This resource has been prepared by Nicholas dePencier Wright of Wright Business Law for educational purposes. This information is current as of the date of writing and does not constitute legal advice, which should be obtained prior to relying on anything herein.
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With increasing globalization, many Canadians are considering moving abroad not only for career and lifestyle opportunities but also for tax-related benefits. While changing residency can yield tax advantages, the process is complex, with significant tax implications and administrative requirements. This guide will outline the key tax considerations for Canadians thinking about emigrating, the steps involved in determining residency status, and how to plan for a smooth transition.
- Understanding Canadian Tax Residency
The first and most important step in planning to emigrate from Canada for tax purposes is understanding what defines a tax resident of Canada. The Canada Revenue Agency (CRA) bases tax residency on several factors that assess an individual’s ties to Canada. Canadian tax residents are taxed on worldwide income, while non-residents are only taxed on Canadian-source income.
Primary Residential Ties
Primary residential ties are the most significant factors the CRA uses to determine tax residency, and they include:
• Maintaining a home in Canada,
• Having a spouse or common-law partner who remains in Canada, and
• Having dependents who remain in Canada.
Secondary Residential Ties
These ties are less significant individually but still considered, especially if primary ties are weak or absent. They include:
• Personal property, such as cars or furniture, in Canada,
• Canadian bank accounts or credit cards,
• Canadian driver’s license or health insurance, and
• Membership in Canadian organizations.
To be considered a non-resident for tax purposes, Canadians must cut most, if not all, of these ties with Canada. It’s worth noting that severing ties can be difficult and may take time. Consulting with a tax advisor is essential for understanding and managing this transition.
- Departure Tax: Canada’s “Deemed Disposition” Rule
When Canadians emigrate and become non-residents, the CRA considers them to have sold, or “deemed to have disposed of,” certain types of property at fair market value, even if they haven’t sold these assets. This triggers a “departure tax” on the deemed capital gains. Departure tax applies to specific property categories, including:
• Shares in Canadian or foreign corporations,
• Real estate outside of Canada,
• Mutual funds, and
• Other investments or assets subject to capital gains.
Exemptions from Departure Tax
Some assets are exempt from the deemed disposition rule, such as:
• Real property in Canada, like a primary residence,
• Registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs), and
• Pension plans and TFSAs.
The CRA allows individuals to defer the departure tax if they provide adequate security for certain properties. This deferral option can be beneficial, but it’s essential to understand the long-term implications, including interest and other conditions.
- Tax Planning Strategies for Emigrating
Careful tax planning can help Canadians minimize the tax impact of emigration. Some strategies to consider include:
Timing the Emigration Date: The date of departure is significant because it affects the amount of time you’re considered a tax resident in Canada for that year. The timing can impact the total tax liability, especially if you earn significant income during the year. Planning to emigrate in January rather than December, for example, may allow for a cleaner tax year with less Canadian tax reporting.
Maximizing RRSP Contributions: Contributing the maximum amount to your Registered Retirement Savings Plan (RRSP) before leaving Canada can create a tax deduction, reducing your taxable income in your final year as a Canadian resident. This can be advantageous if you anticipate paying higher taxes before departure.
Transferring Investments: Consider restructuring investments to reduce capital gains exposure. Selling high-gain investments before departure or transferring certain types of property to tax-favored accounts may help mitigate the impact of departure tax. Consulting with a financial planner is critical to avoid triggering unintended consequences with these transfers.
- Tax Obligations as a Non-Resident of Canada
Once you’re deemed a non-resident, you’ll only be taxed in Canada on income derived from Canadian sources, such as:
• Income from employment in Canada,
• Business income earned in Canada,
• Capital gains from Canadian real estate, and
• Pension or annuity income.
This income may be subject to withholding taxes or other forms of taxation. Canada has tax treaties with several countries, and these treaties often reduce or eliminate double taxation, making it essential to understand the rules specific to the country of your new residence.
For example, Canadians who emigrate to the United States benefit from the Canada-U.S. Tax Treaty, which provides relief from double taxation and clarifies which country has taxing rights over various types of income.
- Filing Your Final Canadian Tax Return
In the year of emigration, you’ll need to file a final tax return as a resident of Canada, reporting worldwide income up until the date you cease residency. On this return, you should:
• Include all worldwide income earned until your emigration date,
• Report any capital gains or losses from deemed dispositions due to the departure tax, and
• File necessary forms, such as Form T1161 – List of Properties by an Emigrant of Canada, which discloses properties subject to departure tax.
Additionally, you may need to submit Form T1243 – Deemed Disposition of Property by an Emigrant of Canada to report and calculate any departure tax owed. Failure to report these details accurately can lead to penalties and additional tax liabilities.
- Risks and Considerations in Emigrating for Tax Purposes
Exit Taxes and Penalties: The departure tax can be costly, especially if you hold significant investments. Failing to adequately plan or report departure can lead to fines, penalties, and future tax complications. Proper planning and documentation are crucial.
Maintaining or Losing Canadian Benefits: Emigrating can impact eligibility for Canadian social benefits, such as Old Age Security (OAS), Canada Pension Plan (CPP), and healthcare coverage. Many benefits depend on residency status and contributions while in Canada, so careful consideration of eligibility requirements and post-departure effects is crucial.
- Changes to Residency Status
It’s essential to avoid inadvertently triggering tax residency by maintaining ties to Canada. Actions like extended visits to Canada, holding property, or maintaining close family ties can be interpreted as an intent to return, potentially resulting in the CRA classifying you as a tax resident again.
- Seeking Professional Advice
Navigating the tax implications of emigration requires careful planning and understanding of both Canadian tax law and the tax rules of your new country of residence. A cross-border tax advisor or legal professional can provide critical insights on managing departure tax, optimizing timing, and understanding your obligations under Canadian and international tax laws.
- Conclusion
Emigrating from Canada for tax purposes involves a range of considerations that require careful planning and professional guidance. From understanding tax residency rules and the departure tax to managing Canadian-source income as a non-resident, each step of the process has implications for your financial future. By proactively preparing for these tax changes, Canadians can minimize the tax impact of emigration while ensuring compliance with Canadian tax regulations.