Canadian Taxation: The Departure Tax
by George Gonzalez
When a Canadian resident severs ties with Canada and becomes a non-resident, they are required to file a final resident income tax return and pay their final resident income tax to the Canada Revenue Agency (CRA). This final resident income tax return, referred to as the “departure return”, involves special tax calculations to arrive at taxable income and the tax payable on that income – the “departure tax”. This article discusses the departure tax and related issues.
A separate article in these web pages discusses Canadian tax residency rules. For context and background, you may want to review that article before reading this one.
Basics of the Departure Tax
Under Canadian tax law, a resident who becomes a non-resident is deemed to have disposed of all of the assets they own at fair market value on their last day of residency, and to have immediately re-reacquired those assets at their fair market value. Although the individual does not actually sell their property, and possibly may not do so for many years after emigrating from Canada, nevertheless they are deemed to have sold those assets on their departure date.
Gains and losses on the assets deemed to have been disposed of must be included in taxable income in the calculation of tax in the departure return. Form T1243 (Deemed Disposition of Property by an Emigrant of Canada) must be filed with the CRA, listing the assets subject to the departure tax deemed disposition rules.
Example #1: A resident individual has a stock portfolio with a cost base (i.e., original amount invested) of $90,000 and a fair market value of $150,000 on the date that they emigrated and became a non-resident. Under the departure tax rules the individual is deemed to have sold all of the stock in their portfolio for $150,000, resulting in a capital gain of $60,000 ($150,000 minus $90,000 equals $60,000). The taxable portion of this capital gain (one-half, or $30,000) is included as an item of income in the individual’s departure return. Note that this taxable capital gain is included in the calculation of the departure tax even though the individual did not actually sell the stocks in their portfolio, and therefore did not generate cash proceeds from a sale to help pay for the additional tax that would result.
There are exceptions to the departure tax deemed disposition rules for some types of assets. The main exceptions relate to the following types of assets:
- Real property, immovable property, and resource property located in Canada.
- Inventory and other business property in Canada.
- A variety of assets receiving special tax treatment under the tax law: annuities, registered retirement plans, other types of registered plans such as registered education plans, salary deferral arrangements, interests in Canadian life insurance policies, etc.
The above exceptions are for specific types of assets. There are two other exceptions to the departure tax deemed disposition rules for assets of individuals who (1) originally immigrated to Canada and subsequently emigrated during a certain frame, or (2) emigrated from Canada and subsequently immigrated back. The details on these are beyond the scope of this article.
Example #2: Assume the same facts as in Example #1 above. Also assume that at departure, in addition to the stock portfolio, the individual owned an apartment building with rental property units. On the date of departure, the rental property had a fair market value of $750,000 and an undepreciated capital cost (UCC) of $500,000. Although this property has a potential gain on disposition of $250,000 ($750,000 minus $500,000), it is not subject to the departure tax deemed disposition rules because it falls under one of the exceptions listed above. Thus, in this example, the individual would be subject to the departure tax on the deemed disposition of the stock portfolio, but not on the rental property.
Election to Defer the Payment of Tax
It is possible to defer the payment of tax arising under the deemed disposition rules of the departure tax. This is done by filing an election with the CRA using 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). If an individual makes this election and the amount of tax owing on income from the deemed disposition of assets is greater than an established threshold, a security deposit must be paid to the CRA to cover the federal and provincial/territorial tax amounts. Currently the threshold is $16,500 (or $13,777.50 for Quebec residents). Payment to the CRA of this security deposit would usually be done through a bank guarantee, letter of credit or mortgage on real property, but the CRA is usually open to reasonable alternative arrangements.
Note that the aforementioned threshold applies to the amount of tax related to the deemed dispositions of assets, not to the gains from those deemed dispositions.
Example #3: An individual in a combined tax rate of 50% has deemed dispositions resulting in a capital gain of $66,000. This results in a taxable capital gain of $33,000 ($66,000 x ½) and a related tax on deemed disposition of $16,500 (33,000 x 50%). This $16,500 tax would put the individual right at the threshold, and no security deposit would be required since the threshold was not exceeded.
If the threshold is exceeded, and therefore payment of a security deposit is required, Form T1161 (List of Properties by an Emigrant of Canada) may also have to be filed. This form has its own threshold amounts; this form’s filing requirement is discussed below, under “Required Filing of Report with List of Properties”.
Election to have Departure Tax Apply to Property Qualifying for the Exception
Notwithstanding the exceptions noted above to the application of the departure tax deemed disposition rules to certain types of property, an individual may elect to have the departure tax deemed disposition rules apply to property qualifying for the exception, if they so choose. Such an election could be beneficial under some circumstances (for example, to recognize a loss on the deemed disposition of the asset, or to take advantage of loss carryovers from prior years). To make this election one would file Form T2061A (Election by an Emigrant to Report Deemed Dispositions of Property and Any Resulting Capital Gain or Loss).
Example #4: Assume the same facts as in Example #2 above, except that the deemed disposition of the rental property would result in a loss of $50,000 rather than a gain of $250,000. Including this $50,000 loss in the departure return would reduce the individual’s tax in their final resident tax return. In this case, it would be beneficial to make the election to have the departure tax deemed disposition rules apply to rental property.
Required Filing of Report with List of Properties
If, on departure date, the fair market value of an individual’s assets exceeds $25,000, the individual is required to file Form T1161 (List of Properties by an Emigrant of Canada) with the CRA. Certain assets are excluded from this $25,000 threshold amount:
- Cash (including bank deposits)
- A variety of assets receiving special tax treatment under the tax law: annuities, registered retirement plans, other types of registered plans such as registered education plans, salary deferral arrangements, interests in Canadian life insurance policies, etc.
- Items of “personal-use property” (such as your household effects, clothing, cars, collectibles) that have a fair market value of less than $10,000.
- Property owned by an individual who originally immigrated to Canada and subsequently emigrated during a certain frame.
Disposition of Property After Becoming a Non-Resident
The section above “What Exactly is the Departure Tax?” set forth certain types of assets to which the departure tax deemed disposition rules do not apply. If such an asset was not originally included among the deemed dispositions when the individual departed Canada, and is later sold or otherwise disposed of when the individual is a non-resident, the individual must file Form T2062 (Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property) with the CRA. This form must be filed to inform the CRA of the proposed disposition or of the completed disposition of the property within 10 days after the sale or other disposition occurs.
Additionally, if the property is Canadian resource property, Canadian real property (other than capital property), or depreciable taxable Canadian property, another form must also be filed: Form T2062A (Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Canadian Resource or Timber Resource Property, Canadian Real Property (Other than Capital Property), or Depreciable Taxable Canadian Property).
Critical Date: From Resident to Non-Resident
On what date does a Canadian resident officially become a non-resident? Sometimes the date is quite clear, but other times it is not. One must review all of the tax residency rules to make this determination.
Depending on circumstances, there could be some subjectivity involved in determining your exact departure date. This raises the question: what if you determine that you became a non-resident on a certain date but the CRA thinks differently? One way to deal with this uncertainty is to file Form NR73 (Determination of Residency Status (Leaving Canada)) with the CRA. After completing and filing this form with the CRA, the CRA will reply with their opinion on whether you became a resident or a non-resident on a certain date. This may help reduce uncertainty in your expatriate tax planning.
Conclusion
This article discusses the departure tax: what it is, how it can apply to a Canadian resident who becomes a non-resident, and various filing requirements related to the departure tax. The departure tax is unique in international tax planning for emigrating Canadians. If you are a Canadian taxpayer to whom the departure tax rules may apply, then understanding the basics of the departure tax and being aware of the related filing requirements are very important. Such knowledge will help you ensure you meet your tax compliance obligations and avoid potential penalties that the CRA may assess for failure to follow file required forms or otherwise fail to follow the tax rules.