is not always that easy to get. If you also add in the fact that you're depending on the CRA and their workload and if you enjoy the four hour to eight hour phone calls that you have with them, imagine how long it'll take to get the clearance certificate. In today's environment. It's going to take a long time. So that clearance certificate, there's a couple of steps you have to go through. You have to first determine what asset needs it. The second is you got to notify them. And then after you notify them, you might need to get like some taxation number or some other trail related to it. And once you get that, and once you've gone and you have to synchronize that with let's say the sale of the asset, if you are actually disposing of it, that might not even synchronize in the timing that you want, unless you want to do fire sales. So not only do you pay more taxes for triggering all these other landmine taxes, you might even depress the value because you're in emotional desperation to leave Canada. So that's again something to be mindful of to in my, like the approaches I like to take is very measured approaches to do things. And that's one of those measured components to include in the equation.
• 28:16
  Speaker A: And so once that the market may not align with my timing to leave the country. Now is it possible that the market might like wake up and be like, oh Richard, you're you and your family are leaving Canada? No, I'm sorry, we're, we're, we're not going to allow a reasonable amount of buyers and sellers in the marketplace to acquire your asset at the time that you need. So there's like some additional risk on there other than just the tax risk is kind of what I'm hearing. Am I on track?
• 28:42
  Speaker B: Yes, for sure. So there's, there's, there's not only the recommendation to incur, I, I would call it a price for the professional to help you with this. Then there's the bureaucratic minutiae that you got to work through with the cra, then you gotta market time it in a good timing component. Now if you decide to emotionally make the decision, all of that is off the table and you're the one who takes the biggest hit for that. And the other thing to just be very cognizant of as it relates to something like a clearance certificate is this is, I want to just emphasize the significance of it because it's, if you think of it from the vantage point of the cra, they are signing off to essentially say we're, we're agreeing to cutting ties with you. They're going to put a lot of diligence behind it and that means they have to put more resources behind it and maybe those resources capacity may not be there for it. So this length of time takes quite a while before it actually might even happen. So it could be quick if you have simple, easy assets. But if it's complex, oh man, you'll need to do quite a lot of work to make sure you get there. Okay. So that's the main thing I just want to emphasize on the clearance certificate.
• 30:04
  Speaker A: Got it.
• 30:06
  Speaker B: So now let's just use as an example you decide to be either a non resident or a, or you've cut ties. One of the things is, well, if the asset in what you have is still residing in Canada, still generating, you may make the decision to not, if you make the decision not to dispose of it, you may make the decision to continue managing it. So maybe let's say as an example, you're a non resident and you have an rsp. You don't want to liquidate your RSP because if you'd liquidate it when you leave Canada as a non resident, that's a huge tax bill. So you're going to take a different approach which essentially is to melt it out and there's going to be what's called withholding taxes. So it still follows standard withholding Taxes, roughly about the 30% and all this other wonderful stuff that is part of that. And something like an rrsp, there is an exemption. So you have to, you, you actually may have capabilities of exemptions to pay less taxes. So the exemption would be 25% or less than that. So you can file a form and deal with that. So that's why when you're part of the systems, you follow the forms, you follow the paperwork. It's, it's a, an enjoyable process.
• 31:16
  Speaker A: It sounds so much fun when you describe it like that. It, it does sound like a real joy.
• 31:23
  Speaker B: And when you are part of planning this in advance, again, opportunities come, but you don't. Opportunities come. So that's why maybe you might decide to manage things. But if it's on the spectrum of, you know, flip the table, I want to leave. There's some things you just have to consider. You always, there's always a place for strategic maneuvering and having the right conversations with the right people to help you manage the assets and have a proper exit plan in place or a proper transition plan in place. So the key is having that proper discussion on your individualized needs and situation. Now, the second, the next one is, let's just say you decide to give up citizenship and what are all of the events that are going to happen to that? So the first thing is there is going to be a deemed disposition or a factual disposition, depending on the asset. So you, you would say, today I've decided you've gotten good clearance to say you are, you've relinquished your citizenship so there would be deemed disposition values. And then there's going to be taxes on that. And so how are you going to pay for those taxes? Just be very mindful of that component. And in order for you to get even, things like clean fully being clear, the CRA wants to make sure you are clean with them. So you will pay taxes, you'll have to finance and pay for taxes and all of that stuff. If that was not part of the process that you've thought about. The other thing to actually also be mindful of, if there's assets that are being still managed or still part of the process of what you're going through, again, even if you give up citizenship, you don't have to give up the assets too. But it's just being mindful of there's still a deemed disposition event, so you can still have the asset, but there's a deemed disposition event, so you've just pushed the value up to fair market value and you've incurred that liquidation event, sorry, that requirement that there's going to be a need for liquidity for taxes. Again, planning needs to be in place. The other component that people don't really think about is if you have assets that are in Canada and there's specific thresholds related to it, you have to still report to the CRA on those assets. So people, your, your hands are not free yet. You still, if you have, even though you are residing internationally and you have assets in Canada still, there's still potentially reporting requirements. So those are things to be very mindful of. Now the specific asset now I just want to dive into to help our listeners because of how we help clients, especially with the concept of becoming your own banker, is the asset of permanent life insurance policies, specifically high cash value insurance. Now most people only understand insurance for insurance, but people don't realize life insurance policy, especially the way that we design them, especially in how it's used on a permanent policy, is actually an asset. And as an asset there are components to it which include dividends, cash value, death benefit, those components, depending on which country you go to. And now just kind of linking things together, the tax treaty and everything related to that, there's components to how that is being treated and then there's also your behavior and how you fund the policy and do all that stuff. So that's why there's no straightforward answer to it. But as an example, if you have a fair market value greater than the acb, then there's, there's a potential, there's a taxable event there because the value of that asset is higher than the adjusted cost basis. So these are components of maintaining the policy and disposing of the policy. If you decide to cut ties and also remove the life insurance, then those are also components to think about as it relates to the taxable consequence. So it's still an asset, it's treated like an asset, it is an asset. But what it gets attracted to in terms of tax all stands on the components of the value of that asset as it's been created. And maybe the triggering event when you are non resident or a triggering an event when you are no longer a citizen. So those components have to be looked at very, very much individually. But the part I want to talk about as it relates to the life insurance two is. Sorry, I just lost. Is one thing in my opinion is part of the planning process to think about is if you are deciding the decision you want to have more flexibility and be less tied down by Canada, then it would make sense to have Asset components in your wealth portfolio, your family wealth warehouse that are less complex. And in my opinion the permanent life insurance is actually a lot less of a complex animal compared to things like private company shares or government registered accounts or real estate. So this is just another thing to really appreciate the power of this kind of asset that is available and it's actually very uniquely available only for Canadians and U.S. citizens. I mean other countries have life insurance but the way that we can really benefit policy owners and life insured with it is very unique for Canada and US. So that actually really highlights how, how great this asset is.
• 36:59
  Speaker A: Yeah. So it's not going to create the same, you know, if we're looking at all the things you just mentioned and all the complexities involved and getting the, what do we call it again, a clearance document certificate, you know, so all of these things, there's none of that clap trap necessary if you just have the simple old, I got a boatload of cash value and insurance contract, some point someone's going to die and there's going to be tax free benefit. Easy situation to navigate with in comparison to all of the other things that you listed. Should you decide to become a non resident or whatever, give up citizenship.
• 37:37
  Speaker B: Yes. So I mean that's, that's an opinion once and again this, this asset is very specialized and not many people have a full understanding of it. And this is where you know it. You want to make sure that the people you align with really understand the mechanics of this kind of asset. No different than when you are doing real estate and you're renting real estate or you're building, developing real estate. You want to find a professional who knows how to do the accounting and tax filing for real estate. Life insurance is no different. And this is the same thing that I would really just encourage listeners to really be a part of to know when they add this asset into their portfolio arsenal. Now when it comes to the permanent life insurance, there's just to keep it really simple that there are consequences if you decide to cut ties and it is an asset and let's say the value is greater than the fair market value of the asset is greater than the acb. Really there's two options. The first option is to pay the tax and the minute and get that clearance certificate that is the most preferred option to do. The second option is with no clearance certificate the life insurance carrier would end up withholding 50% of the proceeds of the disposition. So if your value of your policy in terms of fair market value is $100,000 just using easy numbers and your ACB is $20,000. The insurance company would be required to withhold 50% or $50,000 of the proceeds. Not the gain, the difference, the proceeds of it. So this is why the insurance company is in their best interest to support you on this. So this is the part where first work with your advisor or your coach in terms of this policy that you have. If that decision comes, the second component then is that experience is going to help you lead to at least get to do the first option so you get the benefit of paying the tax. The difference of the, let's say the example I use was 80,000. The tax implication on the 80,000 instead of losing withholding, 50% of the proceeds being withheld for no clearance certificate reasons. So again this is a very specialized asset that you want to get certificate for.
• 40:09
  Speaker A: Just to confirm, when you say proceeds, what you're referring to is the asset component. So the cash value component. And if there's a, if, if your cash value is much greater than the adjusted cost basis, that's where you would find an indication of this taking place. So again that, that's a key reference point. And just to make sure everyone's also clear, he's not referring the proceeds of the tech of the death benefit. We're just talking about the asset component. I have $100,000 in cash value. The adjusted cost basis is 20,000. The difference between those two things is 80,000. And so that would produce, if you were, if you, if you were in Canada as a resident and you said, hey, I don't want this anymore, I'm going to get rid of this policy. You know, give me my, give me my $100,000. Because of the difference in that value and the adjusted cost basis, there would be a taxable event created that's if you were a resident of Canada. So now if you're becoming a non resident, similarly there would be a taxable implication in that situation.
• 41:10
  Speaker B: Yes, same taxable implication except the money that you will get in hand if you are a non resident or a non citizen and you've decided to just cut the ties on that policy. If you don't get the clearance certificate or pre pay the taxes in advance, the insurance company is going to require to withhold 50%. So that's why it's much more beneficial to make sure that you go through the first option and the insurance company will of course cooperate. And of course that's when you want to work with the advisor especially who placed the policy to help you go through this process. So to put everything all together when it comes to the decision really to evaluate your future, whether it's within Canada or not, oftentimes again, the emotional reaction comes from a political climate and it's, and the way things happen is people will go through. Who do you know that could help me get through this process the most quickest way so I can leave Canada. And you just don't want to go through that emotional decision making. So when you find those professionals, you want to interview them, you want to test them, you want to challenge them and make sure that just because they know how to get something done doesn't mean there's not going to be some back end that can come back to you. So that's why you want to work with someone who actually specializes and understands this particular component. And the next thing is those professionals, depending on your circumstances, if you're a non resident or you have other foreign income sources, things like that, they can help you manage the taxable events and the tax treaties related to those countries and situations. That's why you want to make sure that the more complex you have come into, the more someone else's system wants to take from you. And that's why you want to find the right professionals to mitigate the risk and protect you against those incoming forces.
• 43:09
  Speaker A: So to give you another example of that, just to flush this through from a practical standpoint for our listeners. So I have policies on myself, on my spouse and on my two kids. Richard decides he's going to leave Canada and become a non resident. I go to, I'll just pick Mexico because I'm flying to Mexico in a couple months for, for an event. So I'm going to go to Mexico and we're all going to set up shop there. And somehow or other I was able to control my wife into getting it done. Okay, she was the holdup, but now she's finally on board. All right, so I have existing policies, they're all below the ACB situation. So there's no deem disposition situation there that I need to be concerned with. And lo and behold, we're living a glorious life in Mexico on some wonderful beach and you know, not getting attacked by sharks or whatever. And then Richard, Richard passes away. Richard kicks the bucket. So there's a tax free death benefit paid. My wife, who is the beneficiary of a lot of that, needs to, you know, sort things out. She's got to file on the claim paperwork. So nothing changes in the paperwork. We got to file the claim. We need a Death certificate. We need to prove the cause of death or whatever and all those associated things that take place. And then they will issue her the death benefit proceeds, the net death benefit proceeds, after any policy loans are accounted for. And the insurance company will provide that in Canadian currency to where she's located and however she elects to receive that money. Okay. Now I have policies on the kids and I've elected contingent owner in this scenario. My wife is a contingent owner. But let's just say hypothetically that the kids were the contingent owner and this happens farther into the future depending on the jurisdiction. Now we actually really have an asset transfer. There's a value there and there's an asset transfer in Canada. As long as you're doing things in the, in that family lineage, you know, it's, it's a parent to spouse, parent to child, parent to grandchild, that little line of allotted people, there's a, there's a transfer that is exempt from any taxation of that asset. It's a legacy component. And so as, so the country I mentioned, Mexico, there's a tax treaty so someone would want to look into. Does that tax treaty allow for the same exemption that we get in Canada under that scenario? Is that correct?
• 45:28
  Speaker B: Yes. Yes.
• 45:31
  Speaker A: So that's an important question to ask if you're thinking about leaving Canada, I guess is the end result, the summary of that.
• 45:37
  Speaker B: And well, it's important to know the destination country that you're going into and what treaties are available to that. So in Richard, in your example, you, you decide to forever leave Canada from that citizen, even from a citizenship standpoint, that transfer of ownership, there's still an event that happens. Now does that fall into a taxable event? We don't know. Unless all of those criteria that we talk about from acb, fair market value and whether the availability to have the same treatment and how it works in Canada to work in Mexico is part of that evaluation. So it's not a really simple answer because there's just so many multitude of factors involved. However, given all of the kind of unique characteristics of challenges this asset class brings, I'm of the opinion that it's still nice to have a great death benefit that can be paid internationally without attracting taxes generally because of the most universal tax treaties that exist for it.
• 46:50
  Speaker A: And just the general simplicity like you identified in comparison to the many other assets that we discussed. So I won't take that one step further just from again, practical standpoint. So I'm in Mexico now and with my family and I'm a non resident. So I still have my Canadian citizenship, I still have a Canadian passport, but I'm a non resident and I, it might be very difficult for me to go get a new insurance policy. I can't go get a new insurance policy in Canada so that's going to become a complication. However, if I have term insurance to convert, I might have a way to be able to convert it again within some leeway and some wiggle room there to be determined. But you're from a perspective of I have a. I maintain a Canadian bank account, so I have a couple insurance policies and I've got a Canadian bank account. I don't have anything else that's in Canada now I go and transfer money from my Mexican bank account or whatever. I've got a bank account, I'm transferring money to my Canadian bank account and I pay premiums and then I can also still take policy loans in the same way that I'm doing and they can be issued to that Canadian bank account and then I can receive that money and I can transfer it over here and use it. However I was using it before, other than maybe a few an extra step of, you know, interbank transfer, there's no other real impact to me if as long as I've followed through the process that you described, I've complete, I've got my clearance certificates and I've got all the certificates under the sun. I'm. I'm certified non resident. I've got all the. I've given. I went in and I asked for a certification for this and for that and man, I'm walking out. It's like I got gold medals. I'm just certified up the wazoo and I'm the most certified non resident under the planet with all my assets. But I still maintain these insurance contracts. I can continue to proceed with implementing the process as I've been doing in Canada, other than maybe a couple of additional steps. So just want to, you know, make sure that's clear for people to recognize that it doesn't mean that you can no longer do this process or it's not possible or if you've got policies, you can't take them with you. It's none of those things. We just want to bring at a high level understanding that you want to do things properly. You need to seek good advice, you need to work with qualified professionals in a niche environment. This is a talking, a very niche circumstance. You need to really get clear on where you're going. So what is the country? So that you can ask some good fact Finding questions about the tax treaty status and Henry's identified a number of very key elements so that you're making a prudent financial decision that benefits your family. Amongst the emotional and, and other mindset related decisions that you're, you're choosing to make that, that transition from Canada to some other ju, you know, national jurisdiction. It's really about being prudent and recognizing you can still implement this process, you can still do everything. There are some subtleties. Don't take it lightly, you know, make sure you do some research and don't make a rash decision and just, you know, pull the pin on our grenade and say I'm out of Canada and just throw the grenade and blow up all your assets behind you while you disappear, you know, into a smoke of mist. Essentially.
• 49:59
  Speaker B: Completely agreed with all of that. It, it's to take it with good common sense, straightforward thought and really recognize Canada has a very unique asset that is very versatile and this is the one that is, it's amazing to have. Obviously the only thing that can taint it is if you become a US citizen and then that just makes things a lot more challenging. However, the versatility around not going in that direction is something to really not think also not think lightly, however, just some things to include because the value of the death benefit and the ability to practice the process of banking and control the banking function can happen internationally. Because if you are not a citizen though, or if you are not in Canada and you can't, you won't. If using Richard, your example in Mexico, you can't get this asset. If you were a citizen and with a reasonable period of time that you've been in Canada, you've gotten the asset and then somehow your plans change and you decide to go internationally, at least you have this asset that no one else can have. So that's just something to also highlight in terms of the unique ability of what this asset feature provides.
• 51:20
  Speaker A: It makes me think of a saying that I've used a lot of times in client meetings. I'd rather be looking at it than looking for it. Okay, so you know, as an example, the rental property that you own and have that's gained some equity in comparison to the one that you never made an offer on and never acquired, which one would you rather have? You would want the one that you have and gain some equity. So, you know, so regardless of the asset class, just recognize that. And additionally, I think it's important to recognize that, you know, lending requirements, you know, I would encourage everyone to go and watch episode 100 of our podcast for Canadians. That's something that I tell my clients is annual homework. It's something you need to revisit every single year. Has to do with taxation of policy loans at a future point in time and what are some of the things you can do about it in Canada, specifically in the States, it's not something that you really need to be too concerned with. But if you, if you are ever looking to collateralize a policy, let's say with a third party lender, it's harder to do that if it's Canadian policy and you. So you need to find a lender in a different jurisdiction to do that because it's the likelihood of you getting it done in Canada, if you're no longer a resident, it's going to be pretty hard to go and get some lending done. Most banks or banking institutions don't want to lend to someone who's not a citizen. And they're going to ask you, they're going to basically take that microscope of questions that they do. Then they're going to stick it really far up a location you do not want it to be to ask a lot more questions. And the likelihood of them giving you and granting you anything is, is not very high. So recognize that debt obligations that you have, although we didn't really discuss them, debt obligations in Canada, while you may have done and signed them in Canada, once they find out that you're no longer in Canada, they might be less inclined to maintain those debt obligations. They might call the loan due as an example. So those are some other considerations that are a little bit outside of the insurance policy, outside of some of the other assets we discussed, but also things to consider if you're making such a large decision. Amazing. Well, Henry, we did a pretty good deep dive. We talked a lot about certifications that don't sound very pleasant. I mentioned about a microscope, which also didn't sound very pleasant. And we talked about the opportunities that exist by having the right type of or a high quality asset class of insurance, cash value insurance, dividend paying, whole life insurance specifically, and the versatility it presents. Even though you still got to jump through some hoops if you were to leave the nation, it still is a much more simplified and robust asset class in comparison to many of the others. To make your life quite a bit simpler, the more things you have, the more assets, the more businesses and interests and corporations, the more complexity you create around you, the more complex a lot of your future decisions can be in relation to all that. So it's okay to keep it simple. With that in mind, we're going to make it really simple. Your next step is so simple, I I can barely even describe it. In fact, I'm just going to point right here and you're going to see that video and just go ahead and click right on it and continue learning more about how you can implement this process in your life. Thanks for being with us today.