When an individual, who was resident in Canada for tax purposes, ceases to be resident in Canada, there is generally a deemed disposition of assets owned by that individual at their fair market value. Any resulting deemed gain must be reported on the final tax return filed as a resident.
This is commonly called “departure tax”. However, unlike the kind of “departure tax” that is levied at some airports, there is no tax official in Canada waiting to collect it when the Canadian expat leaves. Rather, it is calculated and payable as part of the normal income tax filing.
This article will provide an outline of the key points in relation to the “Departure Tax”.
Scope And Exemptions
The deemed disposition at fair market value immediately prior to emigration generally applies to all property owned by the individual at that time. However, there are many important exceptions, including:
(a) Direct interests in Canadian real property
(b) Interests in Canadian “Registered Retirement Savings Plans” and “Tax Free Savings Accounts”
(c) Rights under various types of employee benefit or pension plans, as well as rights under stock option plans
(d) In the case of an individual who was resident in Canada for not more than 60 months in the 120 months prior to departure, property that was owned by that individual at the time when he or she last became a Canadian resident, or that was acquired by gift or bequest after that time,
(e) Interests in a personal trust resident in Canada that was not acquired for consideration, and
(f) Interests in a non-resident testamentary trust that was not acquired for consideration
Where applicable, the deemed dispositions must be reported in the tax return for the last year in which the individual was resident.
That tax return should also include two special schedules: T1161 (which is a listing of assets owned on emigration) and T1243 (which reflect the deemed disposition).
Election To Defer Payment of Tax
It is possible to elect to defer the payment of any tax resulting from the deemed disposition until the time that there is an actual disposition of the relevant property.
The election is made by filing form T1244 with final tax return as a resident and subsequently providing adequate security to the Canada Revenue Agency. No interest is charged on the deferred tax.
Special consideration for Canadians moving to the US
In cases where a Canadian expat has realized a deem gain when moving to the US, it is possible for that individual to make an election, under Article XIII(7) of the Canada-US Tax Convention, that will avoid potential double taxation of the deem gain.
By making that election, the individual will have a deemed cost base, for US tax purposes, equal to the fair market value of the relevant property at the time of emigration from Canada. Thus, the gain that was taxed in Canada on departure will not be taxed in the US when there is an actual sale.