What is the Canada Exit Tax and How Does It Work?

When a person ceases to be a resident of Canada for tax purposes, they become subject to a “departure tax.” This is the income tax that results from a “deemed disposition” of certain assets. The Canada Revenue Agency (CRA) treats the individual as if they have sold specific properties at their fair market value on their date of departure, ensuring Canada can tax the appreciation in value that occurred while the owner was a Canadian resident.

This process involves calculating these gains, reporting them on a final tax return, and settling the tax obligation.

Determining Your Emigration Date for Tax Purposes

An individual’s residency status for tax purposes is a factual matter determined by their residential ties to Canada. The Canada Revenue Agency (CRA) evaluates these ties to establish when they have become a non-resident. The date these ties are severed is the emigration date, which is the effective date for valuing assets under the deemed disposition rule.

Primary residential ties are the most important factors in this determination. These include having a home in Canada, a spouse or common-law partner in Canada, or dependents who remain in the country. If an individual maintains any of these ties, the CRA will consider them a Canadian resident, and severing all of them is a strong indicator of ceasing residency.

The CRA also considers secondary residential ties, which contribute to the overall picture of a person’s connection to Canada. These include:

• Personal property in Canada, such as furniture or a vehicle
• Social ties, like memberships in Canadian clubs or religious organizations
• Active Canadian bank accounts or credit cards
• A Canadian driver’s license

There is no single rule that defines non-residency. The CRA looks at all the facts of a case, weighing the ties that have been severed against those that are maintained. The date that the last of the major ties is cut is considered the official date of emigration for tax purposes.

The Deemed Disposition Rule

The deemed disposition rule stipulates that on your emigration date, you are considered to have sold certain property at its fair market value (FMV), creating a taxable event without an actual sale. An exception applies to individuals who have resided in Canada for less than 60 months, as they are only subject to the departure tax on assets acquired during their residency.

A wide range of assets are subject to this deemed sale, including shares in public companies, units in mutual funds, partnership interests, and real estate located outside of Canada. Personal-use property, such as art or jewelry, is also included if its value has appreciated. Any increase in value from the acquisition date to the emigration date can result in a taxable capital gain.

Several types of property are excluded from the deemed disposition rule. Canadian real estate is not subject to the departure tax. If you sell the property after becoming a non-resident, the buyer must withhold a percentage of the gross sale price and remit it to the CRA. If you earn rental income from a Canadian property after leaving, your agent must withhold 25% of the gross rental income, though you can elect to be taxed on the net rental income instead.

Assets held within registered accounts like a Registered Retirement Savings Plan (RRSP), a Registered Retirement Income Fund (RRIF), or a Tax-Free Savings Account (TFSA) are also exempt. As a non-resident, however, most other types of Canadian-sourced income, such as dividends and interest, are subject to a 25% withholding tax, which may be reduced by a tax treaty.

Calculating Your Departure Tax

The departure tax calculation begins by determining the capital gain on each property subject to the deemed disposition. This is done by subtracting the Adjusted Cost Base (ACB) of the property from its Fair Market Value (FMV) on the emigration date. The ACB is the original purchase price plus any associated costs, like commissions or legal fees, and any capital improvements.

Once the capital gain for each asset is calculated, the amounts are added to find the total capital gain. A portion of this gain is included in your taxable income, determined by the capital gains inclusion rate. For capital gains incurred on or after June 25, 2024, the inclusion rate is 66.67% for the portion of gains exceeding $250,000 annually. The initial $250,000 in gains remains subject to the 50% inclusion rate.

For example, consider a stock portfolio with an ACB of $300,000 and an FMV of $400,000 on the emigration date. The capital gain is $100,000. Applying the 50% inclusion rate, the taxable capital gain is $50,000. This amount is added to the individual’s other income for the year and taxed at their marginal tax rates.

Filing Requirements and Payment Options

When ceasing to be a Canadian resident, you must file a final T1 General income tax return for the year of departure, reporting worldwide income earned up to your emigration date. You must also file Form T1243, Deemed Disposition of Property by an Emigrant of Canada, to report the capital gains or losses from the departure tax.

If the total fair market value of all property you owned upon leaving Canada exceeds $25,000, you must also file Form T1161, List of Properties Owned by an Emigrant of Canada. This form requires you to list all properties owned at departure, including those not subject to the deemed disposition. Failure to file this form on time can result in significant penalties, and all forms are due by April 30 of the year following departure.

The departure tax is due at the same time as your final tax return. However, an individual can elect to defer the payment by filing Form T1244, which allows you to postpone paying the tax until the asset is actually sold.

Making this election requires providing security to the CRA for the amount of tax being deferred if the federal tax owing exceeds $16,500. The CRA prefers a letter of credit from a Canadian financial institution. Providing adequate security allows you to defer the payment without incurring interest on the outstanding tax liability.