Leaving Canada and becoming a non-resident of Canada results in a departure tax. Building in plenty of lead time before leaving the country can save clients money. Clients leaving Canada must put departure tax planning at the top of their travel checklist.
About three million Canadians currently live outside the country. Many others contemplate making a move at some point in their lives—whether it be to pursue a professional opportunity, return to their home country, or relax in a warmer climate.
But if you are thinking of moving abroad, it’s important to remember that the process can be complicated. Among other things, you will need to plan for the tax consequences, especially if you expect the move to be permanent. There are many rules to consider which is why professional advice is important.
Determining Your Residency Status in Canada
You can be a Canadian citizen and a Canadian tax resident simultaneously.
You can be a Canadian tax resident, living in Canada, or have the Canadian residential ties that make you a Canadian tax resident, and yet you are not a Canadian citizen.
You can be a Canadian citizen but not a Canadian tax resident. This means that you can still use your Canadian passport to travel around the world, but you don’t have to pay any taxes to the Canadian government unless you have a Canadian source of income.
That sounded pretty awesome, isn’t it? Let's discuss the different types of residency status in Canada and the factors that determine each status.
Are You a Non-Resident of Canada for Tax Purposes?
For some people, it’s hard to understand whether they are residents of Canada, which can be a little confusing. We have broken it down for you to make it a little easier.
According to the CRA, you are a non-resident of Canada if the following situations apply to you:
- You live in Canada from time to time, but you do not have any residential ties in Canada.
- You stayed in Canada for less than 183 days in the previous year or
- You live outside Canada throughout the entire tax year.
What Are the Different Types of Residency Status?
If you don’t qualify as a proper resident or an ‘ordinarily’ resident/deemed resident, you may fit into one of the other categories. You may either be a factual resident or a deemed non-resident.
Who is a factual resident?
A factual resident is a person who does not live in Canada (he/she is traveling, etc.) but at least maintains residential ties (house, family, etc.) with Canada. The residential ties are mentioned in detail later in this article.
For example, some people categorized as factual residents include individuals teaching, vacationing, studying, or working outside Canada.
Who is a deemed non-resident?
This is where most people get confused. A deemed resident of Canada or a Factual resident of Canada may be a person who maintains residential ties in Canada, and they are also considered a resident of a country that has made a tax treaty with Canada. So, if you have ties with a country that has made a treaty with Canada and have residential ties in Canada, then you may be considered a non-resident. A deemed non-resident generally follows the same tax rules as a regular non-resident.
Who is deemed a resident?
Anyone who lives in Canada for more than 183 days, even though he/she does not have ties with Canada, will become deemed a resident, and he/she will be subject to tax on Canadian and worldwide income.
To become a non-resident of Canada for tax purposes. It is important to note the following ties before filing the Departure Tax Return or NR73.
Primary Ties:
- Primary Residence.
- A Spouse or Common-Law Partner living in Canada.
- Dependent living in Canada.
Secondary Ties
- Driver’s License
- Health Card
- Bank Account
- Furniture &Clothing
- Credit Card
- Vehicles
- Pets
- Memberships in clubs
- Pension Plan
- RRSP & TFAS
- Any other personal possessions.
A person doesn’t need to break off all secondary ties to be considered a non-resident. Secondary ties are a weighing scale, which means which country you have more ties with (Canada vs. any other country). For example, if you have more secondary ties with Canada than any other country, then you will be considered a resident of Canada for tax purposes.
What Do I Have to Do to Be Considered a Non-Resident?
To become a non-resident of Canada, you are required to pay something commonly known as “Departure tax”. If it’s right for you, you can ask your accountant about the Determination of Residency Status Form (NR73 form) or file a departure form tax return. The benefit of filling out the NR73 form is the clarity about the residency status.
Once you fill out this form, the CRA can provide you with a notice that determines your residency status with them. However, there is a downside to filling it out. Sometimes, it may lead to the CRA investigating your file as they prefer that you remain a resident since that works in their favor when paying taxes.
To become a non-resident, a person can file a Departure Tax Return with the CRA before April 30 instead of the NR73 Form.
Tax Implications of Becoming A Non-Resident of Canada
Not Eligible to Receive the Benefits:
After becoming a non-resident of Canada, you will not be eligible to receive Canada Child Benefit (CCB), Ontario Trillium Benefit (OTB), GST/HST Credit, or Climate Action Incentive Payment (CAIP).
Home Buyers Plan&Lifelong Learning Plan:
Within 60 days of leaving Canada, you must repay any amount you owe under the Home Buyers Plan (HBP) and Lifelong Learning Plan (LLP). If you fail, that amount will be added to your annual taxable income.
RRSP’s & TFSA’s:
It would be best to stop contributing to your RRSP&TFAS unless you expect to have a lot of income in your final Canadian tax return.
Canada Pension Plan& Old Age Security:
It would be best to inform your bank and the administrator of your pension so they can withhold 25% of your income tax. The 25% tax will be withheld from your Canada Pension Plan (CPP), Old Age Security, and Registered Pension Plans. After becoming a non-resident, If you don’t inform your financial institutions about your new residency status, they keep giving you the gross amount of your income. You’ll have to file the Canadian tax return, and the final obligation will be determined. However, Canada’s Tax Treaty with your new country of residence can reduce this withholding tax.
Departure Tax Reporting Requirements
Canada levies a departure tax on residents when they leave Canada. Individuals are expected to dispose of their assets (with some exceptions) at fair market value on the date they cease Canadian tax residency. Half of any net gains resulting from the deemed disposition are included in income and taxed at normal marginal rates. This ensures that Canada collects the tax related to the portion of the gain that accrued while the individual was a Canadian tax resident.
Individuals who were residents of Canada for less than 60 months are subject to departure tax only on assets purchased during their Canadian tax residency period.
Along with the tax return for the year of departure, individuals must file Form T1243, “Deemed Disposition of Property by an Emigrant of Canada,” listing information including the property’s year of acquisition, its fair market value on the date of departure and the adjusted cost base.
For marketable securities, such as stocks, bonds, and mutual funds, a broker can generally provide assistance in determining the fair market value and the adjusted cost base. An appraisal may be required for other property.
Disclose Canadian Assets by the time of Departure
When you become a non-resident of Canada, you must disclose all Canadian assets worth $25,000 or more by filing form T1161 (List of Properties by an Emigrant of Canada) to list all the properties inside and outside Canada. In case you fail to report your assets, CRA can make you pay a maximum of $2,500 as a penalty plus interest. If you are late in filing the form T1161, then a $2,500 penalty also applies. The due date is April 30.
Tip: To avoid penalty and interest, you can file a Voluntary Disclosures Program (VDP) with Departure Tax Return.
Residency After Leaving Canada
If you sell your house after leaving Canada, a 25% tax will be implied by CRA on the gross selling amount of your home, which can be financially crucial. Fortunately, by opting for Section 116, you can reduce your tax to 25% of the gain, that is, the selling price minus the original purchase price of your house.
If you decide to rent your house instead of selling it, you should file Section 216 Return to report your rental income and expenses yearly.
Deemed Disposition of Assets:
After becoming a non-resident of Canada, you’re deemed to dispose of your assets at the fair market value and pay tax on gain. They call that “Departure Tax” to be paid at departure time.
Assets subjected to Departure Tax:
- Property situated outside Canada
- Company Stock (Private & Public)
- Foreign Trusts
- Funds (Mutual & Exchange Traded)
- Any Other Personal Property
Assets not subjected to Departure Tax:
- Property situated in Canada.
- Certain property of a returning former resident who last emigrated after October 1, 1996. This will no longer be treated as having realized accrued gains on departure.
- Property of a short-term resident at the time of arrival in Canada or any property transferred through inheritance after that person became a resident of Canada.
- Future benefits and payments such as RPPs, IPPs, RRSPs, RRIFs, RESPs, DSPs, and RCAs.
- Owning a foreign life insurance policy is subjected to departure tax.
File Final Tax Return
After becoming the non-resident of Canada, you should;
- File your final tax return for the year you leave Canada.
- Be clear about your departure date on the final tax return.
- Reduce your number of personal tax credits with the number of days outside Canada.
- Disclose all your properties and assets if they are worth $25,000.
- File to defer the departure tax or pay it.
Payment of Departure Tax
Departure tax is generally due by 30 April of the year after an individual departs Canada unless the individual files an election to defer the departure tax. Individuals may elect to defer the tax on their deemed dispositions until the asset is actually disposed of, or they repatriate to Canada, whichever occurs first.
Individuals who wish to make this election must do so by completing Form T1244, “Election, under Subsection 220(4.5) of the Income Tax Act, to Defer the Payment of Tax on Income Relating to the Deemed Disposition of Property” by the normal filing deadline of 30 April.
Individuals who make this election and whose amount of federal tax owing on income from the deemed disposition of property exceeds CAD 16,500 (or CAD 13,777.50 for former residents of Quebec) must provide adequate security to cover the amount. The CRA (and Revenu Québec) will accept various items as security, including the assets themselves; however, a letter of credit from a Canadian bank is generally preferred. When the election is made and adequate security has been provided, no interest will accrue on the unpaid departure tax. The individual or a tax advisor must contact the CRA well in advance of the 30 April deadline to make acceptable arrangements.
An individual does not need to provide security on the first CAD 100,000 of capital gains from the deemed disposition.
Revenue Québec may accept the deferral of tax without the posting of security when the taxable income resulting from departure tax is less than CAD 50,000.
Post-emigration Dispositions
When departure tax is deferred, and the assets are actually disposed of in a subsequent year, the deferred tax must be paid to CRA (and Revenu Québec) by 30 April of the year following the year of disposition.
If the capital gain on the actual disposition is also subject to tax in the country where the individual has moved, the individual may be able to claim a foreign tax credit for the foreign capital gains tax.
Returning to Canada
If an individual subsequently resumes residency in Canada, the individual is generally deemed to reacquire all assets held at that time, at fair market value on the date that residency resumed. If the same assets are held at the time residency resumes, individuals may elect to “unwind” the deemed disposition. This “unwinding election” has specific consequences depending on each case’s specific facts.
Due Date of Departure Tax Return:
The due date to file the departure tax return is always April 30 by the following year, when you leave Canada.
Stay Updated on Taxes
It’s important to have a consultation with a professional accountant in Toronto to have a clear understanding before moving forward. Sometimes, it might be worthwhile to remain a Canadian tax resident because of the complications and costs involved.
Whether or not to file a non-resident tax return can be a complicated decision. There are situations in which a non-resident must file a tax return and there are situations when he can elect to file. Filing taxes is there to advise you on whether filing a Canadian Tax return may be beneficial to you as a non-resident. Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.