Moving can become a costly exercise from a tax perspective.Along with the moving bills, the tax bill can be hefty.
This article focuses on the considerations for individuals who are ceasing to be residents of Canada for tax purposes and provides a general overview of the “tax moving process.”
On the day of emigration
On the day an individual ceases to be a resident of Canada, they are subject to the deemed disposition rule on most of their properties (both Canadian and foreign). Under Canada’s Income Tax Act (the Act), the individual is deemed to dispose of their property for proceeds equal to its fair market value on the date of emigration. Immediately after emigration, the individual (now a non-resident) is also deemed to have reacquired the property at a new cost base equal to the proceeds on the deemed disposition.
The tax resulting from the accrued income or gains accumulated to the emigration date is often referred to as the “departure tax.” If the deemed disposition results in a loss, that loss may be carried back to the three preceding tax years to request a refund of tax from those years.
Exceptions on the day of emigration
There are exceptions to the deemed disposition rule. Certain properties—including but not limited to the ones listed below—are excluded:
- Real property situated in Canada;
- Canadian business property (including inventory) if the business is carried on through a permanent establishment in Canada;
- Various deferred income plans such as RRSPs, RRIFs, RESPs, RDSPs, and TFSA plans;
- Various pension funds, including benefits under the Canada Pension Planand the Old Age Security Act; and
- Properties owned by the individual prior to when they became a resident of Canada—if the individual was a resident of Canada for 60 months or less in the 120-month period prior to emigration.
There are generally no negative Canadian tax implications for holding onto the above properties at the time of emigration. However, there may be future Canadian tax implications after the individual becomes a non-resident of Canada; for example, payments out of a pension plan or an RRSP are subject to a flat income tax rate of 25% unless a tax treaty reduces the tax rate.
While the aforementioned properties are excluded from the deemed disposition rule, individual taxpayers have the option to trigger a deemed disposition on the first two properties described above: 1) real property situated in Canada, and 2) Canadian business property (hereafter referred to as “exempt properties”). The election to trigger a deemed disposition on an exempt property may be advantageous if:
- The individual is in an overall capital loss position in the year of emigration. In this case, the individual may want to trigger capital gains on the exempt properties to utilize this loss; or
- The exempt properties have accrued capital losses. In this case, the individual may want to trigger these losses to offset gains arising on the deemed disposition of non-exempt properties. Note that capital losses triggered by this election can only be used to offset capital gains arising from the deemed disposition rule. It is also important to note that the capital loss would be restricted if the exempt property is a personal-use property.
To trigger the deemed disposition, an election must be filed with the individual’s tax return in the year of emigration.
Using the principal residence exemption – now or later?
Among other residency factors, an individual does not necessarily need to sell their home or vacation property in Canada before their departure to have non-resident status. If an individual decides to keep their home and/or vacation property in Canada, these properties will not be subject to the deemed disposition rule, as they are real properties situated in Canada. Nonetheless, planning opportunities might be available by using the election described above, combined with the principal residence exemption.
For example, if an individual wants to keep their home or vacation property in Canada to use as a seasonal property after they emigrate, they may want to consider the following plans of action (assuming there is an accrued gain on the date of emigration):
- Electing to trigger the deemed disposition on the property and use their principal residence exemption in the year of emigration to exempt the accrued gain from inclusion in their taxable income. The proceeds on the deemed disposition will be their new cost base against which any future gain on the ultimate disposition will be calculated for Canadian tax purposes.
- Doing nothing at the time of emigration as the property is exempt from the deemed disposition rule. When they sell the property in the future—as a non-resident—the gain will be calculated from the historical purchase price, and they may use their principal residence exemption at that time. Note that the principal residence exemption is available to a non-resident for all or a portion of the years that they owned the property as a resident of Canada.
In determining which option is the most advantageous, many factors will need to be considered, including the amount of gain an individual has accrued up to the date of emigration versus the amount of gain they expect to accrue post-emigration.
Canadian income tax filings in the year of emigration
While there are no prescribed filing requirements on the date of emigration, there are statutory obligations to file the following in the year of emigration:
- A Canadian T1 Income Tax and Benefit Return. Worldwide income should be included in this return up to the date of departure. The deemed disposition of assets is reported on Form T1243, Deemed Disposition of Property by an Emigrant of Canada, and must be included on the T1 return.
- Form T1161, List of Properties by an Emigrant of Canada. This is required to report any property where the aggregate fair market value of the properties is greater than $25,000. However, certain properties are excluded; they include but are not limited to: cash (including term deposits), pension plans, RRSPs, RRIFs, and personal-use properties with a fair market value of less than $10,000. Note that the assets reported on this form may differ from the assets subject to the deemed disposition rule on emigration.
The due date for the above is the same as the normal due date for an individual’s personal return for that year.
The Canada Revenue Agency (CRA) often requests that an individual complete Form NR73, Determination of Residency Status (Leaving Canada); however, there is no statutory obligation to complete this form. While Form NR73 may be useful in extenuating circumstances to help determine whether residential ties have been severed sufficiently to satisfy a non-resident status with the CRA, advisers often counsel against completing this form due to the intrusive nature of the questions.
Deferring the departure tax
Departure tax is due April 30 of the year following the year of emigration. An individual may defer this tax by electing to post security on the entire balance or on a portion of the balance until the property is ultimately sold. The election must be made and the security provided before April 30 of the year following the year of emigration. Security may not be required if the amount of the departure tax is under a certain threshold, but the election must still be made—otherwise interest and penalties will apply. Once the property is sold, the departure tax must be paid.
Double taxation concerns
The gain, if any, on the ultimate disposition of a property owned prior to the individual’s departure from Canada may be subject to double taxation if the ultimate disposition is taxable in the new country. Many countries calculate the gain on the disposition based on the historical purchase price. In other words, the new step-up cost base that was assigned to the property by Canada on emigration may be disregarded by the new country. For an asset that has appreciated in value, the portion of the accrued gain from the purchase date to the emigration date would be taxed by Canada and the new country.
Relief from double taxation may be available. The Canadian tax legislation may grant relief by allowing a foreign tax credit on the ultimate disposition of certain assets that were subject to the departure tax. If this credit is available, the individual taxpayer would file a T1 Adjustment Request for the year of emigration. Moreover, if the new country has a tax treaty with Canada that recognizes the new step-up cost base assigned by Canada on emigration, the foreign tax credit may not be required.
Given the complexity of these matters, it is important for individuals to consult their Canadian and foreign tax advisers to discuss the tax implications on the ultimate disposition of a property that was subject to Canada’s departure tax.
Before the move begins…
Where possible, individuals should plan their emigration well in advance to help reduce some of the moving (including tax) costs. Careful planning—particularly with regards to the timing of deemed dispositions—can go a long way to helping individuals manage the departure tax and the tax arising on the ultimate disposition of their assets.
Nancy Lum is a manager with Grant Thornton LLP in Vancouver.
- The tax considerations of a corporation or a trust emigrating from Canada are beyond the scope of this article.
- Paragraph 128.1(4)(b) of the Act.
- This assumes there are no other gains on actual dispositions during the year.
- Paragraphs 212(1)(h) and (l) of Part XIII of the Act.
- Form T2061A, Election by an Emigrant to Report Deemed Dispositions of Taxable Canadian Property and Capital Gains and/or Losses Thereon.
- The principal residence exemption is an exemption from an individual’s taxable income that applies to a gain associated with the disposition of a property designated as a personal residence.
- In Income Tax Folio: S5-F1-C1: Determining an Individual’s Residence Status: the Canada Revenue Agency states that the retention of a seasonal residence in Canada generally does not—alone—constitute a significant residential tie. The CRA follows this statement in practice.
- This assumes there are no other gains on actual dispositions during the year.
- Form T1244, 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.
- Subsection 220(4.51) of the Act provides that security is not required for departure tax on up to $50,000 of income in the top federal bracket.
- Assuming the property had an accrued gain on the date of emigration from Canada.