Emigrating from Canada has a multitude of tax implications including which country can tax particular income and the Canadian tax owed for emigrating. This article provides an overview of the emigration tax issues most relevant to the average individual taxpayer. Canada has also entered into a number of tax treaties which may modify the general taxation rules.
Departure Date and Residence Status
An emigrating taxpayer's Canadian T1 tax return for the tax year in which they emigrate requires reporting a departure date. The departure date is the date on which the taxpayer is no longer a tax resident of Canada. The concept of tax residency is wholly separate from residence for other purposes, such as immigration. Tax residence is determined on the basis of the residential ties a taxpayer has to Canada . The primary residential ties are a dwelling place, and a spouse and/or dependents in Canada. Secondary ties include personal property, driver's license, and economic ties. A taxpayer cannot be a non-resident of Canada until they have established tax residence in another country. A taxpayer may therefore move to a new country and still be considered a Canadian tax resident. For the remainder of this article, emigration will be assumed to denote a change in tax residence to a foreign country.
The applicable departure date is determined on a case-by-case basis. Generally, this will be the latest of when the taxpayer leaves Canada, when the spouse or dependents of the taxpayer leave Canada and when the taxpayer becomes resident of another country. Taxpayers emigrating to re-establish residence in another country will likely have a departure date on the day they left Canada, regardless of any dependents or a spouse remaining in Canada to complete school years or moving activities.
Canada has a self-reporting tax system. Taxpayers declare what they believe is the correct information about their circumstances, including residence. There is no requirement to provide proof of residence or departure date. The Canada Revenue Agency (the "CRA") may however, even years into the future, disagree with the taxpayer's self-reported residence status or departure date and reassess the taxpayer on that basis. Such a reassessment could lead to late filing and gross negligence penalties
For tax purposes, when taxpayers emigrate from Canada they are deemed to have disposed of property they own even though no actual sale of the property occurs. The deemed disposition creates a taxable capital gain or loss equal to 50 percent of the difference between the value of the property at the departure date and the acquisition price of the property. If the taxpayer owned the property prior to immigrating to Canada, the acquisition price will be the value of the property on the date they immigrated. This capital gains tax liability that is incurred is often referred to as a "departure tax" even though it is not a separate tax per se. Certain property is exempted from departure tax, most notably real property located in Canada and personal-use property such as clothes valued at less than $10,000.
Persons who emigrate from Canada but continue to earn certain types of Canadian-source income such as rental income or royalties will be subject to withholding tax. Whomever the emigrant is receiving payment from will generally remit 25 percent of the income to the CRA. The amount of withholding tax is often lowered by tax treaties
Employment and Income From Business
Emigrants who continue to earn income from employment in Canada, a business carried on in Canada or the sale of Canadian source income will be liable for Canadian tax on this income. The new country of residence may offer foreign tax credits in respect of the Canadian tax paid on this income to avoid possible double taxation. Tax treaties may also lower the taxation rate on these types of income.
RRSPs and TFSAs
Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are common investment vehicles utilized by Canadians due to their special tax treatment. Amounts contributed to an RRSP are deductible from income, but withdrawals are taxed. Conversely, income contributed to TFSAs is not deductible, but withdrawals from TFSAs are not taxed. These differing tax treatments impact use and taxation of these investment vehicles for non-residents. Non-residents can continue to own both RRSPs and TFSAs they opened while they were Canadian tax residents after their departure.
Eligible contributions for RRSPs are only based on each earned income which has been taxed in Canada. For many non-residents, this will mean they can no longer contribute to their RRSPs after departure. Withdrawals from RRSPs will be taxed in Canada at the applicable withholding tax rate. The new country of residence may also tax the withdrawals from a RRSP
Taxpayers can continue to contribute to their TFSAs after departure. However, since non-residents cannot accrue TFSA contribution room, any contributions made to the non-resident's TFSA will be taxed at 1 percent monthly. This taxation will only end when the taxpayer removes the contributed income or becomes resident again. Withdrawals from a TFSA will not be taxed in Canada but may be taxed in the new country of residence.
The CRA may waive liability for over contributing to a TFSA under subsection 207.06(1) of the Income Tax Act. However, taxpayers should not rely on this relief being granted as this relief is at the CRA's discretion. In the case Jiang v. Canada (Attorney General) 2019 FC 629, a taxpayer who contributed to her TFSA as a non-resident was denied this relief in part because the taxpayer has the onus to understand the law. Non-residents must be cautious with the continued use of their RRSPs and TFSAs after emigrating.
Tax Tips – Avoiding the Unexpected Taxation Impacts of Emigrating
Taxation issues related to emigration are complex, dependent on the type of income, the source of the income, the taxpayer's residence status and relevant tax treaties. Moreover, the CRA disagreeing with the taxpayer's reported residence status can result in significant penalties. Moving abroad is stressful but with help from our experienced Canadian tax lawyers the tax implications of your emigration can be effectively managed.