Leaving Canada: Know the Tax Implications

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.

Departure Tax

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.

Planning Considerations

  • 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.  
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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".

Summary

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!

Disclaimer

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

Tax Obligations as a Non-Resident of Canada

As a non-resident of Canada, you are subject to different tax rules than residents. Generally, Canadian tax residents pay tax on worldwide sources of income. By contrast, if you are a non-resident of Canada, you are only liable to pay tax on income or gains from Canadian sources. The amount of tax you owe will depend on your residency status and the type of income you receive.

There are two types of taxes that non-residents may be subject to: Part XIII tax and Part I tax. Part XIII tax is a withholding tax that is deducted from certain types of income, such as interest and dividends, rental payments and pension. Part I tax is a general income tax that applies to all forms of income, including employment income, business income, and capital gains.

This article will go over the basics of when you are considered a non-resident of Canada for Canadian income tax purposes, as well as outline your tax obligations as a non-resident of Canada. Furthermore, we will provide a brief overview of when and how a non-resident can elect to file a return in Canada.

What does residency status mean?

Residency status is used to determine whether an individual is considered a resident or non-resident of Canada for tax purposes. An individual’s residency status is determined by a number of factors, including the length of time they have been in the country, their ties to Canada, and their intention to live in the country permanently.

For more information on how to determine your residency status, please refer to our blog article Leaving Canada: Know the Tax Implications.

Who is a non-resident of Canada for tax purposes?

An individual may be considered a non-resident of Canada for income tax purposes if they:

  • normally, customarily, or routinely live in another country and are not considered a resident of Canada
  • do not have significant residential ties in Canada, and any of the following applies:
    • You live outside Canada throughout the tax year
    • Your stay in Canada for less than 183 days in the tax year

The most important thing to consider when determining your residency status for income tax purposes is whether or not you have, or are establishing, significant residential ties with Canada.

Significant residential ties to Canada include:

Secondary residential ties that may be relevant include:

  • personal property in Canada, such as a car or furniture
  • social ties in Canada, such as memberships in Canadian recreational or religious organizations
  • economic ties in Canada, such as Canadian bank accounts or credit cards
  • a Canadian driver’s license
  • a Canadian passport
  • health insurance with a Canadian province or territory

If you are unsure of your residency status, or if you require assistance in determining your tax obligations as a non-resident of Canada, we recommend that you consult with a qualified tax accountant. Alternatively, it is also a good idea to contact CRA prior to filing your return to ensure you are declaring the proper status. You can visit the CRA website or complete the NR74 Determination of Residency Status (entering Canada) form or the NR73 Determination of Residency Status (leaving Canada) form and send it to the International tax and non-resident enquiries office to get an opinion from the CRA about your residency status.

Do non-residents need to pay taxes in Canada?

Image Of A Non-Resident Of Canada With Text Tax
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As a non-resident of Canada, you are subject to Canadian income tax on most Canadian-source income paid or credited to you during the year unless all or part of it is exempt under a tax treaty. Tax calculated on the income of a non-resident of Canada is known as non-resident tax.

In general, non-resident income is subject to Part XIII tax or Part I tax in Canada. If you own a business in Canada or earn employment income in Canada, your income is subject to Part I tax. Part XIII tax applies to dividends, rental payments, old-age pensions, retirement income payments, and annuity payments as well as other types of investment income.

Part XIII tax

Part XIII is a non-resident withholding tax charged at a rate of 25% and is deducted from the type of incomes listed below. However, if there is a tax treaty between Canada and your country or region of residence, the terms of the treaty may reduce the rate of non-resident withholding tax.  Hence, to ensure that the correct Part XIII tax is deducted at source, it is important to tell Canadian payers from which you receive the following income that you are a non-resident of Canada, and also inform them of your country of residence.

If the correct amount of Part XIII tax has been deducted from your income by your Canadian payer, you are not required to submit an annual Canadian income tax return. In that case, the Part XIII tax withheld would be considered your final tax obligation to Canada on that income.

If the correct Part XIII tax has not been withheld, you may choose to voluntarily disclose this information and make the necessary tax payment. In certain circumstances, it will be beneficial for you to file a elect to file a special return to recover some of the Part XIII tax withheld or to eliminate your Canadian non-resident tax owing. Refer to Elective Returns below for more information.

The most common types of income subject to Part XIII are:

  • dividends
  • rental and royalty payments
  • pension payments
  • old age security pension
  • Canada Pension Plan and Quebec Pension Plan benefits
  • retiring allowances
  • registered retirement savings plan payments
  • registered retirement income fund payments
  • annuity payments

Part I tax

Part I tax is a general income tax that applies to all forms of income, including employment income, business income, and capital gains. The most common types of income that may be subject to Part I tax are:

  • employment income
  • business income
  • capital gains

This type of tax is generally deducted at source by the payer. You may be entitled to claim certain deductions from income to arrive at the taxable amount when you file your Canadian tax return. You can also claim a credit for any tax withheld at source or paid on this income. Similar to Part XIII tax, if there is a tax treaty between Canada and your country or region of residence, the terms of the treaty may reduce or eliminate the tax on certain types of income.

Do non-residents need to file a tax return in Canada?

Image With Text Tax Return And Non-Resident Tax Filing

Once you have determined that you are in fact a non-resident of Canada, either through assessment by CRA or consultation by a tax accountant, you may be required to file a Canadian income tax return to calculate your final tax obligation to Canada on:

  • income from federal and provincial or territorial COVID-19 benefits
  • income from employment in Canada or from a business carried on in Canada
  • taxable part of other Canadian-sourced income, such as Canadian scholarships, fellowships, bursaries, and research grants
  • taxable capital gains from Disposing of certain Canadian property

As a result of filing the return, you can either receive a refund of some or all of the tax withheld or have a balance of tax owing for the year.

The following are some examples where individuals or corporations will require non-resident tax services:

  • Individuals leaving or entering Canada
  • Professionals or consultants earning fees for services rendered in Canada
  • Expatriate foreign executives and employees working in Canada
  • Non-resident individuals with residential ties in Canada
  • Deemed Canadian residents
  • Non-resident individuals carrying on business activities in Canada
  • Non-resident shareholders of Canadian corporations
  • Non-residents with rental income from Canadian property
  • Non-resident who disposed of taxable Canadian property
  • Foreign corporations with subsidiary corporations in Canada
  • Non-resident corporations carrying on business activities in Canada
  • Non-resident trusts with Canadian resident contributors and/or Canadian resident beneficiaries
  • Non-residents who are considered to be limited or non-active partners in a partnership carrying on business in Canada
  • Temporary foreign actors, directors, performing artists, and workers in film and entertainment occupations

When can I elect to file a non-resident tax return?

In addition to the instances when you must file a non-resident tax return, there are times when you can elect to file a non-resident tax return.

Elective returns can be filed under sections 216, 216.1, 217, and 218.3 of the Act. When you file under these sections, you have the option of paying tax on certain types of Canadian-source income using an alternative tax method. This means that you may receive a refund for some or all of the non-resident tax withheld.

The most common situations where you might choose to file an Elective Non-Resident tax return would include where Part XIII tax was deducted on:

  • Canadian rental income from real or immovable properties or timber royalties
  • Income earned as a non-resident actor
  • Certain types of Canadian pension income
  • Distributions received on Canadian mutual fund investments where you have a loss on disposition

Summary

In summary, as a non-resident of Canada, you are still required to comply with Canadian tax law. This includes filing a Non-Resident tax return and paying any taxes owing. Non-compliance can result in significant penalties, so it is important to ensure that you are up-to-date on your tax obligations.

If you have any questions about your specific tax situation, we recommend speaking with a qualified tax accountant. If you are looking for an accountant in Hamilton for professional guidance, you can also contact us and we can help guide you through the complexities of non-resident tax.

If you want to learn more about other tax and accounting topics, explore the rest of our blog!

Disclaimer

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.