Canada levies tax on the basis of an individual’s residency. Generally, an individual is subject to Canadian tax on his/her worldwide income if he/she is a resident of Canada. The residency status of an individual is a question of fact to be determined by taking into account all of the circumstances of the individual. The most important factor in determining whether or not an individual is a resident of Canada for tax purposes is whether or not the individual establishes residential ties in Canada. Similarly, the most important factor in determining whether or not an individual is not resident in Canada is whether or not the individual does not have residential ties or severs them.[1]
When you become a non-resident of Canada, you are deemed to have disposed of assets you own at that time at their fair market value and then to have immediately reacquired them (there are some exceptions to this rule for assets that continue to be taxed in Canada after departure, such as Canadian real estate). This tax is commonly referred to as “departure tax” and depending on the taxpayer’s situation, there may be planning opportunities available to reduce or eliminate this tax.
Departure tax does not apply to:
- Real property in Canada, Canadian resource and timber property;
- Capital property and inventory used in carrying on a business in Canada;
- an “excluded right or interest;”[2]
- property owned when the individual last became a resident of Canada if he/she has not been resident for more than 60 months during the 120 month period ending when he/she ceases to be resident of Canada and property inherited during that time;[3] and
- taxable Canadian property if elected by an individual who emigrated from Canada but then immigrates to Canada.[4]
Any taxable capital gain resulting from this deemed disposition is included as a taxable capital gain (deemed proceeds less adjusted cost base) in the individual’s departure return. Currently, capital gains are 50% taxable at a top rate of 53.53%. If a taxpayer’s departure from Canada results in departure tax, the tax is generally paid by April 30th of the year following the year of departure. It is possible to elect to defer payment of the tax until the asset(s) which gives to the tax are actually sold (as opposed to being deemed sold) by filing Form T1244 no later than April 30 of the year after emigration.[6] If the amount of tax exceeds $16,500, security may need to be posted with the Canada Revenue Agency.
Other Reporting Obligations
If the total fair market value of assets owned at the time of departure exceeds $25,000, the departing taxpayer must file Form T1161, List of Properties by an Emigrant of Canada.[7] The form requires the taxpayer to report certain details on all their “reportable properties.” Reportable properties include property other than:
- Canadian currency;
- An excluded right or interest (with some exceptions);
- property owned when the individual last became a resident of Canada if he/she has not been resident for more than 60 months during the 120 month period ending when he/she ceases to be resident of Canada and property inherited during that time; and
- personal-use property with a fair market value of less than $10,000.
[1] The Canada Revenue Agency has established general guidelines for weighing primary and secondary residential ties in order to determine whether an individual is a resident of Canada for tax purposes, see CRA, “Income Tax Folio S5-F1-C1, Determining an Individual’s Residence Status,” effective as of November 26, 2015 (accessed at https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-5-international-residency/folio-1-residency/income-tax-folio-s5-f1-c1-determining-individual-s-residence-status.html).
[2] A “right or interest” is defined in subsection 128.1(10) and includes registered funds, retiring allowances, etc.
[3] This exception applies to individual who immigrates to Canada and then subsequently leaves within the time frame outlined.
[4] The list of property which is not subject to the departure tax is found at paragraph 128.1(4)(b).
[5] Paragraph 128.1(4)(d).
[6] Subsections 220(4.5) to (4.54) provide the mechanism for deferring payment of the departure tax.
[7] Subsection 128.1(9).