Last Updated on October 2, 2024 by Rashad Bolbol

Understanding Canadian Departure Tax: What You Need to Know When Leaving Canada

If you’re considering leaving Canada, it’s crucial to understand the implications of the departure tax and how it may affect your financial situation. Departure tax is essentially a deemed disposition of certain properties when you cease being a resident of Canada. Here’s what you need to know:

Brief Overview of Canadian Tax Residency

Determining your tax residency is the first step to understanding your tax obligations. Residency affects whether you will be taxed on your worldwide income or only on certain Canadian-sourced income. If you’re unsure of your residency status, we’ve previously written a blog covering Canadian tax residency in detail here.

For those who live in two countries simultaneously and are uncertain about which one they are considered a resident of, the Tiebreaker Rule in tax treaties can help clarify. For more on this, you can check out our blog about how the Tiebreaker Rule works here.

What is Departure Tax?

Departure tax is a “deemed disposition” that applies when a taxpayer permanently leaves Canada. This means that, for tax purposes, certain properties are considered sold at fair market value, even though they haven’t been physically sold. If there is a capital gain on these assets, it will be taxed, even though no actual transaction has occurred.

Departure tax generally applies to your capital property, such as publicly traded shares, private company shares, and real estate outside Canada. However, there are exceptions to what is included, such as:

• Real property situated in Canada (e.g., rental properties, vacation homes).
• Certain assets used in Canadian business operations.
• Registered accounts like RRSPs and TFSAs.
• Assets owned by individuals who have been in Canada for fewer than 60 months, provided these assets were acquired before becoming a Canadian resident.

How to Calculate Departure Tax

The fair market value of your assets when you leave Canada is used to calculate departure tax. This calculation can be simple or complex depending on the type of assets you hold. Publicly traded shares are straightforward as their market value is easily accessible, whereas private company shares might require a valuation to determine their worth.

Your deemed disposition will be reported in your final tax return, and any departure tax is generally due by April 30th of the following year.

Deferring Departure Tax

If the tax owing is more than $16,500, you may defer payment by posting security with the CRA. Options for security include:

• A bank letter of credit or guarantee.
• A mortgage on unencumbered real estate located in Canada.
• Publicly traded shares.

If the departure tax is deferred, it won’t be due until an actual sale occurs, death, or if you return to Canada. To defer the tax, you’ll need to make an election on your final tax return, and the security must be arranged before the filing deadline.

Filing Your Final Tax Return

Even if you don’t owe tax, it’s recommended to file a departure return to notify the CRA of your move and cease future obligations. Your departure return should include any T1161 forms listing reportable assets, and T1243 for declaring deemed dispositions. If you wish to defer departure tax, you’ll need to file T1244.

What Happens When You Return to Canada?

If you decide to return to Canada, you may be able to unwind or adjust your departure tax through a process called a reacquisition. Essentially, you are deemed to reacquire the assets at their fair market value upon your return, which then becomes your new cost base. This election to unwind must be made in the tax return for the year of your return to Canada and can reduce your departure tax liability to zero or adjust it based on changes in asset value.

Planning Considerations

Planning before leaving Canada is crucial. Here are some strategies:

1. Liquidating Assets: If you need cash to pay the departure tax or wish to create a cost basis for your new country, consider liquidating.
2. Maximizing Registered Accounts: Utilize any tax advantages in your RRSPs or TFSAs.
3. Adjusting Private Company Shares: Declaring dividends from a private corporation can reduce the fair market value and, consequently, the departure tax.
4. Selecting Departure Date: Depending on your expected income, choosing an optimal departure date can impact tax rates and liabilities.

It’s also wise to keep an eye on any tax changes related to real estate in your departure province, such as speculation taxes.

If you’re considering leaving Canada, remember that tax implications can vary significantly based on your assets, destination country, and timing. Seeking advice from a cross-border tax professional can provide clarity and help maximize your financial planning.

For more detailed information, you can refer to the Canada Revenue Agency’s guide on leaving Canada as an emigrant.

Feel free to reach out for personalized advice!

 

Enrolled Agent, US/Canada Tax advisor.
Expert in US and Canada’s cross-border taxation. I assist individuals and businesses that earn income on either side of the border to plan ahead and save on their tax bills.