As a Canadian resident, are you leaving the True North? If yes, there are numerous tax issues to consider prior to your departure.

Taxes are not usually at the top of the list of factors when people are thinking about leaving Canada, but the tax implication should be reviewed and should be understood as part of your departure planning.

Under Canadian tax rules, you’re emigrant for income tax purposes under following conditions -> 1) you’re leaving Canada to live in another country AND 2) you sever your residential ties with Canada. Any Canadian tax resident that departs Canada and becomes a non-resident are subjected to specific rules around their assets and are required to file certain forms with the Canada Revenue Agency (CRA).

Understanding these numerous rules are critical. If you physically depart Canada and keep your residential ties, you’re considered a factual resident and not an emigrant that will result in Canadian tax residency and subjected to tax in Canada on worldwide income. It’s important to note that your residency status in Canada determined your Canadian tax liability and filing obligations with CRA.

This article discusses various tax issues to consider and to ensure these items are factored in your departure planning to avoid any surprises after saying goodbye to the Land of Maple Syrup!

Determination of Canadian Residence

Under the Income Tax Act, there is no definition of “resident”. In fact, in its 1945 landmark decision the Supreme Court of Canada in Thompson v. Minister of National Revenue’ ; determined various factors are that must be considered. Historically, CRA has focussed on two factors that should be analyzed prior to your physical departures namely significant and secondary residential ties, and a combination of these factors must be considered (in consultation with a tax advisor) for the determination of person’s Canadian residence status.

Normally, a person is resident in Canada for tax purposes if there is a continuing relationship between other related individuals and Canada – what does that mean? Residential ties of significance include the maintenance of a dwelling place available for the person’s occupation and the residence of the individual’s spouse and dependents. Secondary factors include social and business ties and personal property, such as memberships in clubs and religious organizations, driver’s licenses, vehicle registration, and medical insurance coverage.

If any significant residential ties have not been severed upon the physical departure, CRA may consider the person as a factual Canadian resident. There may situations whereby significant ties are severed, but several secondary residential ties remain. In those cases, the individual is still considered Canadian tax resident. There is always judgement involved in making the determination. More importantly, you need to ensure that any tax position taken is planned and supported in case of CRA review or audit.

Areas to consider in the year for departure

Departure Tax:

In the year of departure, the individual will be taxed on the worldwide income earned up to the date that they cease their Canadian residency. Income earned after the date of departure will be taxed in Canada to the extent that it was earned in Canada or attributable to a Canadian source.

In addition, the day the individual emigrates and cease to be a Canadian resident, there is deemed disposition of the worldwide assets at fair market value (FMV) and deemed to have reacquired those assets for the same FMV (subject to the certain exceptions).

Depending on the assets under consideration, this requires carefully analysis and preparation of appropriate supporting documentation.

Also, it may result in a tax liability referred to as departure tax. That may create a cash flow issue (i.e. paying departure tax as result of deemed disposition discussed above). If the total value of all property owned at the time of departure is more than CAD25K, an individual must also file Form 1161, “List of Properties by an Emigrant of Canada.” This form must be filed regardless of whether an individual must otherwise file a tax return for their departure year.

Assets included and excluded from evaluation:

Non-registered accounts, real estate outside of Canada, shares of a private corporation are common examples of assets owned (personally) that are subjected to deemed disposition. Some of assets that are excluded from deemed disposition consist of cash, real estate in Canada, any property engaged in business carried on in Canada, registered plans, any item of personal-use property (such as household effects, clothing, cars, collectibles) that has a FMV of less than CAD$10K.

Separately, certain election can be filed to subject real estate in Canada and property used in a business carried on in Canada, to be included in deemed disposition upon departure.

Impact on registered plans:

There is no requirement to close RRSP, RRIF, TFSA, FSA, RESP and RDSP; however, the tax implication of keeping these plans should be evaluated. For instance, any withdrawal from some of these plans may be subject to 25% Canadian tax unless reduced by a tax treaty.

Also, non-resident beneficiaries will not be entitled to government grants i.e. in case of RESP and RDSP. Any outstanding balances on HBP or LLP should be repaid in RRSP on departure from under both plans, the due date for repayment is the earliest of the following dates:

1) before the time to file the income tax return for the year that the individual become a non-resident or 2) 60 days after the individual become a non-resident. If outstanding balances for HBP or LLP are not repaid, then those balances must be included as income in the tax return the individual becomes a non-resident for Canadian tax purposes.

Tax Compliance:

When depart from Canada, the first tax compliance requirement will be to prepare and to file the personal income tax return for the year of departure. As expected, it generally may be more complex than prior year personal income tax return.

Accordingly, it is important to evaluate your expected implication much prior to departure as certain actions cannot be undone and certain actions cannot be done after ceasing your residential ties to Canada. Also, your return and any related elections should be filed on a timely basis to avoid any penalties associated to non-compliance.

The emigrating individual should note that the return filing deadline is consistent with other general income tax filing deadlines (i.e. April 30), but in addition to the personal income tax return, there are several specific forms to complete and to file – so CRA is aware about your tax position.

These specific forms and elections may vary depending on your personal circumstances and tax position/tax planning undertaken – certain key points to consider is noting the departure date, property owned, election forms, determination of departure taxes, and decision on the status of registered plans.

You may defer payment of departure tax liability by posting security with the CRA (with certain exception) and filing a tax election. Similarly trust emigrating from Canada may post security for defer of departure tax; however, the corporation may not be eligible for the deferral of departure tax.

Certain planning areas to consider:

Principal residence – the individual may choose to trigger any capital gain and by claiming the principal residence exemption to adjust the capital gain on deemed disposition. The approach will increase the adjusted cost base on your home that will reduce capital gain (by that amount) when the property is (actually) disposed.

Lifetime capital gains exemption – shares that meet the requirements to be qualified small business corporation (QSBC) shares, the individual may be able to claim the lifetime capital gains exemption (LCGE) to reduce taxable income.

Canadian rental income – upon departure from Canada (i.e. becoming a non-resident), individuals are subjected to Canadian withholding tax rate on rental income paid to non-resident of 25%. Depending on tax treaty with the country of residence, the actual amount may be lower.

Sale of real estate by non-resident – it’s required that sale must be reported to CRA before the sale or within ten days following the sale of the property. Separately, there may benefit to file Canadian tax return to reduce the risk of double taxation (for any tax implication on the sale of this income in the new country of residence).

Canadian employment income – any individual, who is not a resident of Canada and earns income from Canadian employment then that should be taxed on that income after ceasing your Canadian tax residency (this is no different compare to Canadian resident); however, the tax rate applied, and the method of taxation may vary after details of employment and tax treaty between Canada and new country of residence.

Conclusion

If you are contemplating leaving Canada, no doubt, the focus should on making the move. But it’s critical to work with expert tax advisor that goes above and beyond in determining appropriate Canadian tax implication (and related planning), and more importantly, ensuring all your Canadian compliance obligations are filed and addressed accurately on a timely basis. Lastly, better tax planning prior to departure helps to understand tax implication, tax filing obligations, elections required (optional) and cash flow impact – to avoid any surprises post departure.

This article is a generic overview. Talk to a qualified tax professional to discuss the tax implication based on your specific circumstances.

Mayur Gadhia, CPA, CA, is the Founder of CloudAct CPA Professional Corporation that advises clients on complex tax issues. He can be reached at Mayur@cloudact.ca or 416 985 4978