Departure tax in Canada and its impact on your investments

What’s departure tax? When a Canadian resident has to pay tax on capital gains on their non-registered assets when leaving Canada permanently to live abroad.

And other issues to be aware of when you leave Canada

Moving away? Here’s what you need to know about your assets, Canada departure tax, other tax issues and residency status.

It’s the opportunity of a lifetime: a chance to live and work somewhere exotic for a few years, or maybe even forever. The family is all packed and ready to go, practising their hellos and thank yous in a new language. Your visas are all in order, but what about your Canadian paperwork?

Will you have to keep filing taxes here? What about your investments, including those in registered accounts, such as your Registered Retirement Savings Plan? What happens to your RRSPs on leaving Canada? Will you have to pay Canada departure tax?

Blaise Foulston, IG’s Director of Tax and Estate Planning, explains what Canadians need to know?— and do?— before they head abroad for a new job and become expats.

If I’m leaving canada permanently, I no longer have to worry about being taxed in canada, right?

Wrong. If you are a resident of Canada for income tax purposes, you’re required to file a Canadian tax return and report your worldwide income on your personal Canadian return. If the Canada Revenue Agency (CRA) decides that you are a non-resident of Canada, you don’t need to file a tax return if your only Canadian-sourced income is investment income, but you will have to pay a withholding tax on it.

Depending on your residency status and any applicable tax treaties, you could be taxed in Canada and have the same income taxed again in your new country. Plan ahead: talk to a cross-border tax specialist so you know exactly what your residency status is and which foreign tax credits are available.

How would I be considered a non-resident of canada for tax purposes?

Generally, the CRA will consider you a non-resident of Canada for income tax purposes if you leave Canada to live in another country and sever your residential ties with Canada. You would have to sell your home in Canada and take up permanent residence in another country, your spouse, common-law partner and dependents would have to leave Canada and you would have to break your social ties, such as professional and community memberships.

If you leave Canada but keep a primary and/or secondary residence here, hold onto personal property, such as a car, maintain a Canadian driver’s licence, passport and health insurance and Canadian bank accounts or credit cards, you may be considered a factual resident of Canada for tax purposes.

Consult with your professional tax advisor for further guidance.

What happens to my RRSPs and other investments when I leave canada permanently?

When you leave Canada and sever your residential ties to Canada, you must file a final departure tax return. Let’s say you will be leaving Canada permanently on November 1. On that day, you will cease to be a resident of Canada and will be deemed to have disposed of all your non-registered investment assets at their fair market value. This is known as a deemed disposition, and you will have to report the capital gains or losses that result from it.

RRSPs, tax free savings accounts (TFSAs), registered education savings plans (RESPs) and your principal residence are not subject to this deemed disposition but be aware of the tax consequences in your new country. For example, if you move from Canada to the United States, your TFSA will become taxable by the IRS.

After leaving Canada, you are still subject to tax in Canada on any Canadian-sourced income such as Canadian employment income, income from carrying on a business in Canada or from the sale of any taxable Canadian property. Withholding tax generally applies on your Canadian-sourced pensions and investment income.

What is departure tax?

When you leave Canada, the CRA treats certain types of property (such as shares) as if you had sold them at fair market value and reacquired them at the same price. This is called a deemed disposition, and you may have to report that property on your final tax return on leaving the country, if there has been a capital gain (and if it is in an unregistered account). This is also known as departure tax.

Can I maintain my canadian tax residency while working abroad?

Yes, if you spend more than 183 days in Canada in a given calendar year, or if you have sufficient Canadian residential ties such as a home, a spouse or common-law partner or dependents in Canada.

Can I get canadian pensions and health coverage as an expat?

The Canada Pension Plan or Quebec Pension Plan retirement benefits you have generated through contributions will be paid to you even if you no longer live in Canada or pay taxes here. Other government benefits, such as the Guaranteed Income Supplement, Spousal Allowance, Employment Insurance and the Child Tax Benefit, are subject to cancellation, depending on the amount of time you are out of the country.

Your health care coverage is determined by your home province. For example, in Ontario you must reside in the province for 153 days each year to maintain coverage. However, you can reacquire coverage when you return to your home province but there is usually a waiting?period.

Depending on your residence status and tax treaties, you could be taxed in Canada and have the same income taxed again in your new country. It pays to plan ahead.