Canadian Departure tax Rules

Allan Madan, CA
 Sep 4, 2015
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canadian-departure-tax-rulesWho has to pay Departure Tax?

Departure tax is levied by the Canada Revenue Agency (CRA) on individuals leaving Canada and severing their ties with Canada, either due to employment, business or any other reason.

When do I have to file my departure tax return?

Departure tax returns are regular returns that are due on April 30 (for individuals) and June 15 for individuals reporting income from a business. They are called departure tax returns because (a) They are your final tax filing with the CRA and (b) You must attach a listing of all of your assets to your departure tax return.

In general, a taxpayer’s departure return will include his/her worldwide income up to the date of departure from Canada, along with any capital gains or losses on the deemed sale of property that occurs at time of departure.

Example of Departure Tax Calculation

To better understand the departure tax rules, let’s look at the example of Carlos.

Situation 1: Carlos has been a resident of Canada for less than 60 months (March 1, 2008 through September 1, 2012).

  • Carlos became a resident of Ontario, Canada on March 1, 2008
  • He departed Canada on September 1, 2012
  • Carlos was not a resident of Canada before March 1, 2008
  • The only income reported by him on his 2012 Canadian Income tax return was employment income of $300,000
  • Let us assume that $ 1CAD= $ 1 US for the sake of convenience
  • Carlos had the following assets on September 1, 2012

List of Assets

Date acquired

Original cost

FMV
March 1, 2008

FMV
Sep 1, 2012

200 shares from UK co.

Jan 1, 2004

$ 9/share

$ 12/share

$ 15/share

400 shares from Can Co.

Jan 1, 2011

$ 21/share

N/A

$26/share

Canadian rental property

December 31, 2003

$ 1.3 million

$ 1.5 million

$ 2.0 million

Canadian principal residence

September 1, 2010

$ 800,000

N/A

$ 950,000

Employee Stock Options

Exercised 150 shares on December 31, 2011 and still holds the shares (benefit included on T4 slip)
Remaining 150 options exercisable after December 31, 2012

Exercise price $ 15/share

N/A

$ 18/share

TFSA

January 1, 2002

 $ 1.5 million

$ 2 million

$ 2.2 million

RRSP

April 1, 2008

$ 60,000

N/A

$ 62,000

canadian-departure-tax-rulessAnalysis

Carlos should provide a list of all of his properties at the time of emigrating from Canada with a total fair market value of over $25,000 except for cash, TFSAs and RRSPs.

He must also calculate and report any capital gains (or losses) on all of his properties resulting from the deemed sale of his properties on the date of his departure, including:

200 Shares from UK Co:

There is no deemed disposition on departure of the 200 shares in the UK public company he owns because Carlos has been resident of Canada for less than 60 months the and shares were acquired prior to establishing Canadian residency.

400 Shares from Can Co.:

According to the table above, the 400 shares in the Canadian publicly listed corporation that Carlos owned had a value of $10,400 on the date of his departure (i.e. 400 shares x $26 / share). The total purchase price of the 400 shares was $8,400 (i.e. 400 shares x $21 / share).

The deemed capital gain on departure is therefore $ 2,000 ($ 10,400 – $ 8,400).

Canadian Rental Property:

There is no deemed sale of Carlos’ Canadian rental property, as Carlos has been a resident of Canada for less than 60 months and the property was acquired prior to establishing Canadian residency.

Canadian Principal Residence:

Carlos’ Canadian principal residence is exempt from the deemed disposition rules on departure. However, additional forms must be filed with his departure tax return.

Employee Stock Options:

The employee stock options have a total market value of $2,700 on the date of emigration (i.e. 150 shares x $18 / share). The total purchase price is $2,250 (i.e. 150 shares x $15 / share). This will result in a capital gain for Carlos in the amount of $450 ($ 2,700 – $2,250).

Form T1161 has to be completed for the 150 shares exercised in 2011 and additionally for the other unexercised 150 stock options.

TFSA:

TFSAs are exempt from the deemed disposition rule and are also excluded from form T1161.

RRSP

RRSPs are exempt from departure tax.

Situation 2: Carlos became a tax resident of Canada on March 1, 2005 (more than 60 months)

List of Assets

Date acquired

Original cost

FMV on March 1, 2005

FMV
Sep 1, 2012

200 shares from UK co.

Jan 1, 2004

$ 9/share

$ 12/share

$ 15/share

400 shares from Can Co.

Jan 1, 2011

$ 21/share

N/A

$26/share

Canadian rental property

December 31, 2007

$ 1.3 million

N/A

$ 2.0 million

Canadian principal residence

September 1, 2010

$ 800,000

N/A

$ 950,000

Employee Stock Options

Exercised 150 shares on December 31, 2011 and still holds the shares (benefit included on T4 slip)
Remaining 150 options exercisable after December 31, 2012

Exercise price $ 15/share

N/A

$ 18/share

TFSA

January 1, 2002

 $ 1.5 million

$ 2 million

$ 2.2 million

RRSP

April 1, 2008

$ 60,000

N/A

$ 62,000

Analysis

All the above properties except Carlos’ RRSPs and TFSAs are reportable as their FMV is more than $25,000 and Carlos has been a resident of Canada for more than 60 months (March 1, 2005 through September 1, 2012).

These properties must be reported along with his departure tax return.

200 Shares from UK Co:

The fair market value of the shares on the date of departure is $3,000 ($15 / share x 200 shares). The purchase price of the shares was $2,400 ($12 / share x 200 shares). Therefore, departure tax will be charged on a capital gain of $600 ($3,000 – $2,400).

400 Shares from Can Co.:

The fair market value of the shares on the date of departure is $10,400 ($26 / share x 400 shares). The purchase price of the shares was $8,400 ($21 / share x 400 shares). Therefore, departure tax will be charged on a capital gain of $2,000 ($10,400 – $8,400).

Canadian Rental Property:

The fair market value of the Canadian rental property on the date of departure is $2,000,000. The cost amount is $1,300,000. Therefore, departure tax will be levied on a capital gain of $700,000.

Canadian Principal Residence:

Carlos’ principal residence in Canada is exempt from departure tax.

Employee Stock Options:

The employee stock options have a total market value of $2,700 on the date of emigration (i.e. 150 shares x $18 / share). The total purchase price is $2,250 (i.e. 150 shares x $15 / share). This will result in a capital gain for Carlos in the amount of $450 ($ 2,700 – $2,250)

Form T1161 has to be completed for the 150 shares exercised in 2011 and additionally for the other unexercised 150 stock options.

TFSA

TFSAs are exempt from departure tax. Carlos cannot make further contributions while he is a non-resident. The contributions made while he was a resident of Canada will continue to grow tax-free.

RRSP

RRSPs are exempt from departure tax.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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Comments 8

  1. If I depart from Canada, and have a principle residence (I am not selling, just leaving the property), Do have to put on the T1161 but do I have to disclose on the S3 and T2091 under the new rules for dislcosing sale of principle residence;

    1. Hi AJ,
      You need to report the market value of your home as of your departure date on form T1161. You do not have to disclose the gain on form T2091 and Schedule 3, because the property remains a personal property (i.e. not a rental).

  2. Dear Allan,

    I’m a little confused about the Departure Tax and Canadian real estate that is considered a rental property.

    In one of the responses on the site (no. 137 under “Tax On Real Estate Sales In Canada”, in response to George): “Departure tax does not apply to Canadian real estate, regardless if the property in Canada is your primary residence or a rental property.” But in the discussion of the case above – for Situation 2 – “Canadian Rental Property: The fair market value of the Canadian rental property on the date of departure is $2,000,000. The cost amount is $1,300,000. Therefore, departure tax will be levied on a capital gain of $700,000.”

    Have the rules regarding deemed disposition changed between the time of writing of these two articles, or is “Canadian Rental Property” in the case of Carlos somehow considered differently (for example – is this rental property put into a category which doesn’t qualify as real estate because it was purchased with the only goal of renting, etc.) This last idea is mere speculation – I would imagine that both examples constitute real estate that would not be subjected to deemed disposition as part of the Departure Tax – hence the confusion. I would have thought that Carlos’ rental property would not have triggered any capital gains upon his departure because it’s real estate situated in Canada, and real estate is exempt from the Departure Tax.

    Please let me know! Perhaps I’m mixing up something here.

    All the best,
    Eric

    1. Hi Eric,
      Thanks for pointing that out, the article should be corrected! Departure tax does not apply to Canadian real estate, whether the property is a personal use property (e.g. primary residence) or a rental property.

  3. If I depart from Canada and become a non-resident [NR], and have a principle residence which I plan to rent it out for 2 years. I plan to move back to Canada and live in this resident. I understand I need to pay 25% tax on the net rental income and I have already gotten approval for the NR6 and my dad is going to be my agent.

    The part I’m confuse about is the deemed disposition on the change of use from primary residence to rental. Are there any forms that I need to file to let the CRA my plans and what are my tax implication if the property rise or fall during the 2 period which I was a NR.

    1. Hi John,
      When you change the use of your home from a principal residence to a rental property, there will be a deemed disposition at that time. As a result, any appreciation in your home will become taxable as a capital gain. Providing that you lived in your house for all of the years that you owned it (prior to it become a rental property), you will be able to claim the principal residence exemption to offset the entire capital gain, resulting in no tax payable. Schedule 3 and Form T2091 should be completed to report the change in use and the principal residence exemption.

      Note: If you move back into your home, then there will be another change in use from a rental property to a principal residence. If the property appreciated during this time (i.e. from the date the property became a rental property to the date that you move back in), then the appreciation will be treated as a capital gain for tax purposes. One half of the capital gain will be included in your income.

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