If you are leaving Canada to work or live abroad and you are currently a Canadian resident, then the taxman can and will take a big bite from your wallet upon your departure.
There are 10 major tax implications that will directly affect you when you become a non resident of Canada, which are discussed below.
How do you become a non-resident of Canada?
Before we review the 10 major tax implications of becoming a non-resident of Canada, let’s first answer the question, “How do you become a non-resident of Canada?”
There are four factors that could cause you to become a non resident of Canada:
- You sold your home (or broke your lease) in Canada and purchased a home (or entered into a new lease) in your new country of residence.
- Your spouse and children moved with you to your new country of residence.
- You sold your personal possessions in Canada, such as your furniture, appliances, investments, and so forth and purchased personal possessions in your new country of residence.
- You severed your social ties with Canada and established social ties in your new country of residence.
If you are leaving Canada then you can fill out the determination of residency status form (NR73) from the Canada Revenue Agency (CRA) website. This form is optional, and is not required to be completed.
Certain tax practitioners are of the view that form NR73 should be completed and submitted to the CRA, so that the CRA can provide you with a notice of determination on your non-residency status. By doing so, you have very little uncertainty on your status as a tax resident of Canada, giving you peace of mine.
Other practitioners are of the view that form NR73 should not be completed and submitted to the CRA. This is because you do not want to ‘invite the CRA’ to scrutinize your situation by filing form NR73. The CRA often takes a conservative position in determining your Canadian residency status, and as tax collectors it’s in their best interest to have you pay tax as a Canadian resident.
Becoming a non-resident of Canada – 10 Major Tax Implications
There are 10 major tax implications of becoming a non resident of Canada.
1. Canada Child Tax Benefit – Becoming a non-resident of Canada
You will stop receiving the Canada Child Tax Benefit and Universal Child Care Benefit upon becoming a non-resident of Canada. You should inform the Canada Revenue Agency (CRA, 1-800-959-8281) of the change in your residency status, so that the payments will stop.
2. GST/HST Credits
You will stop receiving GST/HST tax credits (sent in the form of cheques to you by the CRA) upon becoming a non-resident of Canada.
3. Repay Home Buyers Plan and Life Long Learning Plan
You have 60 days from the date you become a non-resident (which is usually the date when you leave Canada) to repay any amounts that you owe under the home buyers plan or the life long learning plan. If you do not make payment within the 60 day period, the balances owing will be included in your income on your final tax return in Canada.
Tip: If you expect your income to be very low in the year of departure from Canada, then it may be advantageous to include the balances owing from the Home Buyers Plan and Life Long Learning Plan as income in your final Canadian tax return. This way, you will pay low tax on the income included, and you will have no obligation to repay the balances owing.
4. Tax Free Savings Account – Becoming a Non Resident of Canada
The funds within your TFSA can remain even after you leave Canada and any earnings accrued in your account and withdrawals will not be taxed in Canada. They may however be taxed in your current country of residence. You will however not be able to accrue additional TFSA contribution room for any years in which you are non-resident of Canada.
5. Stop Contributing to Registered Retirement Savings Plan (RRSP)
You are allowed to contribute to your RRSP’s even after you become a non-resident of Canada, as long as you have RRSP room available. However, it doesn’t make sense to contribute to your RRSP after you leave Canada, because you won’t be able to deduct the RRSP contributions made. The reason being is that you most likely won’t have any income in Canada, after you leave.
Tip: If you expect to have a significant amount of income on your final Canadian tax return, then consider making a RRSP contribution in the year of departure. The RRSP contribution will be tax deductible.
6. Call your Bank, Financial Advisor and Pension Administrator
Upon becoming a non-resident of Canada, you should call your bank, financial advisor and financial advisor to inform them of your change in residency status.
- Your bank must begin withholding 25 percent tax from any interest that it pays you, as must other financial institutions. The same tax applies for dividends paid to you.
- Tax of 25% will also be withheld from Old Age Security payments and Canada Pension Plan payments.
- Payments made to you from a Registered Pension Plan will also be subject the 25% withholding tax.
As you can see, 25 percent tax is withheld from passive income paid to non residents of Canada. However, the withholding tax rate can be reduced by a Tax Treaty that Canada has with your new country of residence. Please consult this chart to determine the new tax rates for each country. Additionally, you can use this online calculator from the CRA to calculate your withholding tax.
Personal Story: I have had clients, who are retired, that did not inform the CRA that they became non-residents of Canada. As a result, they continued to receive the gross amount of CPP and OAS payments without withholding tax being properly deducted. The taxman eventually caught on, and the penalties and interest amounted to more than the actual withholding tax liability. The lesson here is that Pension Income is subject to withholding tax at a rate of 25% by the CRA and it should always be paid.
7. Disclose all Canadian Assets – Becoming a non-resident of Canada
When you become a non-resident of Canada, you must disclose all of the property that you own, having an aggregate cost of $25 000 or more, on your final personal tax return. These are classified as ‘reportable properties’ and penalties up to $2,500 can be levied by the CRA for non disclosure. There are a few notable exceptions including property that is an excluded right or interest (see point and personal use property that has a fair market value of less than $10,000.
Tip: Real Estate, RRSPs, RESPs, and certain types of property do not have to be disclosed.
8. Deemed Disposition of Property
When you become a non-resident of Canada, you are deemed to dispose of all of your property at its fair market value and any unrealized gains will be subject to income tax even if you have, in fact, have not sold the property. This is known as departure tax, and it can add up to a significant amount. Imagine selling all of the property you own today and having to pay tax on the profits, which is what actually happens when you emigrate from Canada.
Assets that are subject to departure tax include:
- Stocks of all companies, private and public
- Mutual funds, exchange-traded funds, partnership interests
- Real estate situated outside of Canada
- Foreign Trusts
- Certain personal property, if it has appreciated in value
Departure Tax is not applicable to the following:
- Real property situated in Canada, Canadian resource properties and timber resource properties;
- The property of a business that is maintained through a permanent establishment. This includes capital property, eligible capital property and property described in the inventory of the business
- Certain property of a returning former resident who last emigrated after October 1, 1996, will no longer be treated as having realized accrued gains on departure.
- Property belonging to a short-term resident (an individual who is a resident in Canada for less than 60 months in the 120 month period preceding the disposition) when that resident came to Canada or any property acquired through inheritance after that individual became a resident of Canada.
- Property that is deemed to be an “excluded right or interest” of the taxpayer. This refers to future benefits and payments under certain plans and arrangements, including pensions, RPPs, IPPs, RRSPs, RRIFs, RESPs, DSPs, and RCAs. For the full extensive list, please consult Section 128 of the Canada Income Tax Act.
- Life Insurance policies also fall under this category. However this is only applicable to Canadian residents. Non-residents of Canada that own foreign life insurance will be subjected to departure tax.
For more detailed information on these exemptions, please take a look at our article on tax consequences on emigration to the United States for Canadians.
Most Canadians do not pay departure tax because of the exceptions. Those Canadians who own investments outside of their RRSPs, or are business owners, should be prepared to pay departure tax upon becoming a non-resident of Canada. (There is a special election available to defer paying departure tax by providing the CRA with security or collateral for paying it later).
Security and Deferring the Departure Tax
It is possible to defer the departure tax for those who intend to regain residency status or for those who do not have the funds to pay the tax. This can be done by providing the Canada Revenue Agency with deemed acceptable security such as bank guarantees, letters of credit, shares of corporation which is equal in value to the taxes due. In order to elect this payment you must file the form T1161. Remember that security is only required if the tax owing on the deemed disposition is in excess of $14,500. Also if you have already paid the departure tax and intend to return to Canada, then you are eligible for a tax refund. The taxes that are owed on the deemed disposition is due by April 30 or (June 15 if you are claiming self-employment income) of the year following the year in which you move.
9. Selling Your Home After Leaving Canada
If you sell your home in Canada after you become a non-resident of Canada, you will have to pay 25 percent tax on the gross selling price of your home. For example, if you sold your home for $400, 000 after you left Canada, then you will have to pay tax of $100,000, or 25 percent. This can cause financial hardship for many Canadians.
Fortunately, there is a special tax election that you can make to reduce the amount of tax to 25 percent of the gain on sale of your home. The gain is calculated as the selling price, less the original purchase price. You can claim the principal residence exemption for the period of time that you lived in the home. With the principal residence exemption, the increase in the value of your home while you lived in it will not be subjected to capital gains tax.
Tip: If you rent your home while you are a non-resident, which many Canadians choose, you will need to file a Section 216 Tax Return to report the rental profits earned. For more information on completing the Section 216 Tax Return, please see our article on non-residents receiving rental income.
For example, assume that the fair market value of your home when you left Canada was $390,000 and that you sold your for $400,000. In this example, the gain will be $10 000, which is subject to 25 percent tax, i.e. $2,500.
10. File Final Canadian Personal Tax Return
You must file a final Canadian tax return for the taxation year in which you leave Canada and:
- You have to disclose your date of departure on the final tax return.
- Your personal tax credits will be reduced by the number of days that you were outside of Canada.
- You must list all of the assets that you own, if those assets have an aggregate cost of $25 000 or more.
- You must pay departure tax or file the applicable forms for deferring departure tax.
About the Author – Allan Madan
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation . Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
|If you like this article, kindly +1 and follow Allan Madan on Google Plus by clicking on these|