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.
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:
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.
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.
There are some exceptions to departure tax. The most common ones are:
1. Real Property and resource property situated in Canada
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
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).
Actions to consider
4. Assets that are subject to the “short-term resident” rule.
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:
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.
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).
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.
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.
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.