Whether your client is a retiree seeking a warmer climate or a professional moving for work, there are tax consequences if they decide to leave Canada permanently.
Under the Income Tax Act (ITA), Canadian residents pay taxes on their worldwide income. A non-resident of Canada is taxed only on certain Canadian-sourced income.
Generally, your client becomes a non-resident if they meet the conditions of leaving Canada to live in another country and severing residential ties with Canada by:
- disposing of or renting their home in Canada and establishing a permanent home in another country,
- having their spouse or common-law partner and dependants leave Canada, and
- disposing of personal property in Canada and breaking social ties, such as church or recreational memberships.
If your client leaves Canada but doesn’t sever residential ties, they’re usually considered a factual resident. This typically applies to people who leave for temporary work, an extended vacation or to attend school in another country, as well as those who commute from Canada to work in the U.S.
If your client establishes ties in a country with which Canada has a tax treaty, they may be considered a resident of that country and a deemed non-resident of Canada for Canadian tax purposes despite failing to sever ties in Canada.
If your client doesn’t have significant residential ties with Canada but spends more than 183 days in Canada annually, they may be considered a deemed resident of Canada.
Factual and deemed residents must file Canadian tax returns reporting worldwide income. Factual residents access both federal and provincial tax credits; however, deemed residents may claim only federal tax credits. Factual and deemed residents alike may continue to accrue RRSP and TFSA room annually and contribute to these plans.
To obtain the Canada Revenue Agency’s (CRA) opinion about their residency status, your client may complete form NR73 Determination of Residency Status when they leave Canada (and they should obtain tax advice prior to doing so).
What happens when your client leaves Canada?
Once a decision to leave Canada is made, your client should inform their financial institutions about their change in residency, as well as the CRA and, for Quebec residents, Revenu Quebec (they can also do so by filing a departure tax return).
Your client must file a departure tax return if they have property or goods in Canada even if they didn’t earn income in the year of departure, and capital property, barring certain exceptions, will be deemed to be disposed at fair market value (FMV).
Exceptions to the deemed disposition rule include Canadian real or immovable property, Canadian resource property or timber resource property, Canadian business property, pension plans, annuities, and RRSPs, TFSAs and RESPs.
Your client must file Form T1243 Deemed Disposition of Property by an Emigrant of Canada to calculate the capital gain from the disposition. Also, if the FMV of all the property owned upon emigrating from Canada is more than $25,000, Form T1161 List of Properties by an Emigrant of Canada must be filed.
Does your client pay taxes on the deemed disposition of assets?
Your client can defer the payment of tax on income relating to the deemed disposition of property, regardless of the amount. They would pay the tax without interest when they sell or otherwise dispose of the property.
To make this election, they can complete Form T1244 Election to Defer the Payment of Tax on Income Relating to the Deemed Disposition of Property, and file it with their tax return.
For the 2020 tax year, if the amount of federal tax owing on income from the deemed disposition of property is more than $16,500 ($13,777.50 for former residents of Quebec), a security deposit must be provided to the CRA to cover the amount. This means that no security is required for the first $100,000 of capital gains for a client in the top federal tax bracket. A security deposit may be required to cover any applicable provincial or territorial tax payable.
What if your client sells their home after departure?
When selling a taxable Canadian property after becoming a non-resident, your client must inform the CRA of the proposed disposition or of the completed disposition of the home within 10 days after the sale closes. Notification is made using Form T2062 Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property (and T2062A, if the property is depreciable property such as rental property) to avoid a penalty of up to $2,500.
When completing the form, the estimated capital gain (or loss) on the sale along with any depreciation recapture/terminal loss (if selling rental property) is calculated. The CRA will require payment at time of sale, which is 25% of the estimated capital gain and federal taxes due on any recapture. The buyer of the property assists in this process by withholding the tax from the gross proceeds due. The CRA will issue a certificate of compliance to your client once the buyer has remitted the correct amount of tax.
The withholding amount isn’t the client’s final Canadian tax liability. They’ll also need to file a Canadian non-resident income tax return to report the sale and calculate their actual income tax. This return is due by April 30 of the year following the year of the sale. They may get a refund or have a payment due if their final Canadian tax liability is more than the amount withheld.
A principal residence isn’t subject to the deemed disposition rules at departure, nor is any other real estate property. Your client has two options at departure:
- Trigger the deemed disposition on the property and use the principal residence exemption in the year of emigration to exempt the accrued gain from inclusion in 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.
- Do nothing at the time of emigration as the property is exempt from the deemed disposition rules. When the client sells the property in the future as a non-resident, the gain will be calculated from the purchase price, and they may use their principal residence exemption at that time. Note that the principal residence exemption is available to non-residents only for the years during which they owned the property as a resident of Canada.
Deciding which option is better depends on the accrued gain up to the point of emigration and expected future gains after emigration.
How is Canadian-sourced income taxed after departure?
Canadian-sourced income is normally subject to Canadian taxation. Non-residents are subject to Canadian income tax on income from employment in Canada, income from carrying on a business in Canada and capital gains from the disposition of taxable Canadian property. Depending on the type of income, different source deductions (e.g., payroll deduction for employment income) or some treaty-based waiver applications are necessary.
Generally, interest and dividends paid to non-residents are subject to Canadian withholding taxes. Also, payments from RRSPs and RRIFs, public pensions and OAS are subject to a 25% flat withholding tax unless a tax treaty reduces the rate.
In conclusion, the tax rules associated with emigration are complex, and penalties may apply if clients don’t comply with the rules. Keeping documents in order is important to prove non-residency, and careful planning is suggested, especially if clients have assets when they leave Canada.