Understanding the Departure Tax: A Guide for Canadians Leaving the Country
Moving out of Canada is not always as simple as packing your bags and settling in a new country. For many individuals, it can lead to unexpected tax consequences—most notably, the departure tax.
The departure tax arises from the 'deemed disposition' of certain types of capital property owned at the time of emigration from Canada, which may constitute a change in tax residence. In essence, the Canada Revenue Agency (CRA) treats the individual as though the individual has sold specific assets, even though no actual sale has taken place.
This article explains the concept of deemed disposition, with a particular focus on departure tax. It is intended to guide Canadians who may be unaware that their emigration—or even an extended stay abroad—could result in a change in tax residence. Such a change will typically trigger departure tax, along with potential interest and penalties on any unreported gains.
Understanding Deemed Dispositions: When the CRA Says You Sold—Even If You Didn't
Under subsection 248(1) of the Income Tax Act, a disposition is defined as any event or transaction that entitles a taxpayer to proceeds of disposition. Such events typically result in either a capital gain or a capital loss. A deemed disposition occurs in situations where there is no actual sale or transfer of property, but the Income Tax Act treats the property as having been disposed of. This can happen when there is a change in use of property, death of the taxpayer, a change in the taxpayer's tax residence, or the 21-year deemed disposition rule for trusts, among others.
Deemed Dispositions are assessed at the property's Fair Market Value, and a taxpayer will be required to pay taxes if such a disposition results in a Capital Gain. Failure to pay such taxes will result in penalties and interest to the taxpayer.
Departure Taxes Explained: What Happens to Your Assets When You Leave Canada
When an individual leaves Canada in a way that causes a change in tax residence, a deemed disposition of most capital property, including cryptocurrency, occurs. The taxpayer is considered to have sold these properties at fair market value and immediately reacquired them at the same value. If this deemed disposition results in capital gains, the taxpayer becomes liable to pay what is known as "Departure Taxes".
A change in tax residence may occur when the individual leaves the country permanently, severs significant residential ties to Canada (such as selling their home, moving their family abroad, or quitting employment), or becomes considered a non-tax resident under a tax treaty. The effective date of the change in tax residence is generally the latest of the following events: the date the taxpayer departs Canada, the date their spouse or dependents leave, or the date they become a tax resident of another country.
It is important to note that changing tax residence is not the same as changing immigration status, and a change in tax residence is determined on a case-by-case basis.
Certain capital properties, notably taxable Canadian property, are exempt from deemed disposition upon this change in tax residence. They include Canadian real or immovable property; Canadian resource properties; Canadian timber properties; Canadian business properties, if business is carried on through a permanent establishment (this includes inventory); most registered plans, and properties owned by an individual at the time he or she last became a resident of Canada (or inherited after becoming a resident) if the individual's period of residence was 60 months or less within the last 10 years preceding emigration.
Properties subject to deemed disposition, upon change in tax residence, generally include most non-registered investment accounts, crypto assets, including NFTs, shares of a Canadian-Controlled Private Corporation (CCPC)—though the lifetime capital gains exemption may mitigate the tax impact—and others. If this deemed disposition results in a loss, the taxpayer can only use that loss to offset gains from dispositions of similar types of properties.
Departure Taxes and Reporting Requirements for Canadian Emigrants
The taxpayer's tax return, after the year of departure, is required to report the taxpayer's worldwide income earned while the taxpayer was a resident of Canada up until the taxpayer's departure, along with the deemed disposition of the taxpayer's properties due to the change in tax residence—commonly referred to as departure taxes. In addition, the taxpayer may be required to disclose all properties owned at the time of departure.
The deadline to file and pay these taxes is April 30 of the year following departure, or June 15 if the taxpayer is self-employed.
Reporting a taxpayer's worldwide income
The worldwide income reported in the taxpayer's return reflects the taxpayer's usual reporting obligation while the taxpayer was a resident of Canada. Since Canada taxes residents on their worldwide income, taxpayers' worldwide income must be reported up to the date the taxpayer ceased to be a Canadian resident.
Reporting deemed disposition, and deferral of departure taxes
The taxpayer must also report any gains or losses arising from the deemed disposition of the taxpayer's properties upon ceasing to become a Canadian tax resident, which includes disclosing the list of properties disposed of. This report is made in the taxpayer's Form T1243 – Deemed Disposition of Property by an Emigrant of Canada. Failure to file this form by the deadline or to pay the applicable capital gains taxes can result in penalties.
A taxpayer may elect to defer payment of the departure tax by filing Form T1244, postponing taxes until the actual disposition of the property, i.e., the selling of the property. However, if the federal tax owing on the proceeds of the deemed disposition exceeds $16,500 ($13,777.50 for former Quebec residents), the taxpayer must provide security sufficient to cover the amount.
This also applies to any applicable provincial or territorial taxes. The election must be made by the April 30 deadline following the year of emigration. Note that this election to defer does not apply to employee benefit plans.
Reporting all properties owned, where the value exceeds $25,000
If the total value of all properties owned at departure exceeds $25,000, the taxpayer is required to file Form T1161, reporting all such properties. Exceptions to this reporting requirement include cash (including bank deposits), personal-use property with a fair market value under $10,000, most registered plans, and properties owned by the individual – except taxable Canadian property – at the time the individual last became a resident of Canada (or inherited after becoming a resident) if the individual's period of residence was 60 months or less within the last 10 years before he or she emigrated.
Failure to file this form by the due date will result in penalties. Importantly, this form is an information return that must be filed regardless of whether the taxpayer is otherwise required to file a tax return.
Unwinding Deemed Dispositions: A Tax Relief Option for Returning Residents
If after emigrating you become a Canadian resident again in the future and still own property that was previously deemed as disposed, you may elect to "unwind" the deemed disposition. This allows you to reduce the capital gain reported on your tax return for the year you emigrated—up to the amount of the original gain.
For properties that are not taxable Canadian property, the amount you can unwind is limited to the lesser of:
- The capital gain you previously reported on the deemed disposition, or
- The fair market value of the property on the date you return to Canada.
If you had previously deferred the payment of departure taxes, unwinding the deemed disposition may eliminate some or all of the reported gain, which could result in little to no tax being payable. In such cases, any security you posted in connection with the tax deferral may be released and returned to you.
This election must be made by the filing due date for the tax year in which you re-establish your Canadian tax residence, and must include a list of the properties you still own, along with their fair market value.
Alternatively, instead of unwinding the disposition, you may choose to pay the previously deferred departure taxes. Note that upon re-establishing your Canadian tax residence, you are generally deemed to have disposed of and immediately reacquired most of your properties at fair market value.
Pro Tax Tips: Tax Residence Isn't Just About Where You Live—Get the Facts Before You Report and Pay Departure Taxes
Before rushing to report your deemed disposition and paying departure taxes, it is essential to consult with an experienced Canadian tax lawyer to determine whether your tax residence has actually changed.
A change in your immigration status or acquiring permanent residence in another country does not automatically mean your tax residence has changed. The determination is far more complex.
A variety of factors—including tax treaties, residential ties, and factual circumstances—are considered when assessing whether you are still a tax resident of Canada.
Our experienced Canadian tax lawyers can help you determine whether a change in tax residence has occurred and whether you are required to file a departure return. For added certainty, we can also request a residence determination to the Canada Revenue Agency (CRA) on your behalf, helping you avoid costly mistakes and ensuring full compliance.
Frequently Asked Questions (FAQs)
What is departure tax, and when does it apply?
Departure tax arises when a Canadian tax resident emigrates from Canada and is deemed to have disposed of certain properties at fair market value, even if no actual sale has taken place. This occurs when there's a change in tax residence, such as permanently leaving Canada, severing significant residential ties or being deemed a non-tax resident by a treaty.
What is a deemed disposition according to the Income Tax Act?
A deemed disposition is a situation where, under the Income Tax Act, a taxpayer is treated as having disposed of property, even though no actual sale has occurred. It commonly occurs during emigration that results in a change of tax residence; death; gifting of property; change in property use; or due to the 21-year rule for trusts. Deemed Dispositions are assessed at the fair market value of the property.
What are the main reporting requirements for individuals who are emigrating from Canada?
The taxpayer's tax return after the year of departure must report their worldwide income up to the date of departure; the gains or losses from the deemed disposition of their properties; and if the total value of all properties owned at departure exceeds $25,000, the taxpayer is require to report all properties owned at departure (except where reporting is optional for some types of properties)