Departure tax for individuals emigrating from Canada
TAX ALERT |
When an individual taxpayer emigrates from and permanently severs ties with Canada, such that the individual will be considered a non-resident for income tax purposes, they will be required to calculate a departure tax on their final personal income tax return. This final return is often referred to as the ‘departure return’.
The departure tax is a crucial aspect of final income tax returns that can impact the overall taxable income of the individual taxpayer. This impact can significantly increase the amount of taxes that need to be paid. By understanding the departure tax requirements, taxpayers will be able to minimize any outstanding tax owing before emigrating from Canada.
Departure tax primer
Under paragraphs 128.1(4)(b) and (c) of the Income Tax Act (ITA), an individual who becomes a non-resident of Canada is deemed to have disposed, and to have subsequently immediately reacquired, all of her property at fair market value (FMV), except for the following:
- real property situated in Canada, Canadian resource and timber property
- capital property and inventory used in carrying on a business through a permanent establishment in Canada
- an ‘excluded right or interest’. This expression includes financial assets in respect of which Canada will be able to collect withholding tax when the funds are withdrawn by the non-resident. Examples are deferred income plans such as RRSPs, RRIFs, rights under a stock option plan or retirement allowance, etc.
- property owned when the individual last became a resident of Canada if she has not been resident for more than 60 months during the 120 month period ending when she ceases being a resident of Canada, and property inherited during that time. This exception only applies to individuals who immigrated to Canada and then subsequently leave within the time frame outlined
- taxable Canadian property if retrospectively elected by the individual who emigrated but subsequently immigrates back to Canada
Any taxable capital gain (i.e. 50 per cent of the deemed capital gain) resulting from the deemed disposition of property, other than property specifically exempted, is included as taxable income in the departure return. An individual taxpayer can elect to have a deemed disposition of properties mentioned in 1) and 2) above. A taxpayer would normally only elect if the deemed disposition results in a loss. This loss can then be used to offset any gains from the deemed dispositions of other properties.
The exception described in 5) only applies to individuals who had a deemed disposition of property when they emigrated from Canada and then return to Canada as residents while still holding that property. It allows the taxpayer to recover the tax paid on the deemed disposition of that property on emigration or to obtain the release of the security posted.
If the total FMV of all properties owned at the time of departure is greater than $25,000, form T1161, List of Properties by an Emigrant of Canada, will also need to be filed with the Canada Revenue Agency (CRA). This form will require the taxpayer to list certain details on all their ‘reportable properties’. A reportable property is defined as any property other than:
- Canadian currency
- with a few exceptions, an excluded right or interest
- property described in 4) above that is not taxable Canadian property
- any item of personal use with a FMV of less than $10,000. Personal-use property is defined as any property used for the personal use and enjoyment of the taxpayer
Tax obligations of emigrating individual taxpayers
Taxpayers contemplating departure from Canada must evaluate if their departure qualifies for departure tax and, if so, determine the tax consequences of emigrating. Generally, taxes owing as a result of the departure tax rules are payable on April 30th of the year following the year of departure. An individual can elect to defer payment of the departure tax until the asset is sold by filing an election, form T1244, no later than April 30th of the year after emigration. If the amount of tax owing is more than $16,500, security may need to be provided to the CRA. Typically, CRA will require a bank guarantee, letter of credit or a mortgage on real property.
Increase in taxable income as a result of departure tax
The departure tax may have a significant impact on individuals since the taxable capital gain from deemed dispositions can significantly increase the taxable income of the individual. Without careful tax planning, taxpayers may be caught off guard with a tax obligation that they do not have the resources to pay.