When you cease to be a tax resident of Canada, you must file a “departure” tax return. A departure tax return reports your worldwide income up to the date of your departure from Canada, a “deemed” disposition of most of your assets, and a disclosure of the assets you held at the time of your departure. Once you are a non-resident of Canada, you are generally only subject to tax on certain types of Canadian-sourced income. See Determining Residency for clarity regarding how residency is determined for income tax purposes.
What is departure tax?
Departure tax is owed when an individual departs Canada as the individual is deemed to dispose of assets at their fair market values on the date of the departure. Certain assets such as Canadian real estate properties and registered accounts, including RRSPs and TFSAs, are exempt from these departure tax rules. A deemed disposition could trigger significant departure tax if the assets have substantially appreciated in value since they were first acquired. As the disposition of capital assets are taxed favorably in Canada, only 50 per cent of the gain is taxable1. However, effective June 25, 2024, the Canadian government has proposed a capital gain inclusion rate increase from 50 per cent to 66.67 per cent. This change does not apply to the first $250,000 of gains incurred by an individual, who will still be eligible for the 50 per cent inclusion rate.
In addition to the deemed disposition of assets, there may be additional disclosure forms to complete as part of the departure tax return. While these forms are intended for the purposes of collecting information, the Canadian government could charge a penalty of up to $2,500 per form for failing to file them by the due date.
I left Canada – Do I still have Canadian tax obligations?
If you own income-producing Canadian assets after departing Canada, you will be subject to a non-resident withholding tax of 25 per cent on most types of Canadian sourced income, such as interest or dividends. This tax rate could be reduced if an income tax treaty between Canada and the new country of residence is in place.
Non-residents who still own Canadian real estate after leaving Canada might be considering whether to sell or rent out the property. If you choose to rent the property out, your tenant or an appointed agent will be required to withhold tax of 25 per cent on the gross rental income earned and remit this to the Canada Revenue Agency (CRA). The ultimate tax could be reduced to marginal tax rates based on net rental income earned, if certain elections and returns are filed. If you are considering selling your Canadian real estate property as a non-resident, the CRA will require 25 per cent (and, in some cases, 50 per cent) to be withheld from the gross sale price upon sale (Note: The withholding taxes may increase from 25 per cent to 35 per cent for dispositions on or after January 1, 2025, to reflect the new higher capital gains inclusion rate). Certain notification forms and tax returns will need to be filed with the CRA; otherwise, significant penalties could apply. In Canada, you will be taxed on the net capital gain from selling a property, excluding any amount protected by principal residence exemption claims. Both selling and renting out the property will result in Canadian tax and possibly additional filing and reporting requirements.
Additional considerations include your ability to utilize your Canadian registered accounts, such as RRSPs and TFSAs. For example, you may be subject to penalties if you make TFSA contributions as a non-resident. Further, your new country of residence may not treat your TFSA as a tax-free savings vehicle.
When is departure tax due?
The deadline to file and pay departure taxes is April 30 following the year in which you depart Canada. The deadline to file is extended to June 15 if you or your spouse are self-employed. Though the deadline to pay departure taxes is April 30, some individuals may have difficulty making this payment as they have not yet received any proceeds from the deemed disposition of the assets. In this case, you may be able to file an election to defer the payment of taxes related to the deemed disposition so that payment is made no sooner than when a sale has occurred. For this election to be valid, you will have to provide adequate security to the CRA. Given the burdensome obligations associated with filing the election, it is usually only worthwhile if you have a significant departure tax.
This article has been prepared for the general information of our clients. Please note that this publication should not be considered a substitute for personalized advice related to your situation.
1 However, note that Alternative Minimum Tax (AMT) could apply which could increase the ultimate tax rate on capital gains on departure. The concept of AMT is beyond the scope of this article.
