Understanding Departure Tax When Leaving Canada

Sep 18, 2024

Introduction:
Are you thinking about leaving Canada? It is necessary to know about the departure tax and how it will affect your overall finances. This guide will explain it in simple terms.
Key Takeaways:

Aspect

Details

Definition

Tax on “deemed disposition” of assets when leaving Canada permanently.

Residency Classification

Real Resident

Part-Year Resident

Deemed Resident

Deemed Non-Resident

Non-Resident

Assets Subject to Tax

Real estate outside Canada, shares, mutual funds, partnership interests, non-resident trusts, personal use property.

Assets Exempt from Tax

Real property in Canada, RRSPs, TFSAs, Canadian pension plans, and personal use properties.

Required Forms

T1161: List of properties.

T1243: Calculate tax.

T1244: Defer payment.

Deferring Payment

Possible with Form T1244 and security

What is Departure Tax?
When you depart Canada for good, the government considers it as though you have sold the majority of your assets, even if no actual sale has occurred. This is referred to as a "deemed disposition," and you might be required to pay taxes on any profits made from these assets.

Departure Tax based on Residency Classification
When you depart Canada, your tax responsibilities are greatly influenced by your residency status. This is the way it functions:
1.      Resident of Canada: You will be classified as a factual resident if you have strong residential connections or ties to Canada. Primary and secondary ties to a country will determine it.
o   Primary ties include significant connections like owning or renting a home, having family members living in the country, and employment.
o   Secondary ties are additional connections such as holding bank accounts, social memberships, owning personal property, and frequent visits.
o   These ties help tax authorities decide if an individual should be considered a resident, affecting their tax obligations.
o   You will be taxed on your global income, even if you are living outside of Canada temporarily.
2.     Part-year resident of Canada: A part-year resident of Canada is someone who either enters or leaves Canada during the year and has significant residential ties to Canada for only part of the year.
o   For the period you are a resident, you are taxed on your worldwide income. For the period you are not a resident, you are only taxed on income from Canadian Sources.
3.     Deemed Resident: You are a deemed resident if you do not have significant residential ties to Canada but meet specific conditions, such as staying in Canada for 183 days or more in a calendar year, being a member of the Canadian Forces, or being a Canadian government employee working abroad.
o   As a deemed resident, you are taxed on your worldwide income for the entire year. Instead of paying provincial or territorial tax, you pay a federal surtax.
4.    Deemed Non-Resident: You are a deemed non-resident if you have significant residential ties to another country with which Canada has a tax treaty and you are considered a resident of that other country under the treaty.
o   As a deemed non-resident you are only taxed on income from Canadian sources.
5.     Non-resident: Non-resident status is acquired once you cut all substantial residential connections with Canada.
o   Individuals who do not reside in Canada are only required to pay taxes on income earned within Canada.
Residency Status and Tax Implications

Residency Status

Taxation

Resident of Canada

Taxed on worldwide income, even if temporarily living outside Canada.

Part-Year Resident

Taxed on worldwide income for the period of residency; taxed on Canadian-source income for non-residency period.

Deemed Resident

Taxed on worldwide income for the entire year; pays a federal surtax instead of provincial/territorial tax.

Deemed Non-Resident

Taxed only on income from Canadian sources.

Non-Resident

Taxed only on income from Canadian sources.

Assets Subject to Departure Tax

When you leave Canada, certain assets are subject to departure tax, including:

·        Real Estate Outside Canada: Any property you own outside of Canada.

·        Private or Public Company Shares: Shares in Canadian or foreign companies.

·        Mutual Funds Units: Units in mutual funds, both Canadian and foreign.

·        Partnership Interests: Your share in any partnerships.

·        Interests in Non-Resident Trusts: Interests in trusts not resident in Canada.

·        Other Portfolio Investments: Various other investments.

·        Personal Use Property: Art, jewelry, stamps, coins, and rare manuscripts.

Assets Exempt from Departure Tax

Some assets are exempt from departure tax which include,

·        Real property situated in Canada.

·        Registered Retirement Savings Plans (RRSPs)

·        Tax-Free Savings Accounts (TFSAs)

·        Canadian pension plans are not subject to departure tax.

·        Any personal use properties like cars, clothes, etc.
Forms required for Departure Taxes

Form

Purpose

T1161

List of properties owned at departure.

You need to file this even if you do not need to pay any tax.

T1243

Calculation of departure tax on your deemed disposition of assets.

T1244

Request to defer payment.
When you are unable to pay departure taxes immediately and need to request a delayed payment. Please consult a Tax professional.

How is Departure Tax Calculated?
The departure tax is calculated based on the fair market value of the assets on the date of leaving Canada and ceasing ties with Canada, here is an example for reference:
Example:
o   Shares/Stock: You invested $23,000 in shares, which are now worth $58,000.
o   On leaving Canada, the government will consider it as though you have sold these assets at their present market worth. Tax must be paid on the profits made from investments.
o   Gain: $58,000 (current value) - $23,000 (purchase price) = $25,000 (Deemed Profit)
o   Profit of $25,000 is subject to tax.
When is Departure Tax Due?
You must pay the departure tax when you submit your last tax return in the year you depart from Canada on or before 30 April of the following year. You have to notify the deemed disposition of your assets and settle any due taxes.
Is it possible to postpone payment of the departure tax?
In certain situations, you may postpone the payment of the departure tax by offering security to the Canada Revenue Agency (CRA). This is often carried out when you lack the funds to settle the tax right away.
On the other hand, there might be an interest charge, so it is advisable to seek advice from a tax expert to understand the consequences.
Steps to Defer Departure Tax
1.      Form T1244: This form is known as the "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."
o   Using this Form you can postpone paying the departure tax until the assets are sold.
2.     Deadline: Submit Form T1244 before April 30th of the year after you leave Canada.
3.     Provide Security/Guarantee as Needed: it may be necessary to provide security to the Canada Revenue Agency (CRA). This might take the form of a bank guarantee or another approved security.
Steps to Take
1.      Estimate Your Assets: Figure out which of your assets are probable for departure tax.
2.     Calculate Possible Tax: Assess the current market value and potential profits from investments.
3.     Submit your Final Tax return with the deemed disposition of your assets.
4.    Think about postponing options: If necessary, look into deferral options with the CRA.
Conclusion
Understanding the departure tax is essential for individuals who expect to leave Canada permanently. Finding how your residency status affects your tax responsibilities, and which assets are applicable for these taxes will help you adequately plan for your relocation. It is recommended to always get professional advice to navigate these complexities and ensure compliance with Canadian tax laws.

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