Moving from Canada to the United States can produce a Canadian tax liability before an investment is sold. At i2 Wealth, we examine potential departure tax early because its cost can affect the funds available for the move and future portfolio decisions. These rules concern tax residency status, rather than citizenship or the act of leaving Canada.
A person’s residence status depends heavily on their residential ties. A home, spouse or dependants in Canada may be significant residential ties, while social ties can also form part of the analysis. Someone with continuing connections may remain a factual resident and Canadian tax resident. When both countries claim the person as a tax resident, the Canada-US tax treaty may determine the outcome.
What Is Departure Tax in Canada?
When an individual ends residency in Canada for tax purposes, the Canada Revenue Agency generally treats certain assets as sold at fair market value and immediately reacquired for that amount. This deemed disposition applies on the departure date.
The calculation may produce a capital gain or loss based on the gain accrued while the property was held. Any taxable gain is generally reported for the year of emigration. Departure tax is commonly described as a form of capital gains tax, although Canada includes taxable capital gains in income and applies the relevant marginal tax rates. The amount someone must pay depends on their specific circumstances and applicable tax laws.
Through Canada-US financial planning, we evaluate how the liability may affect a client’s move to a new country and the U.S. tax implications on those assets as well.
Which Assets Can Be Affected When Leaving Canada?
The deemed disposition rules can cover worldwide assets, including foreign property such as foreign real estate, non-registered mutual funds, ETFs, REITS or other investments as well as shares of a private corporation. Other non-registered investments producing investment income, dividends or other financial interests may also be subject to the rules.
Important exclusions include Canadian real estate, RRSPs, RRIFs, TFSAs and certain pension benefits are excluded as well.
Property excluded from departure tax may remain taxable Canadian property. For example, a house or other Canadian property can create later Canadian obligations. A sale may involve the principal residence exemption, while rental income or Canadian sourced income can remain subject to Canadian taxation after the owner becomes a non resident. Payments such as rent or dividends may also attract withholding tax.
What Canadian Tax Must Be Reported?
Form T1243 calculates gains or losses from the deemed disposition. The final Canadian return is sometimes informally called a departure tax return, although it remains the individual’s income tax return for the year of departure.
Form T1161 may be required when property owned at departure exceeds $25,000 in fair market value. The calculation excludes cash and qualifying registered plans. It also excludes some personal property held for personal use when each item is valued below $10,000.
A resident of Canada preparing to move should confirm which assets count toward the threshold. Form T1161 may be required even when no other return is due. Filing after the due date carries a penalty of $25 per day, subject to a $100 minimum and $2,500 maximum.
Can Payment Be Deferred?
An individual may elect to defer the requirement to pay tax by filing Form T1244. The liability generally becomes payable when the property is sold or otherwise disposed of.
Providing security is required when the federal tax covered by the election exceeds $16,500. The threshold for former Quebec residents is $13,777.50. Any additional provincial requirement depends on the amount owing and the taxpayer’s applicable marginal rate.
Prepare Before Moving to the US
We can review a move’s effect on a client’s portfolio, cash flow and worldwide income, then incorporate the findings into a cross-border retirement plan. The work may also address the US treatment of a Canadian principal residence and remaining financial exposure.
Residency determinations and filings require current legal and tax information. Our guide is the client’s complete financial picture, while qualified Canada-US tax professionals confirm the calculations. Plan ahead and contact i2 Wealth before the move for personalized advice.