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 20

  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.

  4. If someone owned a property outside Canada and lived in it before migrating to Canada, lived in Canada for more than 60months during which they held the property during that time but did not rent it out (and only rented accommodation in Canada), and then moved back to that country to the same property, would this be classed as a principal residence and exempt?
    Thanks

  5. Hi,
    i want to know if i need to file the departure tax if i am a not a canadian citizen but who studied in canada for one year and worked for one year and then left canada after expiry of the work permit. I never bought any property, car or any securities as listed in the above example.
    Thank You.

    1. Hi Abhay,

      Did you file a T1 resident return for the previous year? If yes, then you will need to file a Departure Return to change your status to a non-resident of Canada for tax purposes.

  6. I currently own 100% of a BC registered corporation. I plan to become a non resident of Canada in 2022. If I give 51% of the company to two other individuals, then I presume I will be liable for departure tax on the 49% of the corporation that I own (funds that the corporation has?) Are there any time restrictions on how close to my departure I can make the change to my corporation?

    1. Hi KD,

      If you give 51% of the shares in the capital stock of your BC corporation to 2 other individuals, then the following will happen. First, the CRA will reassess the transfer price to be equal to the fair market value of the shares. Second, a capital gain will be triggered on the transfer of the shares if the fair market value is more than the cost amount of the shares. One half of the capital gain will be included in your income.

      Departure tax (i.e. deemed disposition rules) will apply to the remaining 49% of the shares you hold upon emigration from Canada. The disposition price is equal to the fair market value of the shares. The FMV of the shares could be computed as a factor multiplied by the EBITA of the business. For example, if the EBITA (earnings before interest, taxes, and amortization) of the business is $100,000 and a factor of 3 is applicable, then the business is worth $300,000 (i.e. $100,000 x 3). Since you own 49% of the company, your shares are worth $147,000 (i.e. $300,000 x 49%). This means that the deemed selling price of your shares is $147,000.

      To avoid departure tax, consider crystallizing the capital gains exemption or entering into an agreement with the CRA to defer the payment of departure tax.

  7. Hi I have lived in Canada before high school and then left since college 2003. I’m a canadian citizen and was using my parents’ home address in BC for tax return purpose for appx. 10 years while I was living in USA and Asia. I stopped filling Canadian tax return in 2015 because I settled down and got married in the US, and I called the Canadian revenue agency and was told that they think I may be a non-resident since long time ago. I basically never had any ties in Canada (no property, no income, no family except parents). If this is the case, do I need to file a departure tax return? As of what date? It seems that I qualified that emigrate/non-resident since 2003.
    Thank you!

    1. Hi Tina,

      It appears that you became a non-resident of Canada when you left Canada in 2003. Since you already filed for the 2013 to 2015 tax years, you should send form NR73 (Determination of Residency Status) to the CRA. Once the CRA processes this form, they will likely determine that you became a non-resident in 2003. After receiving a Determination Letter from the CRA, file a departure return for the 2003 tax year and request the CRA to cancel the 2014 and 2015 tax returns you filed.

  8. Hi, I paid departure tax (DT) on shares held when I left Canada and became a non-resident in 2015. I did not actually sell those shares but assessed the value on the date of departure and paid DT on the assessed capital gains. Fast forward to 2020 and I am selling those shares which have grown in value. Is there a tax implication to having the proceeds deposited into my Canadian bank account ? I am a resident now of Australia where capital gains do not apply to my visa class.

    1. Hi Lola,

      You can deposit the sales proceeds into a Canadian bank account, and you will not pay Capital gains tax to the CRA, because you already paid departure tax when you left.

  9. Hi Allan,

    I have a question around the 60 month rule for deemed dispositions. In the scenario 1 above, where Carlos owns shares in a UK company before becoming a Canadian Tax Resident, and ceases to be a tax resident before 60 months is up, he does not pay departure tax on any FMV uplift.

    I have two questions relating to this 60 month rule:

    1.
    What happens if during the period of Canadian tax residency, he buys more shares in the UK company? When he leaves Canada (<60months), does he pay tax only on the capital gains for the shares he purchased whilst a tax resident?

    2.
    What happens if he buys more shares in the UK company, whilst a tax resident, and then sells just those shares prior to leaving Canada? When calculating his gain on the sale of those shares, is the cost base used only based on the cost of the parcel he purchased whilst in Canada, and then sold? Or does the cost base incorporate the FMV cost base of the shares he brought with him when he became a resident? Also, does the 60month exemption apply to the shares he brought with him to Canada and then took with him when he ceased tax residency?

    Thanks in advance,
    Chris

    1. Hi Chris,

      For question #1, the answer is yes. He will pay capital gains tax (also known as departure tax) on the appreciation in the shares he purchased while he was a tax resident of Canada. For question #2, the cost basis of the shares sold must first be computed. The cost basis is computed using the weighted average cost method. In other words, the cost basis is a blended amount of the FMV of the shares owned in the UK company on the date of arrival to Canada, and the actual purchase amount of the shares acquired while he was a tax resident of Canada. Once the cost basis of the shares is calculated, compare the cost basis to the sales price of the shares sold to arrive at the capital gain. Note: Only 1/2 of the capital gain is included in income.

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