Departure Tax : An Unwelcome Surprise
Permanently leaving Canada can end up costing you thousands and maybe even millions of dollars in taxes owing to CRA.
A 2024 study by McGill found that a growing number of Canadians are moving abroad because of a lack of affordability. While another 2024 study by Angus Reid shows that 2-in-five recent immigrants say they may leave their province or Canada. This is followed up by another article stating that Canadians moving to the US has reached a 10-year high. You get the picture of where I am going with this. With more people leaving Canada stateside and potentially more thinking about leaving in the future, if you are a resident of Canada you need to know the tax implications of what happens when you go from being a resident of Canada to a non-resident.
When you go from being a resident of Canada to a non-resident of Canada, under the Income Tax Act you are deemed to dispose of all of your assets at fair market value and reacquire them at that same price. This could create huge tax liabilities owing to CRA. There are certain assets that are exempt from this rule:
Real property in Canada
Certain property used in a Canadian business
Excluded right or interest
Real property in Canada
These assets relate to real or immovable property located in Canada such as your former principal residence or land (Note: the principal residence exemption will not apply if you go to sell your house the year after leaving Canada). They also include Canadian resource or timber resource property.
Certain property used in a Canadian business
This includes inventory and certain intangible assets that are carried on in where a permanent establishment is in Canada.
Excluded right of interest
An excluded right or interest contains a long list in the income tax act but the main ones that most people will have are RRSP’s, TFSA’s, RRIF’s, CPP or OAS rights, stock options and pension funds.
Calculating your departure tax
The best way to calculate your potential departure tax is by creating a spreadsheet of all of your assets with their cost base and fair market values and determining which assets will be excluded and which taxed. There are certain forms to be filled out when preparing your personal tax return (T1243, T1161) that will help with the calculation of your departure tax. CRA is notified of your emigration when you prepare your T1 tax return.
If you have unused capital losses when you are planning on departing, you can file an election form on T2061A to have some of those excluded assets now included to realize a gain and use up some or all of your losses. This will bump up the cost base of your asset to create less of a gain when solder later. You can also do this in reverse and create capital losses on excluded assets that are in a loss position. This will enable you to shield capital gains upon departure.
One thing to keep in mind is that if you have a Home Buyers Plan outstanding, it needs to be repaid as well or else it will be included into your taxable income upon departure.
What if I own a private corporation?
If you own a private corporation when you are departing, there are a host of issues that you will need to contemplate (deemed year end, loss of CCPC status, dividends paid to you withheld at 25%, etc.). However, if there is a large accrued gain and the amount of tax owing is greater than $16,500, you can file a T1244 election form that defers the tax owing to CRA, provided that adequate security is posted. The security will not need to be posted for the first $16,500 of taxes owing. Once the security is posted, the tax is deemed to be paid and interest won’t start to accrue.
CRA will accept bank letters of guarantee or letters of credit from a financial institution, shares in the private corporation if they are the reason for the large departure tax or a mortgage on a real Canadian property. Once posted, CRA will review the security on an annual basis to sign off on the continued tax deferral.
Emigration planning can be very difficult so I would strongly urge anyone thinking about doing it to talk to their advisor. There are numerous forms to be filled out and strategies to put into place prior to leaving.
DISCLAIMER: The articles posted on TaxCrunch should not be considered specific advice to anyone readying. Please reach out to a professional advisor to seek guidance on any issues mentioned in this post before acting upon anything written here. All posts are time sensitive to what is law at the time written and are subject to changes in legislation.