When individuals choose to leave Canada permanently, they may be subject to a tax obligation known as the Canadian departure tax. This tax applies to those who sever their tax residency in the country and is designed to account for unrealized capital gains on specific assets. Understanding how this tax works can help departing residents plan their finances more effectively and avoid unexpected financial burdens.

What Is Departure Tax in Canada?

Departure tax is not a separate tax but rather a deemed disposition of certain assets when an individual becomes a non-resident of Canada. This means that the Canada Revenue Agency (CRA) treats the person’s assets as if they were sold at fair market value on the day before they leave the country. The objective is to tax any unrealized gains that have accumulated while the individual was a Canadian resident.

Who Is Subject to Departure Tax?

Individuals who are leaving Canada permanently and are considered tax residents before departure may be subject to this tax. You are generally considered a tax resident if you have significant ties to Canada, such as owning a home, having family members in the country, or maintaining employment. However, once you establish tax residency in another country and sever your Canadian ties, you may be deemed a non-resident for tax purposes.

Assets Subject to Departure Tax

Not all assets are subject to departure tax. The CRA categorizes them into different groups:

Taxable Assets

• Stocks, bonds, and mutual funds
• Real estate outside of Canada
• Interests in private corporations
• Certain trusts
• Personal property valued above $10,000 (e.g., art, jewellery, collectables)

Exempt Assets

• Canadian real estate (taxed in Canada upon sale, even as a non-resident)
• Registered Retirement Savings Plan (RRSP)
• Tax-Free Savings Account (TFSA)
• Canadian Pension Plan (CPP) and Old Age Security (OAS) benefits

Example of Departure Tax Calculation

Suppose a Canadian resident owns shares in a company that were purchased for $50,000 but are worth $100,000 at the time of departure. The CRA will assume the shares were sold at $100,000, resulting in a capital gain of $50,000. Since only 50% of capital gains are taxable in Canada, the individual would report $25,000 as taxable income on their final Canadian tax return.

How to File for Departure Tax

Step 1: Determine Your Residency Status

Before filing, confirm whether you are considered a resident or non-resident for tax purposes. This status affects how your income and assets will be treated.

Step 2: Complete Form T1161

This form, List of Properties by an Emigrant of Canada, must be filed if the total fair market value of your taxable assets exceeds $25,000. Failing to file this form may result in penalties.

Step 3: Report the Deemed Disposition on Your Tax Return

Use Form T1243 (Deemed Disposition of Property by an Emigrant of Canada) to report capital gains. If you owe tax, it should be included in your final return before leaving.

Step 4: Consider Electing to Defer the Tax

If you are unable to pay the tax immediately, you can elect to defer payment by filing Form T1244 (Election to Defer the Payment of Tax on Income Relating to the Deemed Disposition of Property). However, the CRA may require security or a guarantee to ensure future payment.

Strategies to Minimize Departure Tax

1. Sell Assets Before Leaving

Selling certain assets while still a resident may allow you to use available tax exemptions or deductions.

2. Utilize the Principal Residence Exemption

If you own a home in Canada, designating it as your principal residence before leaving can help you avoid tax on capital gains.

3. Transfer Assets to a Canadian Corporation

Holding investments through a corporation rather than personally may provide tax advantages and defer taxable events.

4. Claim the Lifetime Capital Gains Exemption (LCGE)

If you own a qualifying small business, farm, or fishing property, you may be eligible for LCGE, which can significantly reduce taxable gains.

Consequences of Not Paying Departure Tax

Failing to file the necessary forms or pay the required tax can lead to serious consequences:

• Interest and penalties from the CRA
• Issues when re-entering Canada or dealing with Canadian tax authorities
• Complications in future tax filings, especially if you maintain some financial ties to Canada

Final Thoughts

Planning for departure tax is an essential part of leaving Canada permanently. By understanding the tax implications, reporting obligations, and available deferral options, individuals can better prepare for their financial future. Consulting a tax professional like webtaxonline.ca, before leaving can help optimize tax strategies and ensure compliance with CRA regulations.