Canadian taxes are based on residency. If you reside in Canada and earn enough income, you will be taxed on that income. If you reside outside Canada, but are a Canadian citizen, you normally do not have to pay Canadian tax as long as your residence is outside the Canadian borders. But what if you are a resident of Canada (citizen or non-citizen) and decide to leave the country to live/work elsewhere? Under certain circumstances, you may find yourself subjected to taxes solely based upon your departure. Taxes may be due if you are determined to be an emigrant for income tax purposes.
According to the Canadian Revenue Agency (“CRA”), you are an emigrant for income tax purposes if:
- you leave Canada to live in another country; and
- You sever your “residential ties” with Canada.
Severing your residential ties with Canada means that you do not keep your main ties with Canada. This could be your case if:
- sell your home in Canada and take up permanent residence in another country
- your spouse or common-law partner or dependents leave Canada
- You dispose of personal property and break social ties in Canada, and acquire or establish them in another country.
If you leave Canada and keep residential ties in Canada, you are usually considered a “factual resident” and not an emigrant. However, if you are also considered to be a resident of another country with which Canada has a tax treaty, you may be considered a deemed non-resident of Canada. Deemed non-residents are subject to the same rules as emigrants regarding departure taxes. If you are viewed as a “factual resident” in Canada, you may need to seek advice to protect your status. From a US standpoint, you may not be subject to tax upon the establishment of residency in the US; however your income from that moment forward is subject to US tax. Likewise, any investment you may have in stocks or bonds or pension funds might subject you to additional filing requirements.
What items are considered income subject to the departure tax?
When you leave Canada permanently, certain property is deemed to have been sold at fair market value and that you immediately reacquire the item at that value. The disposition is recognized for a gain if the original basis in the property is less than fair market value. If a gain is recognized, it is treated at capital gains rates.
Some common property that is subject to the departure tax includes gains on:
- Shares of stocks and other investments
- Paintings and art collections
Also, if the fair market value of the property you own at time of departure is in excess of CAD$25,000, you are required to file Form T1161, List of Properties by an Emigrant of Canada. Certain personal-use property (i.e. clothes and household goods) of value less than CAD $10,000 may be excluded from the Form T1161. The form must be filed the year AFTER your departure by April 30th.
- You should always get a residency determination by filing Form NR73. Once a determination is made, you will know whether you have a tax liability and proceed to pay it.
- If you emigrated during the year, all days spent as a resident of Canada subjects you to tax on earnings during the time frame. You will be required to file a part-year resident T1 tax return.
- If you return to Canada after several years, any appreciable property (i.e. stocks, bonds) are valued at the cost when you left Canada. If you dispose of the property (i.e. sell stocks), you may be subject to additional gain on the incremental basis.
- If you had owned foreign property prior to your departure from Canada, you might need to file Form T1135
- If you are an emigrant and you have property in excess of CAD $25,000, you are required to make a list and file Form T1161. If your property does not exceed CAD $25,000, no filing requirement is necessary
- In order to ensure that you are an emigrant for Canadian tax purposes, file Form NR73 prior to departure to receive a determination
- If you become an emigrant during mid-year, you are still liable for Canadian income taxes on income earned during your residency in Canada. You will be required to file form
Penalties for non-compliance can occur, with usual penalties for failure to file form T1161 resulting in an up to $2,500 penalty. Other penalties, such as failure to disclose property in excess of CAD $25,000 will result in a 25% penalty (similar to non-resident withholding tax).
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