Individuals that depart Canada and become non-residents of Canada for tax purposes are subject to specific rules regarding their assets. These individuals also may be required to file specific forms with the Canada Revenue Agency (CRA).
This article examines the departure tax, the election to defer departure tax and what this means for individuals ceasing Canadian residency for tax purposes.
Departure tax reporting requirements
Canada levies a departure tax on residents when they leave Canada. Individuals are expected to dispose of their assets (with some exceptions) at fair market value on the date they cease Canadian tax residency. Half of any net gains resulting from the deemed disposition are included in income and taxed at normal marginal rates. This ensures that Canada collects the tax related to the portion of the gain that accrued while the individual was a Canadian tax resident.
Individuals who were residents of Canada for less than 60 months are subject to departure tax only on assets purchased during their Canadian tax residency period.
Departure tax does not apply to certain types of assets, including but not limited to:
- Canadian real estate;
- Canadian business property and inventory; and
- Assets held within registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), company pension plans, registered education savings plans (RESPs) and tax-free savings accounts (TFSAs).
Along with the tax return for the year of departure, individuals must file Form T1243, “Deemed Disposition of Property by an Emigrant of Canada,” listing information including the property’s year of acquisition, its fair market value on the date of departure and the adjusted cost base.
For marketable securities, such as stocks, bonds and mutual funds, a broker can generally provide assistance in determining the fair market value and the adjusted cost base. An appraisal may be required for other property.
If the total value of all property owned at the time of departure is more than CAD 25,000, an individual must also file Form 1161, “List of Properties by an Emigrant of Canada.” This form must be filed regardless of whether an individual must otherwise file a tax return for their departure year.
Payment of departure tax
Departure tax is generally due by 30 April of the year after an individual departs Canada, unless the individual files an election to defer the departure tax. Individuals may elect to defer the tax on their deemed dispositions until the asset is actually disposed of, or they repatriate to Canada, whichever occurs first.
Individuals who wish to make this election must do so by completing Form T1244, “Election, under Subsection 220(4.5) of the Income Tax Act, to Defer the Payment of Tax on Income Relating to the Deemed Disposition of Property” by the normal filing deadline of 30 April.
Individuals who make this election and whose amount of federal tax owing on income from the deemed disposition of property exceeds CAD 16,500 (or CAD 13,777.50 for former residents of Quebec) must provide adequate security to cover the amount. The CRA (and Revenu Québec) will accept various items as security, including the assets themselves; however, a letter of credit from a Canadian bank is generally preferred. When the election is made and adequate security has been provided, no interest will accrue on the unpaid departure tax. The individual or a tax advisor must contact the CRA well in advance of the 30 April deadline to make acceptable arrangements.
An individual does not need to provide security on the first CAD 100,000 of capital gains from the deemed disposition.
Revenue Québec may accept the deferral of tax without the posting of security when the taxable income resulting from departure tax is less than CAD 50,000.
When departure tax is deferred, and the assets are actually disposed of in a subsequent year, the deferred tax must be paid to CRA (and Revenu Québec) by 30 April of the year following the year of disposition.
If the capital gain on the actual disposition is also subject to tax in the country where the individual has moved to, the individual may be able to claim a foreign tax credit for the foreign capital gains tax.
Returning to Canada
If an individual subsequently resumes residency in Canada, the individual is generally deemed to reacquire all assets held at that time, at fair market value on the date that residency resumed. If the same assets are held at the time residency resumes, individuals may elect to “unwind” the deemed disposition. This “unwinding election” has specific consequences depending on each case’s specific facts.
How BDO can help
If you are considering leaving Canada on a permanent basis, or if you require assistance reviewing your departure tax reporting requirements or deferral options, please contact us for more information.