Moving from Canada to another country, whether for work, retirement, or personal reasons, involves more than just packing up and finding a new home. It requires careful consideration of the tax implications of such a significant life change. Below, we delve into the key Canadian tax considerations for those planning to leave the country, to ensure a smooth transition and full compliance with tax laws.
Tax Residency: A Crucial Determinant
Your tax residency status is fundamental in determining your tax obligations. Upon leaving Canada, your residency status may change, impacting how Canadian tax laws apply to you. Generally, you are considered a resident of Canada for tax purposes if you have significant primary and secondary residential ties to the country, such as a home, family, or economic interests.
You cease to be a Canadian tax resident when you sever these residential ties. This change is often aligned with the latest of the following dates:
- The date you leave Canada
- The date your spouse and/or dependents leave Canada
- The date you become a resident of the new country
In cases of uncertainty, you can work through the determination of residency status (leaving Canada) Form NR73, although submitting this form to the Canada Revenue Agency is not required.
Taxation of Income Upon Departure
In the year of departure, you will be taxed as a resident on your worldwide income up to the date you cease to be a resident. After this date, you will be taxed as a non-resident on income derived from Canadian sources.
Deemed Disposition & Departure Tax
A departure tax is imposed on the deemed disposition of certain assets at their fair market value (FMV) on the date you leave Canada. This Canadian deemed departure tax ensures that 50% of any net gains from this deemed disposition are included in your income. These are taxed at regular marginal rates, ensuring that Canada taxes the gains accrued while you were a resident.
Investments and Pensions
Non-Registered Investment Accounts: Deemed disposition rules apply, generating capital gains or losses based on FMV at the departure date. Post-emigration, investment income is subject to withholding tax in Canada, with varying rates based on your new country of residence. If relocating to the U.S., you can benefit from a basis adjustment by filing an election under the Canada-U.S. Tax Convention. Your non-registered investment accounts should also be moved from a Canadian custodian to a U.S. custodian. Cardinal Point is uniquely registered in both Canada and the U.S. and can manage your investment accounts in either or both countries.
Canadian Employee Stock Options: These are not subject to deemed disposition upon emigration. However, exercising stock options after emigration will generate a taxable benefit in Canada, necessitating the filing of a T1 return.
Shares of a CCPC: Subject to deemed disposition at FMV, with potential use of the lifetime capital gains exemption (LCGE) for qualifying shares. Tax deferral options are available by submitting Form T1244, although security may be required for significant tax liabilities.
TFSAs: Not subject to deemed disposition, but investment income may be taxable in your new country of residence. Contributions as a non-resident are penalized, so it’s advisable to recognize gains and withdraw tax-free before leaving Canada.
RESPs: Similar to TFSAs, RESPs are not subject to deemed disposition but investment income may be taxable abroad. Contributions as a non-resident are also penalized, and withdrawals are subject to a Canadian withholding tax of 25%.
RRSPs: Not subject to deemed disposition, and contributions can still be made in the year of departure. Electing under the Canada-U.S. Tax Treaty can allow RRSPs to grow tax-free in the U.S., although withdrawals will be taxable.
Canadian CPP & OAS: These benefits are not subject to deemed disposition and may still be received after emigration, with possible withholding tax based on your new residence. CPP and OAS are only taxed in the U.S. under the terms of the Canada-U.S. Tax Treaty.
RPPs: Not subject to deemed disposition, and benefits can continue post-emigration with a 15% withholding tax on withdrawals as per the Canada-U.S. Tax Treaty.
Real Property in Canada
Deemed disposition rules do not apply to Canadian real property. You can claim a principal residence exemption on the sale of your home even after leaving Canada, provided you comply with specific reporting requirements. Rental income from Canadian property after emigration is subject to a 25% non-resident tax on gross income, which can be adjusted by filing Form NR6.
Filing Requirements
T1 Emigration Income Tax Return: Must be filed for the year of departure, reporting worldwide income up to the departure date. The due date is April 30 of the following year (June 15 for self-employed individuals).
Key Forms:
- T1161: Disclosure of properties valued over $25,000
- T1243: Listing properties subject to deemed disposition
- T1244: Election to defer tax payment on deemed disposition income
- T2061A: Election for real and business property not subject to deemed disposition
Section 216 Return: For reporting rental income from Canadian property, allowing taxation on net income with potential refunds for over-withholding.
Section 217 Return: Elective return for reporting Canadian Benefits income, which is advantageous if the effective tax rate is lower than withholding tax.
Conclusion
Leaving Canada involves significant tax planning to navigate the complexities of tax residency, income reporting, and asset disposition. Consulting with a tax professional familiar with cross-border tax laws is essential to ensure compliance and optimize tax outcomes. Please contact Cardinal Point to review your unique financial situation.