tax

KEY TAKEAWAYS Canadians relocating to the United Arab Emirates (“UAE”) must carefully assess their global tax obligations and formally establish non-residency in Canada to avoid paying Canadian taxes. There is no relief under the UAE-Canada tax treaty; however, obtaining a Tax Residency Certificate (“TRC”) in the UAE can strengthen residency claims under UAE domestic laws and mitigate tax disputes. Proper planning is essential to mitigate Permanent Establishment (“PE”) and Place of Effective Management (“POEM”) risks for foreign businesses managed from the UAE. TLP Advisors has worked with numerous founders and Canadian former residents, particularly those whose income is derived from trading or crypto income, to prepare submissions and statements for UAE filing purposes. INTRODUCTION Canadians are taxed on their global income as long as they are considered tax residents of Canada. For Canadians relocating to the United Arab Emirates (“UAE”), understanding the nuances of residency rules, tax obligations, and available relief measures is critical. Relocating to the UAE does not automatically sever Canadian tax residency, which is determined based on personal and economic ties to Canada. Failure to properly manage this transition can result in dual residency, leading to potential double taxation and compliance challenges. While the UAE does not levy tax on personal income, Canadian expatriates still need to carefully structure their personal and professional affairs to align with the UAE’s residency criteria and tax laws. This article examines the tax considerations for Canadian expatriates moving to the UAE, the interplay between Canadian and UAE tax systems, and steps to ensure compliance while optimising tax structures. UNDERSTANDING CANADIAN TAX OBLIGATIONS Tax on Global Income Canada follows a residency-based taxation system, meaning individuals considered Canadian tax residents are required to report and pay taxes on their worldwide income, regardless of their physical location. Even after relocating to a tax-free jurisdiction like the UAE, Canadian residents must comply with this obligation unless they establish non-residency for tax purposes. For Canadian tax residents involved in crypto, income or wealth generated through trading is not clearly categorised or defined, necessitating a nuanced and close analysis to ensure they are well looked after. Who is a Canadian Tax Resident? Canadian tax laws do not provide a fixed set of rules for determining residency. Instead, the Canada Revenue Agency (“CRA”) assesses an individual’s residency on a case-by-case basis, focusing on the strength of their personal and economic ties to Canada. Maintaining significant connections—such as owning or occupying a residential home in Canada, having family members based in Canada, or operating key businesses within the country—could result in being deemed a tax resident, even if one has relocated abroad. How does One Become a Non-Resident? To cease being taxed as a Canadian resident, individuals must demonstrate a clear severance of substantial residential ties and formally declare non-residency status with the CRA. Key steps to establish non-residency include: Severing Primary Residential Ties: This typically involves selling or renting out any residential property located in Canada to signal that Canada is no longer the individual’s principal place of residence. Reducing Secondary Ties: Closing or minimising connections such as Canadian bank accounts, healthcare coverage, professional memberships, and driver’s licences helps to strengthen claims of non-residency. Filing a Departure Tax Return: This process officially notifies the CRA of the individual’s change in residency status, confirms the date of departure for tax purposes, and ensures compliance with departure tax requirements on certain assets deemed disposed of upon leaving Canada. IS THERE ANY RELIEF UNDER THE UAE-CANADA TAX TREATY? Under Canadian tax law, individuals may rely on tax treaties to mitigate dual residency concerns if they qualify as tax residents of another country under the treaty’s provisions. In such cases, the tie-breaker rules within the treaty determine the individual’s tax residency. If deemed a resident of the other country, the individual is considered a non-resident of Canada for tax purposes as per Canada’s domestic tax law. This status can significantly reduce tax burdens by alleviating global income taxation and removing the obligation to file Canadian tax returns. Although the UAE has a tax treaty with Canada, the treaty imposes a notable limitation. Under the UAE-Canada tax treaty, only UAE nationals are recognised as tax residents of the UAE for treaty purposes. Consequently, Canadian expatriates residing in the UAE do not qualify as tax residents under the treaty, leaving no avenue for relief under its tie-breaker provisions. As a result, Canadians relocating to the UAE will generally remain Canadian tax residents unless they formally sever substantial residential ties with Canada and file for non-residency status with the CRA. Without completing these steps, their tax obligations in Canada will continue to apply, even if they are living and working in the UAE. WHAT DOES UAE TAX LAW SAY? Historically, the UAE lacked formal statutory rules for determining an individual’s tax residency, creating challenges for expatriates seeking to establish their tax residency in the UAE. To address this gap, the UAE introduced comprehensive residency rules, offering much-needed clarity for individuals seeking to formalise their tax residency status in the country. Under UAE domestic laws, individuals are considered tax residents for a given financial year (which coincides with the calendar year) if they meet specific criteria. The simplest route to establishing tax residency is by being physically present in the UAE for at least 183 days in a calendar year. However, residency can also be established even with fewer days spent in the UAE if additional conditions are met, such as being employed by a UAE entity, maintaining a primary place of residence in the UAE, and/or having their centre of financial and personal interests located in the UAE. Once any of these residency tests are satisfied, expatriates—including Canadians—can apply for a TRC. The TRC serves as formal evidence of tax residency under UAE domestic laws. Submitting this certificate to the CRA can bolster claims of UAE tax residency and help mitigate the risk of tax disputes or dual taxation concerns. MANAGING TAX RISKS FOR BUSINESSES In addition to personal tax considerations, Canadian expatriates managing foreign businesses from the UAE must also be vigilant to avoid inadvertently triggering a tax presence for their businesses within the UAE. Under the UAE tax laws, a foreign company can be classified as a tax resident in the UAE if it is effectively managed and controlled from within the country—commonly referred to as having its POEM in the UAE. If a company is deemed to have its POEM in the UAE, it would be subject to UAE corporate tax on its global income, regardless of its country of incorporation. Expatriates managing or operating businesses from the UAE must also consider the risks of creating a PE in the UAE. A PE may be established under UAE tax laws in several scenarios, including: Regularly negotiating or signing contracts on behalf of a foreign entity within the UAE; or Consistently making essential management or commercial decisions for the foreign entity from the UAE. If a PE is deemed to exist, the income attributable to that PE would be subject to corporate tax in the UAE, creating additional financial and operational complexities for the business. To avoid these risks, businesses are strongly advised to seek comprehensive tax guidance. Careful planning and the implementation of appropriate operational structures can help mitigate the likelihood of being classified as a UAE tax resident or unintentionally establishing a PE in the UAE. HOW TLP ADVISORS CAN ASSIST? Navigating the complexities of cross-border tax compliance can be challenging and requires meticulous planning along with expert guidance. At TLP Advisors, we offer bespoke solutions tailored to your needs, including: Specialised Crypto Support: We have extensive experience assisting founders and former Canadian residents, particularly those with crypto-derived income, in preparing UAE submissions and statements that meet filing requirements while addressing the unique challenges of categorising trading income under Canadian tax rules. Strengthening Residential Ties to the UAE: We assist in structuring your personal and professional affairs to establish and maintain robust tax residency in the UAE. We also coordinate with your Canadian tax advisors to ensure seamless compliance with Canadian filing requirements. Minimising POEM and PE Risks: We can assist you in evaluating the POEM and PE risks for your business and advising on operational structures to avoid unintentional UAE corporate tax liabilities. TRC Applications: We provide end-to-end support with the application process for UAE TRCs and liaising with relevant authorities to ensure your residency claims are effectively documented. CONCLUSION For Canadians relocating to the UAE, careful tax planning is essential to optimise financial outcomes and avoid unforeseen liabilities. With its zero personal income tax regime and favourable residency rules, the UAE offers significant benefits for expatriates. However, ensuring compliance with both Canadian and UAE tax obligations requires a proactive approach. By addressing key considerations and working with trusted advisors, individuals and businesses can navigate these challenges confidently and make the most of the opportunities available. *** TLP Advisors is a dynamic and forward-thinking consulting, strategy and law firm specialising in providing cutting-edge solutions to our diverse clientele. With our roots deeply embedded in financial services, gaming, web3, and emerging tech, we offer unparalleled knowledge and support tailored to these rapidly evolving sectors’ unique challenges and opportunities. TLP Advisors has consistently been the firm of choice for L1 chains, DeFi protocols, gaming companies, fintech and payment companies, foundations, funds, and investors. We have built a reputation for excellence through frequent collaborations with regulators, funds, and technology incubators. Our deep understanding of the intricate regulatory landscapes and industry dynamics allows us to provide strategic guidance and innovative solutions that empower our clients to navigate complex challenges and seize emerging opportunities. www.techlawpolicy.com *** See Government of Canada, ‘Income Tax Folio S5-F1-C1, Determining an Individual’s Residence Status’ https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-5-international-residency/folio-1-residency/income-tax-folio-s5-f1-c1-determining-individual-s-residence-status.html. Section 250(5), (Canada) Income Tax Act R.S.C., 1985, c. 1 (5th Supp.), https://laws-lois.justice.gc.ca/eng/acts/i-3.3/page-1.html#h-279748. The sub-section reads: “(5) Notwithstanding any other provision of this Act (other than paragraph 126(1.1)(a)), a person is deemed not to be resident in Canada at a time if, at that time, the person would, but for this subsection and any tax treaty, be resident in Canada for the purposes of this Act but is, under a tax treaty with another country, resident in the other country and not resident in Canada.” Article 4(1)(b)(i) of the Convention Between the Government of Canada and the Government of the United Arab Emirates, https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-arab-emirates-convention-2002.html. It reads: “1. For the purposes of this Convention, the term “resident of a Contracting State” means: … (b) in the case of the United Arab Emirates, (i) an individual who is a national of the United Arab Emirates, provided that the individual has a substantial presence, permanent home or habitual abode in the United Arab Emirates and that individual’s personal and economic relations are closer to the United Arab Emirates than to any other State.” Cabinet Resolution No. (85) of 2022 Determining the Tax Residence, https://uaelegislation.gov.ae/en/legislations/1574/download. Please note that this article does not provide a detailed explanation of the specific residency tests. The information shared is for illustrative purposes only. Article 13(3)(b), Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, https://mof.gov.ae/wp-content/uploads/2022/12/Federal-Decree-Law-No.-47-of-2022-EN.pdf. The corporate tax rate in the UAE is 9%. Article 14(1), Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, https://mof.gov.ae/wp-content/uploads/2022/12/Federal-Decree-Law-No.-47-of-2022-EN.pdf.