Goodbye, Canada: A guide to departure tax, withholding tax for non-residents

Exemptions from the departure tax

Some assets, like pensions and assets held in registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs), are exempt from an exit tax. They can remain tax-deferred or tax-free, as the case may be. RRSPs and pensions may also be considered tax-deferred or even tax-free in a foreign country. TFSAs are most likely to be taxable in a foreign country that does not recognize this uniquely Canadian account.

At the time of departure, deferred capital gains are triggered on taxable capital assets like those held in non-registered accounts, as if the investments were sold.

Private company shares may also be subject to a deemed disposition, unless the shares are of a business that is carried on through a permanent establishment in Canada. Consulting businesses and holding companies would generally not be considered to maintain a permanent establishment in Canada. The lifetime capital gains exemption may be available for qualified small-business corporation shares or qualified farm or fishing properties.

Real estate is exempt from the departure tax; the capital gains tax is payable on a subsequent sale, if applicable. Also, the principal residence exemption will no longer apply the year after leaving Canada.

Short-term residents

There is an exemption from the deemed disposition rules and resulting capital gains tax for short-term residents. A taxpayer (other than a trust) who was a resident for less than 60 months during the 10-year period before leaving Canada can exclude property owned when they last became a resident. Property inherited after becoming a resident can also be excluded for these short-term residents.

Deferring departure tax

You can defer the payment of the departure tax payable upon becoming a non-resident. No interest applies to the deferred tax, either. Tax can then be paid upon the subsequent sale of the asset in the future.

If the federal tax owing is more than $16,500, you need to provide the Canada Revenue Agency (CRA) with adequate security for the deferred tax. This requirement applies to residents of Quebec at the lower threshold of $13,777.50 of federal tax. Examples of acceptable security include the assets themselves or a financial institution letter of credit. The CRA will generally review the security annually to approve the continued tax deferral.

Unwinding a deemed disposition

If you leave Canada and subsequently return in the future, you can elect to unwind the past deemed disposition when you re-establish Canadian tax residency. This results in the deferred tax being cancelled. However, deferred tax would still be payable in the future upon sale, based on the original cost base of the assets.