For many Canadians, it is quite common to leave or depart Canada to become a non-resident of Canada permanently for many reasons. Work, family, or change in personal life can require you to relocate the whole family outside of Canada and you may choose to live in another country or even just visit Canada occasionally. A common term heard is departure taxes to become a non-resident of Canada, or emigrant tax returns. It is important for Canadian tax purposes you understand your residency for income tax purposes. This article will highlight some of the key items that are used to determine if you are a non-resident of Canada for tax purposes and the tax implications of departure tax in Canada.

Determine if you are a Non-resident of Canada:

The Canada Revenue Agency (CRA) provides a number of tests to help determine your residency status. Particularly, they focus on what are called Primary and Secondary ties to Canada. The primary ties generally include the following:

• Do you have a primary residence in Canada?
• Where is your spouse/common-law partner residing?
• Where are your dependents residing?

The secondary ties are a lot more and can be the following most popular ones:

• Personal property in Canada (can be furniture, clothing, rare items, jewelry, automobiles, boats and any other recreational type vehicles)
• Driver’s license
• Canadian passport
• Memberships in various Canadian organizations
• Health and medical insurance coverage
• Bank accounts
• Registered Retirement Savings Plans
• Tax-Free Savings Account
• Registered Retirement Investments Funds
• Credit cards
• Various securities accounts
• Employment with Canadian employer

The primary ties are considered significant ties and either one or a combination of them will easily make you a resident of Canada for tax purposes. If you have a sufficient secondary ties, you can still be considered a resident of Canada for tax purposes. It is important you consult with a tax accountant to ensure you obtain an accurate opinion on your situation. We have seen client specific situations where the client thought they had become a non-resident of Canada, but upon analysis, there were still residents.

Consider the CRA’s Form NR73 for leaving Canada:

You can also obtain an opinion from the CRA at no cost by filing the NR73 form which can be downloaded from their website.  In complex situations, it can be strategic to prepare this form to have documented assessment to ensure you have become a non-resident of Canada.  However, you may expose yourself unknowingly especially if you do not know the departure tax rules for emigrating from Canada. This form is not mandatory to be completed, even when you file your final departure tax return.

What is your departure date for tax purposes?

You cease to be a resident of Canada for tax purposes once you sever ties with Canada, it is also often aligned with the latest of the following date:

• The date you leave Canada.
• The date your spouse/dependents leave Canada.
• The date you become a resident of the new country.

Tax Implications of leaving Canada and becoming a Non-resident of Canada:

1. Deemed Disposition of Assets –

   This rule of departure taxes surprises many Canadians leaving who are unaware that on the date you depart, you are deemed to have disposed of Canadian assets at the fair market value, this triggers immediate capital gains taxes that you are required to pay. However, there are number of assets that departure tax generally does not apply to:

• Direct interests in Canadian real property, Canadian timber and resource properties.
• Registered Retirement Savings Plans, Tax Free Savings Accounts RPPS, IPPs, RRSPS, RRIFs, RESPs, DPSPs, RCAs and many other future benefits related plans.
• Rights under employee benefit or pensions plans, even certain stock option plans.
• For an individual who was a resident in Canada for not more than 60 months in the 120 months prior to departure, property that was owned by that individual when he/she last became a resident of Canada for tax purposes.
• Property of a business carried on by the taxpayer, at the emigration time, through a permanent establishment in Canada

Departure tax generally applies to the following (this is list is not exhaustive):

• Real estate outside of Canada
• Unincorporated businesses outside of Canada
• Private or public company shares inside Canada or outside of Canada
• Mutual funds units inside Canada or outside of Canada (unless sheltered within RRSPs/RRIFS, TFSAs etc.)
• Partnership interests
• Interests in non-resident inter vivos trusts
• Other portfolio investments
• Personal use property and listed personal property.

You can elect to defer the departure taxes until the asset is actually disposed of, however, you will be required to secure the CRA with a form of security equivalent to the tax balance owing. Form T1244 must be file to utilize this election. The disposition of assets is reported on Form T1243

2. Disposition of your primary residence:

The deemed disposition on departure tax date, is usually sheltered from any capital gains due to the principal residence exemption, and general exemption of Canadian immovable property. If you decide to rent out your primary residence as non-resident of Canada, you will be subject to 25% withholding tax of the gross rents collected each month.  You can reduce the withholding tax to 25% of the net rental profit by filing form NR6 annually. You will be required to report the annual rental income on the Section 216 income tax return along with filing a NR4 form. You can learn more about this on our article page Non-resident taxes: Rental Income Guide

Should you decide to sell your primary residence after leaving Canada, you will be subject to withholding tax of 25% of the selling price which can be a very significant amount. You will need to file a section 116 clearance certificate to reduce the withholding tax to 25% of the net capital gain, you can further obtain a refund by filing the Section 116 tax return as capital gains in Canada are only 50% taxable. You can learn more about this on our article page Non-Residents Selling Real Estate Property in Canada

3. Requirement to Disclose your Canadian Assets:

An individual who emigrates from Canada and ceases to be Canadian resident for tax purposes must file the T1161 form along with the departure tax return to list all Canadian assets if the fair market value of the assets exceeds in total $25,000.

4. Change in eligibility for Canadian benefits:

Certain Canadian benefits will cease or trigger rules upon becoming a non-resident of Canada. For example, if you were receiving any GST/HST credits or Canada child tax benefits, you will need to inform CRA that you are non-resident so payments are no longer paid out to you. Any payments made after becoming a non-resident can be requested to be paid back to the CRA. If you were utilizing the home buyers plan (HBP) or the life-long learning plan (LLP), you will be required to repay the money back into the RRSP, otherwise, it will be recorded as an income inclusion on your final departure tax return. Both your RRSP and TFSA will not be eligible for further contribution room limit increases.

5. Non-resident of Canada Part XIII Withholding taxes on payments:

Any income that is paid to you from Canada as non-resident will be subject to withholding taxes. You may notice existing payments you were receiving are less now from banks and other institutions due to this tax rule. You may need to file a Section 217 income tax return to report income earned in Canada.

CRA Filing Requirements

T1 Departure Income Tax Return: This departure tax return will report the income from January 1 up to the date you cease to be a resident of Canada. Must be filed for the year of departure, reporting worldwide income up to the departure date. The due date is April 30 of the following year (June 15 for self-employed individuals)​​.

Common CRA forms:

• T1243: Listing properties subject to deemed disposition
• T1161: Disclosure of properties valued over $25,000 (carries a penalty if not filed, but applicable)
• T1244: Election to defer tax payment on deemed disposition income
• T2061A: Election for real and business property not subject to deemed disposition​​