Considerations for Canadians becoming Non-Residents

Whether for work or for lifestyle many Canadians make a decision to leave Canada and give up their Canadian residency. As part of the planning for these moves we often get asked about the tax ramifications of giving up Canadian residency and becoming non-residents. Some common questions and broader comments are discussed below for Canadians relocating to the U.S.

Table of Contents

1. If I’m leaving Canada permanently, do I stop getting taxed in Canada?
2. What happens to my RRSPs and other investments when I leave Canada permanently?
3. What is departure tax?
4. Final Tax Return and Tax Deferral
5. Next Steps

If I’m leaving Canada permanently, do I stop getting taxed in Canada?

Not necessarily. If you are a resident of Canada for income tax purposes, you’re required to file a Canadian tax return and report your worldwide income on your personal Canadian return. If the Canada Revenue Agency (CRA) decides that you are a non-resident of Canada, you don’t need to file a tax return if your only Canadian-sourced income is investment income, but you will have to pay withholding tax on it. Depending on your residency status and any applicable tax treaties, you could be taxed in Canada and have the same income taxed again in your new country. Generally, CRA will consider you a non-resident of Canada for income tax purposes if you leave Canada to live in another country and sever your residential ties with Canada. You may have to sell your home in Canada and take up permanent residence in another country, your spouse, common-law partner and dependents may have to leave Canada and you may have to break your social ties, such as professional and community memberships. If you leave Canada but keep a primary and/or secondary residence here, hold onto personal property, such as a car, maintain a Canadian driver’s license, passport and health insurance and Canadian bank accounts or credit cards, you may be considered a factual resident of Canada for tax purposes.

What happens to my RRSPs and other investments when I leave Canada permanently?

When you leave Canada and sever your residential ties to Canada, you must file a final departure tax return. On the day that you leave Canada permanently you will cease to be a resident of Canada and will be deemed to have disposed of all your non-registered investment assets at their fair market value. This is known as a deemed disposition, and you will have to report the capital gains or losses that result from it. This is considered a departure tax. RRSPs, tax free savings accounts (TFSAs), registered education savings plans (RESPs) and your principal residence are not subject to this deemed disposition but be aware of the tax consequences in your new country. For example, if you move from Canada to the United States, your TFSA will become taxable by the IRS. As such, we generally recommend collapsing all TFSAs when one of our clients moves from Canada to the US. After leaving Canada, you are still subject to tax in Canada on any Canadian-sourced income such as Canadian employment income, income from carrying on a business in Canada or from the sale of any taxable Canadian property. Withholding tax generally applies on your Canadian-sourced pensions and investment income.

What is departure tax?

The moment a resident leaves Canada, the CRA deems that they have disposed of certain kinds of property at fair market value and immediately reacquired it at the same price. This is known as a deemed disposition and you may have to report a taxable capital gain that is subject departure tax. Types of property include all foreign assets (real estate outside of Canada, Unincorporated companies outside of Canada), shares (including shares in private or public companies), other non-registered portfolio investments (including mutual funds) , property for personal use as well as listed personal property, including works of art, jewelry, stamps and coins. However, that doesn’t mean an individual leaving should rush to liquidate everything. For example, furniture and vehicles, are excluded from tax, as are registered plans as noted and CPP and QPP benefit entitlements, because they will be taxed at a later date. Also, there is also no immediate need to sell your home, as the deemed disposition does not apply to real property. There is no deemed capital gain on a principal residence and the property only becomes taxable when you leave the country and it is sold. At that time, recognition is given to the principal residence designations which apply. It is important to note that principal residence exemption years do not accrue to the homeowners if they are non-residents of Canada. That said, leaving a vacant home can be an issue for residency determination, so it’s common for people to sell or rent the home before departure. If the property is rented, there may be a deemed disposition due to a change in use and other issues may arise, such as withholding tax on rental income. If the house is sold once the owner has become a non-resident, the vendor must notify the CRA about the disposition or proposed disposition and withhold non-resident tax from the gross proceeds to cover the resulting tax payable. It’s also important to communicate your change in status to any financial institutions where you have accounts generating passive income, such as interest or dividends.

Final Tax Return and Tax Deferral

Since your final tax return will include your departure date, the change will be confirmed when you file this return by April 30 of the year following the one you left Canada. The tax authorities treat this final tax return much like they would treat the tax return of a deceased person. It’s the last chance for the CRA to tax the income and property of a Canadian resident, including foreign assets. When filing the return, the applicant can choose to defer the departure tax to be paid on income relating to the deemed disposition of property. This can include some or all the assets with no pre-set time limit, even if the eventual return date to Canada has yet to be decided. Some may defer, since they might come back. If the person provides guarantees [such as a letter from a bank], they will not pay the tax immediately, but only when the assets that are the subject of the guarantee are actually deemed to be disposed of. If the amount of federal tax owing on income from the deemed disposition of property is more than $16,500 ($13,777.50 for former residents of Quebec), you have to provide adequate security to the CRA to cover the amount.

Any serious consideration of removing ties to Canada should not be taken lightly and should always be discussed with a cross border tax professional.

Next Steps

If you’re a thinking about becoming a non-resident and need assistance with moving and optimizing your investments, financial planning and portfolio management, please get in touch with us. At Plena Wealth Advisors, we specialize in Canadian financial planning, cross-border financial planning and cross-border wealth management and would be happy to help navigate the cross-border complexities with you.

The information above is from sources believed to be reliable, however, we cannot represent that it is accurate or complete and it should not be considered personal tax advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. Raymond James Ltd. is a Member Canadian Investor Protection Fund.