The move to another country always entails some degree of complexity. You need a plan before you even start thinking about moving, and one major component is tax planning—especially if you expect your relocation will be permanent. This article will provide an overview of the most relevant emigration tax issues for the average individual taxpayer. We will also provide some tips on how to minimize the impact of taxes on your departure. However, as each situation is unique and there are many factors to consider, it's important to consult with a tax professional to determine the tax implications prior to leaving Canada.
Determine your residency status
As a Canadian resident, you are required to file a tax return on your worldwide income. Even if you are no longer considered a resident of Canada, you may still be required to pay taxes on certain types of income from Canadian sources. The first step towards understanding the implications of leaving Canada is to look towards the residency rules to determine whether you will continue to be considered a resident of Canada for Canadian tax purposes, even after you leave Canada. Please note that the concept of tax residency is wholly separate from residence for other purposes, such as immigration. Tax residency is a question of fact and is determined based on residential ties. Canada Revenue Agency ("CRA") has summarized these into two categories: significant and secondary residential ties.
Significant ties include owning a house or having a spouse/common-law partner and/or dependents who reside in Canada. Secondary ties include personal property, bank accounts, Canadian passport, driver’s licenses, medical insurance coverage with a province etc.
The CRA will also consider other factors when determining your residency status, on a case-by-case basis. These include:
- the purpose of your stay outside of Canada
- the frequency, regularity, and length of your trips to Canada after their departure
- the establishment of residential ties in the country to which you are moving
Generally, CRA will not consider that you have left Canada if you continue to maintain significant residential ties with Canada. In that case, you will remain a tax resident of Canada and be subject to tax, in Canada, on your worldwide income. CRA sets forth its views on the residency status of an individual in Income Tax Folio S5-F1-C1: Determining an Individual's Residence Status.
Tax Implications of Leaving Canada
Once it has been determined that you will be a non-resident of Canada, the following tax implications will need to be considered.
One of the most significant implications of leaving Canada is the departure tax. When you leave Canada, you are deemed to have disposed of almost all your assets and re-acquired it at fair market value immediately before you cease to be a resident in Canada. The deemed disposition creates a "capital gain" or "capital loss" on departure, which may be taxable on your departure tax return If you owned the property before you came to Canada, the acquisition price will be the value of the property on the date of your immigration. The departure tax is payable regardless of whether you have sold the assets or not.
Exceptions to departure tax
There are some exceptions to departure tax. The most common ones are:
1. Real Property and resource property situated in Canada
- Note that Canadian real property (real estate) that was your principal residence will not be subject to the deemed disposition rules or departure tax as any gains will be sheltered by the principal residence exemption. The principal residence exemption can also be claimed even after you have emigrated. However, the maximum exemption is capped at the number of years you were resident in Canada, plus one.
If the disposition occurs after you leave Canada, you will need to apply for a certificate of compliance pursuant to section 116 of the Income Tax Act (" the Act"). The purpose of obtaining the certificate is to have the non-resident withholding tax at a rate of 25% apply only on the net gain amount instead of the gross proceeds. In addition, you will have to file a T1 return for the year of disposition.
If you rent your principal resident upon leaving Canada, there may be a deemed disposition due to a "change in use" rules and other issues may arise, such as withholding tax on rental income and additional filings may be required such as a Section 216 return.
Actions to consider
- Are you planning to sell your home, or turn it into a rental property?
- Discuss the sale impact based on your individual situation after leaving Canada or post departure with your tax professional.
- Talk to your tax specialist about the change-in-use election.
- You must notify the CRA of the sale no later than 10 days after the date of disposition or the CRA may impose a penalty.
- The sale of the Canadian real estate property will require a tax return to be filed.
- If converting to a rental property, Form NR6 should be filed before renting out a property so the 25% non-resident withholding tax can be based on net income instead of gross income.
- You have until June 30 to file an elective Canadian tax return for your net rental income.
2. Canadian business property (including inventory) used in a business carried on by the taxpayer through a permanent establishment in Canada.
3. “Excluded right or interest” including RRSPs, RRIFs, RESPs, pension plans, life insurance, employee stock options, etc. (see complete list here).
- Although you are allowed to keep your RRSPs, TFSAs, and RESPs when you are leaving Canada, it is crucial to understand how any changes in your Canadian tax residency status might affect your ability to contribute or take money out of the investment(s). Furthermore, it is also important to understand how distributions will be taxed in your new country of residence. For example, if you hold a TFSA as a non-resident, you cannot contribute to your TFSA nor will your contribution room increase. In addition, investment income earned in a TFSA may not be tax-free after emigrating from Canada in your new country of residence. Similarly, depending on the domestic law of your new country of residence, investment income earned in your RRSPs may become taxable when earned and withdrawals will be subject to a non-resident witholding tax of 25%.
Actions to consider
- Before leaving Canada, consider the foreign country’s taxation of income within the RRSP, TFSA, and RESP.
- If you hold a TFSA, consider realizing all accrued gains and extracting the funds tax-free prior to your departure. This avoids the tax complexities of holding the TFSA as a non-resident.
- If you have an RRSP, consider maximizing RRSP contributions for the year of departure subject to the normal limitations. If your new country of residence has a treaty with Canada, there could be an election available to defer tax on investment income when earned in RRSP (i.e US-Canada treaty election for RRSP).
4. Assets that are subject to the “short-term resident” rule.
- If you were a short term resident of Canada, meaning you were a resident for 60 months or less during the 10-year period before you emigrate, you are not subject to departure tax on the property you owned before becoming a resident of Canada.
What do I need to do before leaving Canada?
1. Create a list of properties
If the fair market value (FMV) of all "reportable properties" you owned on your date of departure is more than $25,000, you will need to complete Form T1161, List of Properties by an Emigrant of Canada, and attach it to your departure tax return.
Reportable properties” include any property other than:
- cash (including bank deposits)
- property that is an “excluded right or interest” as outlined above
- personal-use property (clothing, household goods, cars, collectibles) with FMV < $10,000
2. Repay Home Buyers' Plan (HBP), and Lifelong Learning Plan (LLP)
Withdrawals from your RRSP for either the Home Buyers Plan and Lifelong Learning Plan that have not been repaid must be paid within 60 days of departure or the amount will be included as income in the year of the departure tax return.
3. Notify Canadian payers and CRA of your change in residency
If you continue to have financial accounts in Canada that could generate passive income after you leave Canada, ensure that you notify any Canadian payers and your financial institutions of your departure status, so appropriate non-resident withholding taxes can be withheld from amounts paid or credited to you.
It's also important that you tell the CRA the date you are leaving Canada so that certain credits or payments that you may be receiving as a resident can be stopped (i.e GST/HST credits, Canada Child Benefit, etc).
4. File departure tax return
A resident individual in Canada will be taxed on their worldwide income earned up to the date of departure from Canadian residency. The applicable departure date is determined on a case-by-case basis. Generally, this will be the latest of when the taxpayer leaves Canada, when the spouse or dependents of the taxpayer leave Canada or when the taxpayer becomes a resident of another country.
Income earned after the date of departure will be taxed in Canada to the extent that it was earned in Canada or attributable to a Canadian source. The tax return for the departure year is due on April 30 of the subsequent year.
Individuals could face a challenge with departure tax if they are deemed to have sold assets but do not receive any sale proceeds in connection with those assets. In this situation, taxpayers can elect to defer the payment of tax by providing adequate security that is acceptable to the CRA, allowing one to defer payment of departure tax until the property is actually disposed of.
What if you continue receiving Canadian source income?
If you receive certain types of income from Canada after you leave, the Canadian payer has to withhold non‑resident tax on the income and send it to the CRA. The tax treaty between Canada and your new country of residence may reduce the withholding tax rate on some sources of income. The tax withheld is usually your final tax obligation to Canada on the income. In certain circumstances, it will be beneficial for you to elect to file a special return (i.e section 217) to recover some of the Part XIII tax withheld or to eliminate your Canadian non-resident tax owing. For more information on what types of income are subject to the withholding tax and elective returns available for filing to non-residents, see our blog article, "Tax Obligations as a Non-Resident of Canada".
It is important to understand the tax implications when you leave Canada to ensure you don't have unpleasant tax surprises. A qualified tax professional can help you review everything in advance before the departure tax return is filed. If you have any questions about your specific tax situation, please contact us and we can help guide you through your emigration process.
If you want to learn more about other tax and accounting topics, explore the rest of our blog!
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page