Goodbye, Canada: A guide to departure tax, withholding tax for non-residents

Tax withheld or payable in a foreign country is generally eligible to be claimed as a foreign tax credit on a Canadian tax return, resulting in a reduction in Canadian tax payable. This foreign tax credit mechanism is meant to mitigate double taxation.

But what happens when a Canadian resident leaves to move abroad?

How to declare yourself a non-resident of Canada for tax purposes

Becoming a non-resident for tax purposes may require a Canadian resident to not only move abroad but to also sever so-called residential ties in Canada.

Severing ties generally requires:

• Selling or renting out your home to move to a new home (owned or rented) in another country
• Having your spouse or dependants leave Canada with you

You may also need to sell your personal property and sever social connections and other ties in Canada (for example, your health insurance, driver’s license, memberships, etc.) and establish these in another country.

You may be considered a factual resident of Canada if you move to another country while maintaining these ties. However, in this case, you may still be a non-resident of Canada if the tax treaty between Canada and the foreign country of residence—if one exists—considers you to be a tax resident of that foreign country.

Departure tax in Canada

When you become a non-resident, you report (and pay tax on) your income for the year up until the date you leave. Just like a regular tax filer, your tax return is due April 30 (or June 15 if you are self-employed).

Leaving Canada can result in an exit tax—also known as a departure tax. A resident who becomes a non-resident is subject to a deemed disposition. This means they are considered to have sold all of their assets on their date of departure, and the sale price is based on the fair market value on that date.

Exemptions from the departure tax

Some assets, like pensions and assets held in registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs), are exempt from an exit tax. They can remain tax-deferred or tax-free, as the case may be. RRSPs and pensions may also be considered tax-deferred or even tax-free in a foreign country. TFSAs are most likely to be taxable in a foreign country that does not recognize this uniquely Canadian account.

At the time of departure, deferred capital gains are triggered on taxable capital assets like those held in non-registered accounts, as if the investments were sold.

Private company shares are also subject to a deemed disposition. The lifetime capital gains exemption may be available for qualified small-business corporation shares or qualified farm or fishing properties.

Real estate is exempt from the departure tax; the capital gains tax is payable on a subsequent sale, if applicable. Also, the principal residence exemption will no longer apply the year after leaving Canada.

Short-term residents

There is an exemption from the deemed disposition rules and resulting capital gains tax for short-term residents. A taxpayer (other than a trust) who was a resident for less than 60 months during the 10-year period before leaving Canada can exclude property owned when they last became a resident. Property inherited after becoming a resident can also be excluded for these short-term residents.

Deferring departure tax

You can defer the payment of the departure tax payable upon becoming a non-resident. No interest applies to the deferred tax, either. Tax can then be paid upon the subsequent sale of the asset in the future.

If the federal tax owing is more than $16,500, you need to provide the Canada Revenue Agency (CRA) with adequate security for the deferred tax. This requirement applies to residents of Quebec at the lower threshold of $13,777.50 of federal tax. Examples of acceptable security include the assets themselves or a financial institution letter of credit. The CRA will generally review the security annually to approve the continued tax deferral.

Unwinding a deemed disposition

If you leave Canada and subsequently return in the future, you can elect to unwind the past deemed disposition when you re-establish Canadian tax residency. This results in the deferred tax being cancelled. However, deferred tax would still be payable in the future upon sale, based on the original cost base of the assets.

If a deemed disposition were unwound, some or all of the security provided for the deferred tax would also be returned to you.

Non-resident withholding tax in Canada

When a taxpayer leaves Canada, their Canadian-source income may only be subject to withholding tax thereafter, with no ongoing income tax filing requirements. That said, there may be optional and required tax returns to consider.

If you earn certain types of income after departure, like Canada Pension Plan (CPP), Old Age Security (OAS), defined benefit (DB) pension income, RRSP or registered retirement income fund (RRIF) withdrawals, among other sources, you may be able to elect to file a return under section 217 of the Income Tax Act.

This special tax filing can result in a tax refund if your withholding tax—generally 15% to 25% depending on your country of residency—is higher than the tax you would otherwise pay on your worldwide income if you were a Canadian resident. This election could be beneficial for someone with a relatively low income.

Canadian real estate is one non-optional exception to filing a Canadian tax return as a non-resident. Rental income and real estate sale proceeds need to be reported on a Canadian tax return.

If a private company is controlled by non-residents, it may lose its Canadian-controlled private corporation (CCPC) status. This means it will not qualify for the small-business deduction and may pay a higher corporate tax rate on active business income. However, the tax rate for investment income earned may decline.

Other considerations before leaving

There can be other things to consider before leaving Canada. Home Buyers’ Plan (HBP) and Lifelong Learning Plan (LLP) balances may become repayable. Some financial institutions may not be able to continue working with non-residents. Certain investments, like Canadian mutual funds, cannot be purchased by non-residents. There can be an impact on health insurance coverage and estate planning documents.

Leaving Canada has tax implications. Some countries have lower tax rates than Canada, particularly for high levels of income. However, for some taxpayers, leaving Canada can result in an exit tax, as well as changes to the way their Canadian-source assets and income are taxed thereafter.

Seeking advice prior to departure can help you better plan and avoid any surprises before or after leaving the country.

Read more about taxes in Canada:

• Should Canadians keep their investment accounts when retiring abroad?
• The tax implications of working abroad for residents and non-residents of Canada
• Do non-residents pay tax on CPP? What if you live in the U.S.?
• “Where do we pay income tax if we retire abroad?”

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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