Leaving and moving outside Canada comes with a list of financial to-dos, and the departure tax is near the top. Often referred to as the exit tax, this tax is triggered when you cease to be a resident of Canada for tax purposes and is based on certain assets you own.
Understanding who needs to pay this tax, when it's due, and potential exemptions is crucial for anyone planning to emigrate. It's one of the final steps required to tie up your personal finances before leaving the country.
This guide will walk you through the details of Canada's departure tax, helping you navigate the process smoothly.
Key Takeaways
- Canada’s departure tax kicks in when you move out of the country and applies to the increase in value of certain types of property when you sell them before leaving.
- Departure taxes are due by April 30 of the year following your exit from Canada, even if you didn’t actually sell any assets.
- You can defer the exit tax by providing the CRA with some kind of security, thereby delaying payment until the asset is sold or you return to Canada.
- Some assets, like RRSPs, RRIFs, pensions, and TFSAs, aren’t affected by the departure tax.
- If you're leaving Canada permanently, it's very important to declare non-residency and understand your ongoing tax obligations, including withholding taxes.
What is departure (or exit) tax?
The departure or exit tax is a tax obligation that Canadians face when they move to another country and, therefore, will no longer be residents of Canada for tax purposes.
Upon emigration, the Canada Revenue Agency (CRA) considers you to have disposed of certain types of property, even if you haven't sold them. This "deemed disposition" is based on the value of the items and property on the day you leave Canada.
The purpose is to tax any increase in value that happened while you were living in Canada, before you leave.
I left Canada, do I have to pay exit tax?
If you've left and don't live in Canada anymore, you're generally considered a non-resident for tax purposes. This change in status triggers the exit tax on applicable assets.
Your official residency status depends on several details. Here are a few examples of what the government considers "residential ties":
- Owning a home in Canada
- A spouse who remains in Canada
- Dependents who remain in Canada
- Having personal property (vehicles, furniture, etc.) remaining in Canada
- Having economic ties (bank accounts, credit cards, etc.) in Canada
If you maintain significant residential ties, the CRA may still consider you a resident, and the exit tax won't apply. On the other hand, if you have clearly severed ties, you'll need to comply with the exit tax requirements.
When is the exit tax due?
The exit tax is based on what your assets are worth – their fair market value (FMV) – when you stop being a Canadian resident. If you owe tax, it’s usually due by April 30 of the next year, just like your regular tax return.
For example, if you left Canada in June of 2024, your exit tax would be due by April 30, 2025.
The government assumes that you'll dispose of your assets at FMV when you leave Canada, and then reacquire them for the same value once settled in your new home. This is called deemed disposition, and you're required to report it on your final Canadian tax return.
If you don't report the deemed disposition and pay any taxes you owe, you'll be subject to interest and penalties, just as in any other tax year.
Exemptions from exit tax
Certain properties are exempt from the deemed disposition rules associated with the exit tax. Understanding these exemptions can help in planning your departure and managing potential tax liabilities.
Here are a few exemption examples:
- Cash (including what you have in the bank)
- Canadian real estate
- Registered accounts (RRSPs, TFSAs, etc.)
- Certain pension plans
How to defer the exit tax
If you're facing a significant exit tax bill, you may be able to defer payment. Those who owe more than $16,500 (or more than $13,777.50 for former Quebec residents) may choose to defer their exit tax payment until they sell or dispose of the property they still have in Canada.
To be eligible for referral, you're required to provide the Canada Revenue Agency (CRA) with some type of security to prove that you will indeed make payment at the deferred date or time. Accepted security includes:
- The assets themselves
- A letter of credit from a financial institution
Applying for an exit tax deferral requires completing Form T1244: Election to Defer Payment of Tax on Income Relating to the Deemed Disposition of Property.
Unwinding a deemed disposition
If you return to Canada and re-establish residency, you can "unwind" the deemed disposition. This means that the CRA ignores the original deemed disposition, so your assets go back to their original value for tax purposes.
Of course, this is only an option if you still own some of the property included in the original deemed disposition before you left Canada.
The unwinding process can be complicated, and specific conditions apply. You may want to seek professional guidance to ensure everything is completed properly.
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To declare non-residency, you should inform the CRA of your departure date and new address. This can be done by completing Form NR73: Determination of Residency Status (Leaving Canada).
Additionally, indicate your departure date on your final tax return in the "Information about your residence" section.
If you're unsure of your residency status, filling out Form NR74: Determination of Residency Status (entering Canada) will help the CRA determine this for you.
Notifying Canadian financial institutions and other relevant parties of your change in residency status is also important. This information is needed to ensure any Canadian-sourced income is taxed properly, so you're not faced with penalties.
What is non-resident withholding tax in Canada?
As a non-resident, certain types of Canadian-sourced income you receive may be subject to a non-resident withholding tax. The standard withholding rate is 25%, but it could be less if you've emigrated to a country that has a tax treaty with Canada.
A few common types of income subject to this tax include:
It's essential to understand these withholding tax obligations to avoid unexpected tax liabilities and ensure compliance with Canadian tax laws.
Tax filing requirements when you leave Canada
Even though you're departing, you still have to file a final Canadian tax return for the year you emigrate. This return should include:
- Your spouse or partner's information
- Your date of emigration
- Income earned while still a resident
- Canadian-sourced income earned post-emigration
- Any deemed dispositions related to the departure tax
If you’re eligible for credits or deductions, you may still be able to claim them on this return, but only for the portion of the year you were a resident.
If you owe on your taxes, including any amount related to a deemed disposition, it must be paid by April 30 of the following year.
FAQ
Does Canada have an exit tax?
Yes, Canada charges a departure (or exit) tax when you become a non-resident. It's based on the value of your property before you emigrate, as the government assumes you'll sell or dispose of this property before leaving.
When is the exit tax due?
If you do owe an exit tax, payment is due on April 30 of the year following your departure, just as it would be if you were still a Canadian resident. Missing this deadline will incur penalties and interest.
How does non-resident exit tax work?
When you leave Canada, the government assumes you've sold certain assets at fair market value. This is called a deemed disposition, and the exit tax is based on this value, even if you didn't actually sell anything.
Can I defer the exit tax?
Yes, you can apply to defer your exit tax by offering acceptable security with the CRA (the assets themselves, or a letter from your bank). This lets you delay payment until your assets are sold or you return to Canada.
Are RRSPs and TFSAs subject to exit tax?
Luckily, no, registered accounts like RRSPs, RRIFs, pensions, and TFSAs aren't subject to the deemed disposition rule and don’t trigger departure tax when you leave. Other deemed disposition exemptions include cash and Canadian real estate.
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