Moving from Canada to another country can involve more than changing your address and filing a final Canadian tax return. For many individuals, leaving Canada can trigger departure tax, a tax rule that may create a capital gain on certain investments and other property even when those assets have not actually been sold.
Understanding Departure Tax Canada rules before you leave can help you avoid unexpected tax liabilities, meet CRA reporting requirements, and make informed decisions about your assets and residency status.
At WYCPA, we help individuals and families understand Canadian tax obligations associated with leaving Canada and becoming non-residents. Visit WYCPA for professional accounting and tax assistance.
What Is Departure Tax in Canada?
Canada's departure tax is essentially a deemed disposition rule. When an individual ceases to be a Canadian tax resident, the Canada Revenue Agency (CRA) generally considers certain properties to have been sold at their fair market value (FMV) immediately before departure and then reacquired at the same value.
This can result in a taxable capital gain, even though the taxpayer has not actually sold the asset.
For example, suppose you purchased shares for $100,000 and their fair market value when you leave Canada is $180,000. The departure tax rules may treat you as having disposed of the shares for $180,000, potentially creating an $80,000 capital gain.
The exact tax payable depends on the type of property, applicable capital-gains rules, other income, deductions, and your overall tax situation.
Who May Be Subject to Departure Tax?
Departure tax generally applies when an individual ceases to be a resident of Canada for income tax purposes.
However, simply travelling or moving temporarily outside Canada does not automatically make someone a non-resident. CRA considers residential ties and other circumstances when determining whether someone has emigrated for Canadian income tax purposes. Significant residential ties can include a home, spouse or common-law partner, dependants, and other connections to Canada.
This makes determining your actual Canadian tax residency status one of the most important steps before calculating departure tax.
What Assets Are Subject to Canada's Departure Tax?
The deemed disposition rules generally apply to many types of property owned when you leave Canada.
Depending on your circumstances, these may include:
- Shares of corporations
- Investment portfolios
- Certain securities
- Jewellery
- Paintings and artwork
- Collections
- Other capital property
There are important exceptions. For example, certain Canadian real property, Canadian resource property, Canadian business property, registered plans, and other specified property may be excluded from the standard deemed disposition rules.
Because the rules depend on the nature and status of each asset, it is important to review your portfolio before departure rather than assuming every asset is treated the same way.
The $25,000 Foreign and Domestic Property Reporting Threshold
One important reporting requirement involves Form T1161, List of Properties by an Emigrant of Canada.
If the total fair market value of the properties that you owned when you left Canada exceeds $25,000, you may have to complete and file Form T1161. Certain property is excluded when determining whether this threshold applies.
The T1161 requirement is separate from calculating the actual capital gain. Therefore, taxpayers should not assume that having little or no departure tax means there are no departure-related reporting obligations.
CRA states that the penalty for filing Form T1161 late can be $25 per day, subject to a minimum of $100 and a maximum of $2,500.
Forms Commonly Associated With Departure Tax
Several CRA forms may be relevant when an individual emigrates from Canada.
Form T1243
Form T1243, Deemed Disposition of Property by an Emigrant of Canada, is used to calculate deemed dispositions and the resulting capital gains or losses for applicable property.
The resulting amounts are generally reported on the appropriate sections of the Canadian income tax return.
Form T1161
Form T1161 is the list of property required from an emigrant when the applicable reporting threshold is exceeded. It provides CRA with information about property owned at the time of departure.
Form T1244
In certain circumstances, an individual may elect to defer payment of tax arising from the deemed disposition. Form T1244 is used for this election. CRA indicates that the election generally must be made by April 30 of the year following emigration.
These forms can be complex, particularly when an individual owns investments, private-company shares, real estate, or assets in multiple countries.
Can You Defer Departure Tax?
In certain circumstances, yes.
CRA allows an individual to elect to defer payment of tax related to qualifying deemed dispositions, regardless of the amount. The deferred tax generally becomes payable when the property is actually disposed of, subject to the applicable rules and conditions.
Security may be required in certain circumstances. CRA currently states that when the federal tax owing on income from the deemed disposition exceeds $16,500, adequate security is generally required for the election, with special rules applying to former Quebec residents.
Because a deferral does not eliminate the underlying tax liability, taxpayers should evaluate whether deferral is financially beneficial before making the election.
What Happens to Canadian Real Estate?
Canadian real estate requires special consideration.
Canadian real or immovable property is generally excluded from the standard deemed disposition rules applicable to emigrants. However, this does not mean that Canadian real estate becomes tax-free after you leave Canada. Different rules can apply when a non-resident later sells Canadian property.
If you own a Canadian home, rental property, commercial property, or other Canadian real estate and plan to become a non-resident, professional advice can help you understand both the departure and future non-resident tax implications.
How to Prepare for Departure Tax Canada
If you are planning to leave Canada permanently, consider taking these steps before your departure:
- Determine your expected Canadian residency departure date.
- Review your residential ties to Canada.
- Prepare an inventory of your worldwide assets.
- Determine the fair market value of potentially affected assets.
- Review the cost basis and acquisition records for investments.
- Identify assets that are excluded from the deemed disposition rules.
- Calculate potential capital gains and departure tax.
- Determine whether Form T1161 is required.
- Complete Form T1243 when applicable.
- Evaluate whether a departure-tax deferral election is appropriate.
- Review future Canadian-source income and non-resident tax obligations.
Starting this process before moving can provide more time to obtain valuations, organize records, and consider legitimate tax-planning opportunities.
Common Departure Tax Mistakes
Several mistakes can create unnecessary tax complications.
Assuming Moving Abroad Automatically Makes You a Non-Resident
Leaving Canada physically does not by itself settle your tax residency. Your residential ties and circumstances matter.
Ignoring Investment Gains
An investment does not necessarily need to be sold for a capital gain to arise under the deemed disposition rules.
Forgetting T1161
The $25,000 reporting threshold and applicable exclusions should be reviewed carefully. Failure to file required information can result in penalties.
Using the Wrong Fair Market Value
The value of an asset at the relevant departure date can be critical to the calculation. Keeping reliable valuation records is therefore important.
Waiting Until After Leaving Canada
Departure tax planning is generally more effective when completed before the move. Once residency has changed, certain planning opportunities and documentation options may become more difficult.
Professional Help With Departure Tax Canada
Departure Tax Canada can involve residency rules, capital gains, asset valuations, reporting forms, tax deferrals, and cross-border tax considerations. A mistake can potentially result in unnecessary tax or penalties.
W.Y. CPA can help you review your Canadian tax situation before leaving the country, identify potential departure-tax obligations, organize the required information, and prepare the appropriate tax filings.
If you are planning to move outside Canada, it is worthwhile to seek professional tax advice before establishing non-resident status. Early planning can help you understand your obligations and make better-informed financial decisions.
Final Thoughts
Canada's departure tax rules are designed to address unrealized gains on certain property when an individual ceases to be a Canadian tax resident. The rules can be particularly important for people with substantial investment portfolios, business interests, or other appreciated assets.
Understanding your residency status, identifying affected property, determining fair market values, and completing the appropriate CRA forms are essential parts of the process.
If you are preparing to leave Canada and want professional assistance with Departure Tax Canada, contact WYCPA to discuss your tax planning and compliance needs.
