Canada ranks second among the best countries to live in. But even then, if you are planning to move abroad permanently, you need to plan out several things, from documentation to handling your assets in Canada to tax residency status. Moving to another country is expensive, and the process is complicated. When it comes to taxes, which are already complicated, it is better to consult a tax expert.
The Canada Revenue Agency (CRA) imposes a departure tax if you leave Canada. Just as you do a full and final settlement when you switch jobs, you do a final tax settlement through departure tax when you switch countries.
In this article, we will touch on a few tax procedures you need to know before leaving.
Determining Residency Status to the CRA
The CRA determines the residency status of an individual depending on their ties with the country. The CRA considers you a resident if you have a home and family (dependents, spouse, or common-law partner) in Canada. It also looks at secondary ties like personal property (car, furniture), passport, driving license, health insurance, bank account, credit cards, or social group membership.
Just moving abroad is not enough. You must sever primary ties and establish your residency status by informing all the concerned parties you are moving abroad. These parties include financial institutions where you have accounts which are earning interest, dividends, or passive income. You can retain some of your secondary ties, like a driving license, if there is a valid reason.
If you don’t establish your firm intention to leave the country, your residency status could be:
- factual resident (temporarily living abroad for work, schooling, or vacation)
- non-resident (a factual Canadian resident who has residential ties in a country which has a tax treaty with Canada)
Once you sever your residential ties with Canada and establish a permanent home abroad, the CRA considers you “an emigrant”.
Know Your Departure Tax When Leaving Canada
Once you are no longer a Canadian resident in the eyes of the CRA, you must bear the departure tax. The date you cease your residency, the CRA deems that you have disposed of your assets at fair market value and collects a capital gain tax (departure tax) on 50% of your total profit. This way, the CRA collects tax on all the gains you accrued as a Canadian resident.
The departure tax does not apply to certain types of assets, such as Canadian real estate, investments in registered savings accounts (like RRSP, TFSA, and Canada Pension Plan), and business property and inventory. Some assets, though exempt from departure tax, have their own complications while calculating taxes.
Tax Treatment of Canadian Property Owned by Non-Resident
As the departure tax does not apply to Canadian real estate, you need not sell it immediately. The property only becomes taxable when you sell it. But you also can’t keep it vacant, or it could create an issue in determining your residency status. In such a scenario, you could rent it out while meeting the CRA requirements of having a written lease for the property. If you have become a non-resident and are earning rent on your Canadian property, the tenant will withhold tax on the rent paid.
But if you sell your Canadian residence, you could claim the principal residence exemption (PRE) wherein no capital gain tax is levied on a house sale. However, the PRE has a condition that you and your family (children, spouse, or common-law partner) must have stayed in the house during the year you sell it. If you rented your principal residence to someone else, the number of rented days should be less than the number of self-occupied days.
If you sell the house after becoming a non-resident, your real estate broker has to notify the CRA by completing Form T2062 and make payment on your behalf for the resulting tax.
Another house-related related expense is the Home Buyer’s Plan. In this plan, the CRA allows you to withdraw up to $35,000 from your RRSP tax-free to make a down payment for your house. You must repay the money withdrawn from HBP in the next 15 years. But if you are leaving Canada, you have to repay the balance of HBP.
These are just a few scenarios. The tax treatment of property is complex and varies as per the situation. A skilled tax expert specializing in real estate transactions can guide you on your tax liability based on your situation.
Tax Benefits from the Registered Savings Accounts
The TFSA and RRSP are also exempt from departure tax. But you will lose your right to contribute to the TFSA once you change your resident status. While you can still contribute to the RRSP, you may not get the tax benefit as that is only available to Canadians.
As for RRSP withdrawals, they are taxed in Canada at 25% for non-residents. If the country you have moved to acknowledges this tax, you can claim a foreign tax credit and avoid double taxation (one in Canada and one in the new country where you have settled). In certain circumstances, you could also lower your tax rate on RRSP withdrawal to 15%. A professional tax consultant can guide you on your tax obligations.
Reporting Requirements When Leaving Canada
Once you understand the tax treatments of all your assets, you have to file the final tax return with the CRA and pay your tax liabilities by April 30 of the year you leave Canada. This final tax return will include:
- Form T1243 for “Deemed Disposition of Property by an Emigrant of Canada.” Here you have to fill in the information of all your properties – the acquisition year of the property, its fair market value on the date of departure and the adjusted cost base.
- If your total property value at the time of departure surpasses $25,000, you must also file Form 1161 – “List of Properties by an Emigrant of Canada.”
You can also fill out Form T1244 and choose to defer the payment of departure tax on deemed dispositions on some or all assets till it is actually disposed off or you return to Canada. To defer the tax, you have to provide a guarantee like a bank letter. If the federal tax obligation is more than $6,500, you have to provide a security, such as the asset itself or a letter of credit from a Canadian bank. This will prevent any interest accrual on unpaid departure tax.
Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with Tax Planning
A professional tax consultant can help you manage your taxes as you move abroad. The experts are updated about tax changes and can help you minimize your tax liability. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with your tax planning, contact us online by telephone at 905-517-2297.