One Comment About Taxation – Canada’s Personal Tax Rates Are Definitely a Consideration For Successful People Leaving Canada – But There’s More Considerations Too

 

I’ve recently written about Canadian personal tax rates being too high and how such rates do not compare favourably to the United States.  It is driving many of our successful people out of the country.

To be fair, however, there are many considerations other than just high personal tax rates that goes into a decision to leave Canada and become a non-resident for income tax purposes.

As I often state to many of my clients and colleagues – “don’t let the tax tail wag the dog.”  In other words, tax is not usually the sole driver behind important decisions like that of leaving Canada.  Other factors like:

• Canada’s cold climate;
• Where family and friends are located;
• Quality and cost of medical services in the new location as compared to Canada’s;
• Cost of living – including housing – in new location;
• Language spoken in the new location and overall culture appeal;
• Political stability / climate of the new location;
• Ability to legally reside in the new location;
• Overall quality of life in new location as compared to Canada; and
• Other issues.

In over 90% of the cases that I’ve worked on in recent years – and that’s a lot of cases – the taxpayer clients desire to live in the United States.  And that’s not a surprise to me.  When you compare the list above, the United States is certainly – for most of the above areas – very comparable.  It has a warmer and gentler climate.  Medical services are world class.  The languages spoken in the U.S. are virtually the same as in Canada.

Whenever I speak or write about the above, I inevitably get people who provide comments that Canada’s health care system is superior to that of the U.S.  Yes, I get it…the U.S. does not have universal health care and instead relies on a combination of public, private, for-profit and non-profit insurers and providers.  The U.S. does, however, fund the national Medicare program for people 65 and older (and other people who require assistance). Notwithstanding, private for-profit insurance is the dominant form of health coverage in the U.S. and it can be expensive (compared to the cost in Canada which is essentially nil in most provinces).  But, I don’t think it’s in dispute that wait times in Canada for routine procedures and referrals to specialists are very long as compared to that of the U.S.  In other words, both countries’ medical systems have their pros and cons and need to be considered carefully rather than ideologically.

I often get similar comments from some about the U.S.’s political system with some opining that the U.S. is more racist than Canada (an assertion that, in my opinion, is more grounded in ideology rather than fact) or that their politics are worse than Canada.  While people can certainly have their own opinions – and ideology – on these matters, it is usually a minor factor when I’m dealing with people who are planning to leave Canada.

From a tax perspective, it takes careful planning to become a non-resident of Canada.  There is no definition of “resident” in the Income Tax Act.  Instead, the Supreme Court of Canada – in its 1946 landmark decision in Thompson – determined what the factors are that must be considered (which virtually every subsequent court decision to this day still considers Thompson).  The Canada Revenue Agency – in its Folio on the subject – has nicely summarized the factors laid out in Thompson and should be reviewed if you’re considering becoming a non-resident of Canada.

Overly simplified, one has to “cut their ties” with Canada if they are to become a non-resident of Canada for income tax purposes.  In some cases that is easier said than done.  The facts – and not the intention – will determine if a person has indeed become a non-resident of Canada.  For example, one cannot simply say “I’m leaving Canada to go live in my cottage in the U.S. and I’m now a non-resident of Canada” if they still have a home available to them in Canada, strong economic ties to Canada and other secondary ties.

But, if a person indeed does become a non-resident of Canada for tax purposes, that person will generally be deemed to have disposed of all of their worldwide assets at fair market value at the date that they become a non-resident.  To the extent this deemed disposition of worldwide assets results in gains, then the resulting tax liability will need to be paid (or adequate security provided) for the taxation year that they “depart”.  In the tax community, these deemed disposition rules are generally referred to as the “departure tax” rules.  What exactly the non-residency date is and determining the fair market value of the worldwide assets can be tricky.

There are a number of exceptions to the deemed disposition rules with two of the largest categories being Canadian real estate held personally and registered assets (such as RRSPs, RRIFs and TFSAs).  The logic of these exceptions is that Canada still has a right to tax you as a non-resident of Canada in the future should you ever dispose of the Canadian real estate (or be deemed to have disposed such as on death) and on future withdrawals from your RRSP or RRIF.

Accordingly, managing the departure tax exposure and payment can be a very tricky issue – and often expensive – for people who want to become non-residents of Canada.  Don’t venture into this area without specialized advice from a tax professional who has lots of experience in this difficult area.

While tax is not usually at the top of the list of factors for wanting to become a non-resident of Canada, it is still a very important consideration for the ever-increasing number of Canadians who are wanting to or are considering leaving Canada.  And, in recent years, Canada’s high personal tax rates are indeed causing many to leave Canada for greener pastures.

 

One Comment About Leadership – Should the Biggest Producers Always Be “Promoted” to Management / Leadership?

 

Here’s a story that happens every day with many organizations – especially in professional service firms like law, accounting and engineering firms.

Once upon a time, a new young professional aggressively learns their craft and quickly becomes skilled at it.  That person lives a merry life of learning, does their assignments well with pride, starts to bring in challenging new assignments and keeps his / her clients happy and well serviced.  Along the way, he / she earns the respect of his / her colleagues and is recognized as a “leader”.  Eventually, that person is “elected” or “chosen” as the new “managing partner” of the professional services firm.  That person is flattered to accept the position and is enamored with the prestigious title.  Soon, however, the new “managing partner” is struggling to figure out exactly what they should be doing and what the day-to-day priorities are.  There was no manual or even coaching provided on what success for that position looks like.

Eventually, the person struggles along and might “figure it out” but more often than not the new “managing partner” limps along and tries to learn a whole new skill set of managing the practice, developing the strategy of the firm (if there is one), deal with the inevitable human resource challenges, etc.  Soon, the mantle is passed over to another rising star and the now ex-managing partner feels a sense of relief that he / she can get back to practicing their craft.  But the new cycle is just beginning for the new “managing partner”.  And everyone lives happily ever after.

Yeah, not really.

Sound familiar?  Have you witnessed something like this classic fairy tale? There are many lessons to be learned from this tale with many avenues to do something different.  For example, does it make sense to “promote” rising stars to the firm’s leadership table?  Or should non-producing people be brought in to operate and help develop the strategy instead?  Should “rainmakers” – often the lifeblood of professional services firms – be “promoted” to management positions?

There is not a single right answer to the issues presented.  A firm may simply be too small to bring in outsiders.  Or outsiders may not be able to easily command the respect of the professionals in the firm.  Having said that, I think there are two quick observations that I have witnessed over my career that I will share:

1. Professional service firms often make the mistake of “promoting” their rainmakers to management. Rainmaking and management are two very different skillsets, and it is a rare day I find that rainmakers can do both adequately.  Sure, there are exceptions but my observations over the years is that promoting a rainmaker should be done with careful consideration of how that might affect the “rainmaking” and whether or not that person has adequate leadership skills to develop firm strategy and work to ensure it is executed; and
2. Most professionals – including doctors, lawyers, and engineers – have very little, if any, business and / or finance education when they are students. In addition, leadership education / training is likely non-existent as well.  Accordingly, years later, when “promoted” to leadership, that person often struggles mightily.

The solution to the two above observations, in my view, is for firms to be very intentional about how they develop leaders or bring on leaders to develop / grow and operate their firm.  There should be intentionality around developing the vision of the firm and ensuring such vision is executed.  Easier said than done.

In my experience, firms that provide ongoing leadership training and peer-to-peer learning to their up-and-coming and existing leaders is invaluable and important.  That’s one of the reasons why I am a big advocate of peer-to-peer learning … it is lonely at the top and learning from peers is an excellent and powerful way to learn and grow.  I’m a Forum Chair and also the Regional Director for Alberta for MacKay CEO Forums – an amazing peer-to-peer learning organization that is dedicated to populating the world with inspiring leaders.

Leaders, if you’d like to learn more about the power of this type of growth, feel free to reach out to me directly.

 

One Comment About Economics and Politics: Immigration Growth vs Employment Growth

 

A recent newspaper article highlighted Canada’s recent economic performance:

Overall, the report shows an economy in which growth is cooling because of high borrowing costs. That gives policymakers some room to consider lowering interest rates in the coming months. Still, wage growth remains an inflation risk if it persists.

…

Canada has one of the world’s fastest rates of population growth because of high levels of immigration. But employment growth has been slower than the expansion of the labor force in recent months.

The population aged 15 and older grew by 74,000 in December, on par with average monthly population growth in 2023 of 79,000. Yet this time, it didn’t translate into significant growth in the labour force.

The employment rate — the proportion of the working-age population with jobs — continued to trend lower. It fell 0.2 percentage points to 61.6 per cent in December, the fifth decline in the past six months, and down from its recent high of 62.5 per cent in January 2023.

Last year, the economy averaged about 36,000 new jobs per month, yet the unemployment rate rose 0.8 percentage points — highlighting how quickly the pool of workers is growing.

This is disturbing.  I’ve expressed my concerns about Canada’s public debt charges before and obviously I remain concerned today.  I’ve also expressed my concerns about current Canada’s immigration policies.

When interest rates cool an economy and immigration increases are more than the amount of employment absorption, this is a pending train wreck.  Canada needs to get a handle on all of this quickly.

 

Bonus Comment – Quote From Thomas Sowell – Eminent Economist

 

“The real goal should be reduced government spending, rather than balanced budgets achieved by ever rising tax rates to cover ever rising spending.”

 

Yep, totally agree!

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