We live in a mobile society where people often move to a different country for a variety of reasons, such as family or work. This can be both an exciting and stressful time in our lives which requires a great deal of planning. This planning includes tax matters that must be considered when emigrating from Canada.
Canada has a residency-based tax system. This means that Canadian residents must file a tax return each year and are subject to tax on their worldwide income. Non-residents of Canada are only required to file a return if they earn certain types of Canadian-source income. An individual is considered an emigrant on the date they cease to be a Canadian resident. How do you determine this date?
An individual’s tax residency is assessed based on many factors and must be analyzed on a case-by-case basis. Residency is assessed based on both primary and secondary ties. The primary ties include the location of the individual’s permanent home (an owned or rented home that is available to them), their spouse and their dependants. Secondary ties include items such as the location of personal effects (vehicles, furniture, clothing, etc.), economic ties such as financial accounts, driver’s licenses, health coverage or social ties such as memberships in recreational clubs or organizations. Based on the facts and circumstances, an individual will be deemed to sever their residential ties in Canada on a specific date and establish residential ties in a different country.
On the date that an individual severs residential ties, they will be subject to a deemed disposition of all their assets. This deemed disposition is commonly referred to as a departure tax. As mentioned above, non-residents of Canada are typically not required to file a Canadian tax return. This deemed disposition allows the Canadian tax authorities to collect income tax on the portion of the gain that accrued while a Canadian resident. To calculate the appreciation over your original purchase price, you must determine the fair market value of all your assets as of this date. Certain items will be straight-forward, such as marketable securities held in a non-registered investment account. Other items, such as art, jewelry, or shares in a private company, may be more difficult to value. Certain items are not subject to a deemed disposition. This includes taxable Canadian property, such as real property located in Canada or shares of a company which primarily earn income from real property located in Canada. Taxable Canadian property is subject to tax in the year of sale to non-residents of Canada, so you are not required to pre-pay the tax in the year of departure. You will be subject to nonresident withholding tax at the time of sale and may be able to elect to file a Canadian tax return to recover a portion of this withholding tax.
A return must be filed for the period from January 1st to the date of departure. The deemed gain will be reported on this return and subject to tax at your marginal rates. You may be able to defer tax on the deemed disposition until the assets are sold if an election is filed by the due date of the return and adequate security is provided, if required. Tax credits on this return will be pro-rated based on the period you were a resident. You must provide a complete listing of your assets on this return if the total fair market value exceeds $25,000 at the date of emigration.
You will not be required to file a tax return after the date of departure unless you earn certain types of income, such as employment income earned for services provided in Canada. If this applies to you, you must file a non-resident return. You will only be subject to Canadian tax on this income and not your worldwide income.
Other types of Canadian-source income are subject to Canadian tax, but you are not required to file an income tax return. Instead, you will be subject to non-resident withholding tax at source. This includes dividends, interest, rents, or royalties from Canadian sources. The standard rate of withholding is 25% but may be reduced by an income tax treaty. You must notify the payer of the income, such as financial institutions where you hold bank or investment accounts, when you become a non-resident so that they can properly withhold this tax. The tax is considered your final obligation for income tax purposes. In certain situations, you may elect to file an income tax return to recover some or all of this withholding tax. This is commonly done with Canadian-source rental income.
You can continue to hold accounts such as Registered Retirement Savings Plans (RRSP) or Tax-Free Savings Accounts (TFSA) after you emigrate. You can also continue to contribute to these accounts based on your available contribution room. TFSA contribution room will not accumulate while a nonresident, and RRSP contribution room will only accumulate if you continue to earn certain income from Canadian sources, such as employment income. You will need to understand the tax laws in your new country of residence to determine if holding or contributing to these accounts while a non-resident is advisable.
Cross-border tax issues always require careful analysis and consideration to ensure you are compliant with your obligations on each side of the border.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA