Canadians moving abroad have the option to either continue maintaining their residential ties to Canada or sever them (or most of them) completely. By continuing ties, the obligation to pay Canadian taxes will continue. Similarly, if a Canadian plans to not pay taxes on income earned outside of Canada, they must sever ties with Canada so that they’re no longer considered a Canadian “resident” for taxation purposes.
When Cutting Ties
If a Canadian chooses to sever ties, steps must be taken during the year of departure to ensure that all filing requirements are met.
As an emigrant, the first step is to list all capital properties owned on the date of departure. The form “List of Properties by an Emigrant of Canada”, or Form T1161, is used to report this information to the CRA. Cash, RRSP, and personal use items with a value less than $10,000 are not required to be on this list. As well, total assets worth $25,000 or less do not require a Form T1161 to be filed.
The Deemed Disposition Rule
In general, a deemed disposition rule exists whereby on the date of the departure, the taxpayer is deemed to have disposed of and reacquired all capital property at fair market value. This rule effectively triggers capital gains (or losses) on all capital property and, therefore, a possible tax liability. This rule applies to all capital property except for Canadian real estate, Canadian business property, RRSPs, as well as a few other exclusions. The bottom line is that the common capital property such as stocks and mutual funds in an emigrant’s trading account are subject to the deemed disposition rule. The relevant CRA form to complete is called “Deemed Disposition of Property by and Emigrant of Canada”, or Form T1243. Assets exempted from this deeming rule can be elected to be included to trigger gains or losses.
Tax Deferral Option
CRA recognizes that forcing a taxpayer to pay taxes on an asset that has not been actually sold (as the case with the deemed disposition rule) to a third party can be a financial burden, which is why they have created the “Defer the Payment of Tax on Income Relating to the Deemed Disposition of Property” form, or Form T1244. As the form name indicates, tax deferral is an option. If the total capital gains, as per the deemed disposition rule, are less than $100,000, security is not required for this deferred tax liability.
The Form T1161 is due the date the tax return for the departure year is due. Failure to file this form on time will mean significant penalties for the taxpayer. The Form T1243 and Form T1244 (if applicable) are to be attached to the tax return.
Notification of your Departure from Canada
In addition to the compliance filings discussed above, the CRA and any financial institutions where assets are held should be notified of the taxpayer’s departure from Canada. The usual tax slips issued by financial institutions would be changed to reflect the changed status. A good example would be a large amount of cash left in a Canadian bank account. Even though interest earned is generally tax exempt for non-residents under current tax treaties, the bank needs to know the holder of these funds is a non-resident.
Failure to take these steps can result in CRA mistakenly assessing notional Canadian taxes based on information it continues to receive from Canadian financial institutions for the taxpayer. When this happens, the non-resident will need to retain professional assistance to reverse these assessments.
Related Tax Consulting Posts
- Moving Abroad & Cutting Ties to Canada for Lower Taxes (Part 1)
- 6 Tax Factors for Non Residents with Canadian Rental Income
- Real Estate Gains & Canadian Income Tax, A Brief Analysis
- Big Tax Deductions vs Deductions that Are More Fuss than Their Worth
- Canadians & the US Foreign Account Tax Compliance Act (FATCA)
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