Tax Implications of Leaving Canada Permanently

Becoming a non-resident of Canada can offer a range of personal and financial benefits. Each year, an increasing number of Canadians opt for non-residency, particularly in light of the recent 2024 Federal Budget, which introduced tax increases for high-net-worth individuals. This has prompted even more Canadians to explore the possibility of relocating abroad.

Non-residency is a broad and increasingly attractive option, whether it’s for a young family moving to Texas for career advancement or a business owner relocating to the Cayman Islands for tax advantages. With many low-tax jurisdictions available, Canadians have a wealth of options to achieve both personal lifestyle preferences and financial goals.

Since the process of becoming a non-resident can take up to a year, early planning is essential. This article offers a comprehensive guide on the steps to take—from deciding to make the move, to understanding tax implications, completing exit procedures, and managing post-departure considerations to keep your financial life on track.

Disclaimer: The rules surrounding non-residency are complex. To ensure the best outcome, it’s crucial to consult with a tax professional who can provide advice tailored to your specific situation. This article does not cover all potential tax considerations that could apply to you.

Why Do People Choose to Become Non-Residents?

Canadians choose to become non-resident for a variety of reasons. Below are some of the most common triggering events:

• Career Development: Pursuing professional opportunities available only abroad.
• Business Expansion: Growing a business internationally.
• Freelance Work: Expanding a freelance client base overseas.
• Marriage: Moving to join a spouse residing in another country.
• Tax Advantages: Relocating to a jurisdiction with more favourable tax laws.
• Retirement: Moving abroad or splitting time between countries.
• Foreign Investments: Owning property or other assets outside Canada.
• Lifestyle: Relocating for climate, lifestyle, cost-of-living, or political reasons.
• Educational Pursuits: Attending university or specialized programs abroad.
• Health Reasons: Seeking medical treatment or care unavailable in Canada.
• Global Mobility: Embracing flexibility to travel or work remotely across multiple countries.
• Family Reunification: Joining immediate family members living abroad.

No matter the reason for leaving Canada, it’s essential to understand the tax implications of leaving Canada permanently. Whether you’re seeking career development, tax advantages, or a better lifestyle, the decision to become a non-resident carries important financial and legal considerations. Proper planning ensures you can navigate the complexities of non-residency rules, minimize tax liabilities, and make the most of your move abroad.

Canadian Residency Status As It Relates to the Tax Implications Of Leaving Canada Permanently

The rules surrounding Canadian residency and tax obligations are nuanced and can be challenging to navigate. Below is an overview of key residency classifications, which are essential to understanding how non-residency works.

What is Canadian Residency?

It’s important to distinguish between physical residency and tax residency. While physical residency refers to where a person lives and spends most of their time, tax residency determines where an individual is liable to pay taxes.

A person may live in one country but still be considered a tax resident of Canada if they maintain significant ties to the country, such as a permanent home or dependents. For instance, a Canadian spending several months abroad could still be a Canadian tax resident if they maintain substantial ties, like property or family, in Canada.

What Kind of Resident Are You?

Canada recognizes several residency classifications, each with distinct criteria that can affect your tax obligations. The list below outlines the key types of residents for tax purposes, with some variations based on your unique circumstances.

Under Canadian law, you may be classified as a factual resident, non-resident, emigrant, or, in some cases, a deemed resident.

Factual Resident of Canada

You are a factual resident if you maintain at least one primary and/or multiple secondary ties to Canada. Examples include:

• Working temporarily abroad while retaining ties in Canada.
• Commuting regularly between Canada and the United States for work.
• Attending school outside Canada while maintaining residential ties.
• Being a government employee posted abroad, such as a member of the Canadian Forces.

Non-Resident

If you sever your primary ties to Canada and have minimal secondary ties, and if there is no tax treaty with the country you move to, you will be considered a non-resident. This status means you are not subject to Canadian taxes on worldwide income.

Emigrant

An emigrant is someone who leaves Canada, establishes a permanent home in another country, and severs most residential ties with Canada. As an emigrant, you are considered a non-resident for tax purposes.

Deemed Non-Resident

A deemed non-resident still maintains some ties to Canada, but under a tax treaty, they are considered a non-resident for tax purposes. This occurs if:

• You have significant ties in a country with which Canada has a tax treaty, and the treaty’s tiebreaker rules classify you as a resident of that country.
• You were in Canada for fewer than 183 days in a tax year and did not maintain significant residential ties (common for snowbirds and those with homes abroad).

Becoming a non-resident or emigrant typically means you no longer wish to be classified as a factual or deemed resident of Canada. Continue reading to learn how to transition from these categories.

Tax Treaties

Tax treaties play a crucial role in determining your residency status. They prevent double taxation by ensuring you are not taxed on the same income by both Canada and the other country. Canada has numerous tax treaties, though not with every country. Click here to view the full list of Canada’s current tax treaties.

Primary vs. Secondary Residential Ties

The Canadian government uses primary and secondary residential ties to determine your residency status, as outlined in the 1946 Supreme Court case Thompson v. Minister of National Revenue.

• Primary ties are stronger and include your dwelling (owned or rented), the location of your spouse/common-law partner, and the location of your dependents. Having any of these ties in Canada generally makes you a factual resident (unless tax treaty tiebreaker rules apply).
• Secondary ties are broader and include bank accounts, club memberships, driver’s licenses, health cards, pension plans, vehicles, and personal possessions (such as furniture and pets). The more secondary ties you have, the more likely you are to be considered a factual resident of Canada (subject to tax treaty tiebreaker rules).

Tax Implications of Leaving Canada Permanently

Becoming a non-resident of Canada comes with several financial considerations, particularly in terms of departure tax (also known as exit tax). This tax applies to certain assets when you cease to be a resident, and is based on a deemed disposition. Essentially, Canada treats your assets as if you sold them at their fair market value on the date you become a non-resident.

Departure Tax: What It Covers

Not everyone will be subject to departure tax, and it does not automatically apply to all assets. However, certain assets are commonly subject to this tax, including:

• Real estate (including your primary residence in some cases),
• Stocks and bonds,
• Other investments.

If you own a business in Canada, the departure tax may also apply to your business interests, depending on the ownership structure and the nature of the business. Carefully evaluating the tax implications of leaving Canada permanently can help minimize the financial impact of departure taxes and ensure compliance.

Additional Tax Considerations

After you leave Canada, there are other tax issues to consider, particularly if you:

• Rent out your primary residence,
• Receive income from Canadian sources such as pensions, employment, investments, or dividends.

While you may no longer be liable for taxes on your worldwide income, Canada will still tax you on Canadian-source income. This includes income from rental properties, Canadian pensions (although some exemptions may apply), Canadian employment, and certain investments.

Ongoing Tax Responsibilities

Even as a non-resident, you may continue to have Canadian tax obligations. For more details on taxes that apply to non-residents, see Life as a Non-Resident – Ongoing Tax Responsibilities below.

How the Government Assesses Non-Residency

To assess your residency status, the Canadian government typically relies on Form NR73 (Determination of Residency Status) or a self-declaration made through your final T1 tax return. However, we do not recommend completing Form NR73. Based on past experiences, we’ve found that this form often leads to complications. Since the evaluation is handled by a government official, whose judgment and expertise may vary, there is a risk that your non-resident status may not be granted.

Our Recommendation: File Your Final T1

Instead of using Form NR73, we suggest filing a departure tax return (your final T1) to declare your non-residency. On this T1, you will:

• Indicate your departure date,
• Check the “emigrated” box,
• Provide your new address in the foreign country.

This self-declaration effectively notifies the Canada Revenue Agency (CRA) that you have taken the necessary steps to sever ties with Canada, as outlined in the sections above.

The Possibility of an Audit

While audits of non-resident claims are rare, they can be invasive. If your claim is selected for audit, the CRA will likely ask you to provide evidence that you have truly severed your ties with Canada. This may include:

• Proof of your new living arrangements (e.g., utility bills, driver’s license, employment contract in the foreign country),
• Investment statements,
• Separation or divorce papers (if applicable),
• Any other documentation that supports your claim.

We strongly recommend that you prepare these documents in advance, just in case you are audited.

Steps to Becoming a Non-Resident

These steps apply regardless of whether the country you’re moving to has a tax treaty with Canada. However, tax treaties significantly affect your process, so it’s important to understand when and how they apply.

Step 1: Determine if Canada Has a Tax Treaty with the Country You’re Moving To

The country you move to directly affects the tax implications of leaving Canada permanently, as the presence or absence of a tax treaty determines how your ties are evaluated and what steps you must take. If you maintain one or more primary ties or a sufficient number of secondary ties to Canada, you could be considered a factual resident. However, this rule does not apply if you move to a country that has a tax treaty with Canada.

Tax treaties are generally based on the OECD model and follow similar guidelines, though each treaty can have specific provisions. Review the tax treaty between Canada and the country you’re moving to, as it may alter your residency status for tax purposes.

For instance, if you move to the Cayman Islands (a jurisdiction without taxes or a tax treaty with Canada), you will need to sever all primary ties (e.g., your home, spouse, dependents) and most secondary ties with Canada. While keeping a Canadian passport or driver’s license may not be considered strong secondary ties, it’s best to minimize your connections to Canada.

Alternatively, if you move to a country like the United States, which has a tax treaty with Canada, the CRA will apply the tiebreaker rules to determine your residency status. These rules are based on three tests:

1. Where is your permanent home?
2. Where are your economic ties the strongest?
3. Where do you spend the most days?

The tests are applied in a hierarchical order, meaning if there’s a tie on one test, the next test is applied.

Example: Shirley owns an apartment in both New York and Toronto (permanent home), works in New York, but has her spouse in Toronto and personal belongings in both places. She spent 210 days in New York during the year. Based on the tiebreaker rules, she would be considered a deemed resident of the United States and a non-resident of Canada.

Step 2: Set Your Departure Date

Your departure date is critical, as it determines when you stop being a Canadian resident for tax purposes and affects your departure tax calculation. You generally become a non-resident of Canada on the latest of the following dates:

• The date you leave Canada,
• The date your spouse or common-law partner and dependents leave Canada,
• The date you no longer maintain a home/residence in Canada (leased or owned); and
• The date you become a lawful resident of your new country (e.g. when you obtain a work permit, dependent visa, or permanent residency card).

From this departure date onward, you are considered a non-resident, assuming you’ve severed all necessary ties with Canada. Ideally, you should set your departure date as early as possible, but be mindful of practical considerations such as your spouse’s job, children’s schooling, and other personal circumstances.

Step 3: Sever Primary and Secondary Ties

For Countries with a Tax Treaty

If you’re moving to a country with a tax treaty, follow the tiebreaker rules to position yourself as a deemed non-resident of Canada and a deemed resident of your new country. This generally means you should:

• Transfer primary ties (e.g., home, spouse, dependents) to the new country,
• Minimize secondary ties with Canada.

Although it’s possible to keep your primary residence in Canada and still be considered a non-resident (if the tax treaty permits), we recommend selling your property before leaving, especially if you are considering a sale. Canada imposes a withholding tax on the sale of real estate by non-residents, and any appreciation in property value will increase your tax burden.

Another option is to rent out your home to a tenant. By doing so, you effectively sever your primary tie (i.e., your residence) in Canada, as the property is no longer considered your personal residence.

For Countries without a Tax Treaty

Severing your ties with Canada is essential to solidify your non-residency status and minimize the tax implications of leaving Canada permanently, especially for those relocating to countries without a tax treaty. If you’re moving to a country that does not have a tax treaty with Canada, you will need to sever all primary ties. This includes:

• Selling or renting out your Canadian property (or terminating leases),
• Ensuring your spouse and dependents are prepared to move with you. This includes obtaining passports and the necessary means for relocation.

Next, reduce your secondary ties. This includes:

• Cancelling insurance,
• Closing bank accounts,
• Selling vehicles,
• Ending memberships (e.g., clubs, gyms),
• Disposing of personal possessions (e.g., furniture, clothing).

The fewer secondary ties you retain, the stronger your case will be for non-residency.

If You Rent Out Your Principal Residence

In some cases, you may choose not to sell your principal residence before leaving Canada, particularly if market conditions are unfavorable, or if you want to retain access to the property.

When you decide to rent out your property, the Canadian government considers this a deemed sale. To lock in the value of your home at the time it is converted to rental property, get an appraisal as of the rental date. This will set the market value for tax purposes.

To avoid paying capital gains tax on the appreciation of the property, you can file for a principal residence exemption by submitting Form T2091(IND) and Schedule 3 with your departure tax return by April 30th.

Additionally, once you start renting the property, you must withhold 25% tax on the rent you collect. This tax can be recovered by filing Form T1159: Income Tax Return for Electing under Section 216 by June 30th of the following year.  For more information on this topic read our guide about non-resident tax on rental property.

Step 4: Obtain Lawful Residency in the Foreign Country

The next critical step is securing lawful residency in your new country of residence. It’s important to understand that entering a country on a tourist visa and later applying for residency typically does not qualify for non-resident status in Canada. You must be legally recognized as a resident by the country you are moving to.

Types of lawful residency include:

• Temporary Residency: Allows individuals to stay in the country for a limited period for purposes such as work, study, or specific projects. Ideally, this residency should be renewable, with the option for indefinite renewals.
• Permanent Residency: Grants the right to live indefinitely in the country. Permanent residents often enjoy rights similar to citizens, though there may be restrictions, such as limitations on voting, holding public office, or applying for certain jobs.
• Work Residency: Issued for employment purposes. These visas are usually tied to a specific job or employer and can be temporary or part of a pathway to permanent residency.
• Family Residency: Granted to family members of citizens or permanent residents, such as spouses, children, or sometimes parents, allowing them to reside lawfully in the country.
• Investor or Business Residency: Available to individuals who make significant investments or start businesses in the country. These permits often come with specific conditions, such as minimum investment amounts or business activity requirements.
• Humanitarian Residency: For refugees, asylum seekers, or individuals requiring protection for humanitarian reasons. These residency permits may be temporary or permanent, depending on circumstances and the country’s policies.
• Special Residency Programs: Some countries offer residency to specific groups, such as retirees, remote workers, or those with specialized skills.
• Residency by Descent or Heritage: Some countries offer residency based on ancestry, even if the individual or their immediate family has never lived there.

Once you have obtained lawful residency, the next step is to set up accommodation. This could involve purchasing a home or apartment, staying with family or friends, or renting a property in your new country.

Step 5: Close Out Financial Ties

Next, you’ll need to address your financial ties to Canada. Start with any government-related financial obligations, such as:

• Home Buyers’ Plan (HBP) or Lifelong Learning Plan (LLP),
• Outstanding tax payments (both personal and corporate).

If you are moving to a country with a tax treaty, inform your bank(s) of your departure by submitting Form NR301: Declaration of Eligibility for Benefits (Reduced Tax) under a Tax Treaty for a Non-Resident Person. This form notifies your bank to withhold the correct non-resident tax.

For investments like TFSA and RRSP accounts, you’ll want to stop making contributions once you leave Canada. While you can still hold these accounts after becoming a non-resident, there are penalties for contributing to your TFSA after departure — a 1% per month penalty for any contributions made. (This does not apply to RRSP contributions.) For more details on pensions, refer to the section Life as a Non-Resident – Ongoing Tax Obligations below.

Step 6: Appraise and Disclose Assets

Step six – appraising and disclosing your assets – is a critical step in preparing for the tax implications of leaving Canada permanently, as it determines the taxable gains and liabilities you may face upon departure. This includes:

• Real estate (homes, land, etc.),
• Marketable securities (stocks, bonds, etc.),
• Any assets held personally or through your business.

Once you’ve had these assets appraised at their market value, you must disclose them by filing Form T1161: List of Properties by an Emigrant of Canada. This form is required as part of your departure tax return, which details the assets you are leaving behind and establishes their fair market value upon departure.

Step 7: Calculate and File Departure Tax

The second to last step in the process is calculating your departure tax and setting aside funds to cover it. Departure tax is most commonly applicable to assets such as:

• Shares in private corporations,
• Marketable securities held in non-registered accounts,
• Foreign real estate,
• Canadian real estate held through Canadian corporations.

Departure tax is essentially a capital gains tax based on the fair market value (FMV) of your assets at the time you cease to be a resident. If you have significant appreciation in your assets, you may face a large tax bill.

Example:

Let’s say you invested $50,000 in Apple stock in 2009, and by 2024 (the year you emigrate from Canada), the stock has appreciated to $200,000. If you decide to keep the stock after leaving Canada, you’ll pay departure tax on the $150,000 capital gain (the difference between the current FMV and the original cost). For more details on calculating capital gains tax, refer to the latest 2024 Federal Budget changes.

To offset some of the taxes, consider maximizing contributions to your RRSP before your departure.

Assets Not Subject to Departure Tax:

Certain assets are not subject to departure tax, including:

• Canadian real estate owned by an individual,
• Cash,
• Money in your RRSP, TFSA, RESP, RPP, and RIF.

Additionally, if you sell assets before you leave Canada, the departure tax does not apply, as the capital gains tax would be settled at the time of the sale. Minimizing your departure tax burden can significantly reduce the tax implications of leaving Canada permanently, particularly if you liquidate assets strategically or defer taxes through an agreement.

Ways to Minimize Your Departure Tax Burden

• Private Corporations: If you own a private corporation, consider paying a final dividend to yourself before leaving. This is essentially a liquidation of the company’s net assets, which reduces the value of the company and thus minimizes potential departure tax liabilities.
• Non-Registered Accounts: If you hold investments in non-registered accounts (e.g., stocks, bonds, online trading platforms, or crypto exchanges), it’s advisable to close or liquidate these accounts before leaving. Non-registered accounts are taxed on unrealized gains (i.e., gains on assets you still hold when you leave), which means you’ll owe tax on any increase in value from the time of departure.
• Foreign Real Estate: Hire an appraiser to determine the lowest possible market value for any foreign property you own. This appraised value will be used to calculate the departure tax, and it’s crucial to ensure this is done accurately.
• Canadian Real Estate Held Through a Corporation: If you own real estate through a Canadian corporation, consider purchasing the property personally from the corporation before you leave. This allows you to “realize” the capital gain at that point, setting the cost basis at the appraised value. By doing so, you avoid future complications with departure tax when selling the property as a non-resident.

What If You Can’t Pay the Departure Tax Immediately?

If you’re unable to pay your departure tax when it’s due, you can enter into a Departure Tax Deferral Agreement with the CRA. This agreement allows you to defer the tax payment until you actually sell your assets. Keep in mind that obtaining approval for this deferral can take up to a year, so it’s important to start the process early.

To secure this agreement, you’ll need to provide adequate security to the CRA. This can include a letter of credit from your bank, shares of a corporation, or a real estate asset.

File the Departure Tax Return

Before filing your departure tax return, update your mailing address with the CRA to reflect your new address in the foreign country using the MyAccount online service. Your departure tax return is essentially your final T1 tax package. This return needs to be filed by the regular due date (April 30th), unless you have special circumstances.

In addition to your regular T1 form, you may need to file the following forms:

• T1161: To report the fair market value of your assets at the time of departure.
• T1243: To report departure tax.
• T1244: To defer your departure tax (optional).
• T1135: To report foreign assets (if applicable).

For a full list of T1 tax package forms, see the CRA’s website.

Life as a Non-Resident – Ongoing Tax Obligations

Even after you are considered a non-resident of Canada for tax purposes, you may still have ongoing tax obligations, depending on your specific income sources and economic situation. For example, individuals who receive a Canadian pension, Canada Pension Plan (CPP), Old Age Security (OAS), or rental income from Canadian properties will continue to be subject to tax on that income.

Non-Resident Withholding Taxes

As a non-resident of Canada, several types of income are still subject to withholding taxes. Withholding taxes are amounts deducted at the source before the income is paid to you. These taxes apply to income earned from Canadian sources, such as pensions, rental income, dividends, and investment income. The payers—such as pension administrators, CPP/OAS, banks, or corporations—are responsible for deducting the appropriate percentage of tax from your income.

The default withholding tax rate is generally 25%, but it can vary depending on the type of income and any applicable tax treaties between Canada and your country of residence. Below is a breakdown of the withholding tax rates for various income sources:

For most types of income, you may be able to reduce the withholding tax rate at source by applying the relevant tax treaty. For example, pensioners may be able to reduce withholding tax on their pension income from 25% to approximately 15% if a tax treaty applies. To do this, you will need to file Form NR-5 before leaving Canada.

Additionally, pensioners, CPP, and OAS recipients can file under Section 217 to claim a refund on overpaid withholding tax. This form is optional, and it is filed annually after you become a non-resident.

If you receive rental income, you may also need to file a Section 216 Return—a non-resident tax return—to report Canadian income from the sources listed above.

Tax on Employment Income as a Non-Resident

Any income you earn from employment in Canada while you are a non-resident will be subject to Canadian income tax at the federal and provincial rate of the province where your employer is located. Therefore, you will continue to pay taxes in the province where you earn employment income, even if you no longer reside in Canada.

Maintaining Non-Resident Status

To maintain your non-resident status, the two main factors to consider are:

1. The number of days you spend in Canada:
   As a non-resident, if you spend more than 183 days in Canada during the tax year, you may be considered a deemed resident for tax purposes.
2. Your primary and secondary ties to Canada:
   If you re-establish primary ties (e.g., buying a home, getting married to a Canadian, or having dependent children living in Canada) or retain significant secondary ties (e.g., maintaining Canadian bank accounts, memberships, or personal property), you could lose your non-resident status and become a factual resident again.

By understanding these ongoing tax obligations and the rules around maintaining non-resident status, you can better manage your tax situation after leaving Canada.

Becoming a Resident Again – Re-Establishing Canadian Residency

Many Canadians who become non-residents may later decide to return to Canada and re-establish their residency for tax purposes. This could be due to family commitments, lifestyle changes, or because their move abroad was always intended to be temporary. Understanding the steps and tax implications of re-establishing residency is key to a smooth transition.

Re-Establishing Residential Ties

To regain Canadian residency, you must rebuild significant residential ties. This can include returning to Canada with the intent to stay long-term, purchasing or renting a home, reuniting with family, and re-establishing Canadian bank accounts, a provincial driver’s license, and health care coverage.

Tax Implications of Returning to Canada

Once you re-establish residency, Canadian tax obligations apply from your return date. You will need to report all Canadian-source and worldwide income for the remainder of the tax year. Canadian residents are taxed on global income, so any foreign earnings will be subject to Canadian taxation.

Upon return, you must disclose all foreign income on your Canadian tax return, including earnings from employment, investments, property, and other assets. Be aware of foreign tax credits and deductions that may reduce double taxation. Consulting a tax professional in advance can help you avoid unexpected tax liabilities and take advantage of applicable international tax treaties.

The Snowbird Dilemma

The snowbird dilemma applies to Canadians who wish to spend part of the year in another country but do not want to lose their Canadian residency. This is particularly common for those who “fly south” to the U.S. for up to six months annually.

U.S. residency rules include the Substantial Presence Test, which determines whether Canadians spending extended periods in the U.S. will be considered a “resident alien” for tax purposes. If you meet the test, you must file a U.S. tax return with the IRS. The test is based on the following calculation:

Substantial Presence = Days in the current year + ⅓ of days in the previous year + ⅙ of days in the year before that (over three years).

For example, if Shyma spent 150 days in New York in 2024, 100 days in Florida in 2023, and 50 days in California in 2022, her calculation would be:

Substantial Presence = 150 + 33 + 8.3 = 191.3 days.

Since Shyma exceeds 183 days, she would be required to file a US 1040 tax return with the IRS as a resident alien of the US. The IRS can verify the number of days you spent in the U.S. by checking with Customs and Border Protection if you are audited.

However, Shyma could maintain non-resident status by filing IRS Form 8840 under the Closer Connection Exception, which would exempt her from the Substantial Presence Test.

In addition to this, it’s crucial that Shyma files the FBAR (Foreign Bank and Financial Accounts) form with the IRS because she meets the US substantial presence test.  Failure to report any foreign bank account holding $10,000 or more can result in a $10,000 penalty per account.

For snowbirds with Canadian businesses operating in the U.S., additional reporting is required using IRS Form 5471. Failure to file can result in a $10,000 penalty.

To avoid these IRS obligations, Canadian snowbirds should limit their time in the U.S. to less than 122 days per calendar year, keeping their total under 183 days over three years.

Conclusion

Many Canadians choose to become non-residents for tax purposes to take advantage of lifestyle choices or tax benefits offered abroad. However, understanding the tax implications of leaving Canada permanently requires careful planning to ensure compliance with Canada Revenue Agency rules. For personalized advice, always consult with a tax professional to ensure your unique situation is properly managed and in line with tax regulations both in Canada and abroad.