Moving abroad? Think about the tax consequences

Thinking of moving to another county? If you’re leaving Canada, there could be expensive tax consequences before you leave and officially become a non-resident. You’ll have to file a final Canadian tax return and/or a host of related forms and will likely need some specialized tax advice. Here’s what you need to know.

Changing your tax residency

Canadian residents must report their “world income” in Canadian funds. When they become non-residents, they must file a final tax return as of the date of emigration to report income for the period of residency in Canada and, in some cases, pay a departure tax.

Tax form filing requirements

To begin, if the fair market value (FMV) of all property owned as of the date of emigration is more than $25,000, you’ll need to fill out and submit form T1161 List of Property of an Emigrant to Canada. This document must be attached to your T1 return. In fact, even if you don’t file a T1, failure to file this form by your tax filing due date will attract penalties.  

To calculate a capital gain or loss on your deemed disposition, complete form T1243, Deemed Disposition of Property by an Emigrant of Canada and attach it to your T1 return. Some exceptions apply in both these cases, discussed below. 

Should you owe money upon departure, but can’t pay because you haven’t sold your property or don’t want to, there is another important form: T1244, Election, under Subsection 220(4.5) of the Income Tax Act, to Defer the Payment of Tax on Income Relating to the Deemed Disposition of Property. Expect to post security in these cases if the capital gain exceeds $100,000.

Exceptions to reporting requirements

You don’t have to report the following assets when you leave Canada:

• Cash (including bank deposits)
• Pension plans, annuities, registered retirement savings plans (RRSPs), pooled registered pension plans, registered retirement income funds 
• Registered education savings plans (RESPs), registered disability savings plans, tax-free savings accounts (TFSAs)
• Deferred profit-sharing plans, employee profit-sharing plans, employee benefit plans, salary deferral arrangements, retirement compensation arrangements, employee life and health trusts, and rights or interests in certain other trusts

Note that in the case of your Canadian pensions, non-residents are subject to a 25% withholding tax on the income paid, which is withheld at source by the pension fund. Non-residents can apply to reduce the withholding tax every five years, using form NR5. There may be tax treaty variations, but this would normally be a final tax owed to Canada with no further tax filing obligations on this income source.  

Note that filing a tax return annually is a prerequisite to receive Old Age Security (OAS) when living abroad. Recipients must meet two other criteria. They must have:

• Been a Canadian citizen or a legal resident of Canada on the day before they left Canada
• Resided in Canada for at least 20 years since the age of 18

If you hold the following taxable properties when you leave Canada, you won’t need to report them before you leave. The future disposition of these “taxable Canadian properties” will require filing when these assets are actually disposed of:

• Canadian real or immovable property, Canadian resource property, and timber resource property 
• Canadian business property (including inventory) if the business is carried on through a permanent establishment in Canada

You can elect to report the FMV of these properties on departure by filing form T2061. This is known as an Election By An Emigrant To Report Deemed Dispositions Of Property And Any Resulting Capital Gain Or Loss.  

That leaves the non-registered financial assets in investment accounts on your balance sheet to consider. They must be reported on the final return at their FMV, so choose your departure date carefully. Remember, you won’t need to file your T1 return until April 30 of the year after you leave.

Even if you don’t have investments or real estate or business assets to report, you may not be off the hook: personal-use property with a fair market value of more than $10,000 must be reported on exit. That includes cars, boats, jewelry, antiques, collections, and family heirlooms if together these items are worth more than $10,000 in value.  

Different rules for immigrants

The rules are different rules for immigrants who now wish to move on. It is not necessary to pay departure tax on property owned when the person last became a resident of Canada (or property inherited afterward) if residency in Canada was 60 months or less during the 10-year period before emigration. This rule doesn’t apply, however, if the person is a trust, and the property is not “taxable Canadian property.” 

Penalties for failure to file forms

You’ll be subject to a penalty if you miss filing a final T1 return. Form T1161—your asset list—attracts its own penalties, too. Whether you file a T1 or not, the T1161 must be filed on or before your filing due date. The penalty for failing to file is $25 for each day it’s late, with a minimum of $100 and a maximum penalty of $2,500. Interest on the balance due and penalties is extra. 

What about provincial taxes?  

Remember, the Canadian tax filing system is based on residency, not citizenship. That means you report all your worldwide income in Canadian funds on your Canadian tax return. Your provincial share is normally based on where you lived on December 31 of the tax year. But this also changes to your date of emigration when you leave the country, for the purpose of determining provincial tax residency.  

Coming back to live in Canada

If you ultimately change your mind about emigrating or a foreign job opportunity runs its course, it is possible to unwind your departure tax when you become a resident of Canada again, as long as you still own the property you previously reported at FMV when you left Canada. The Canada Revenue Agency (CRA) notes that if you make this election for taxable Canadian property previously reported, you can reduce the gain up to the amount of the gain that you reported.

For other properties, reduce the amount of the proceeds of disposition that you reported on your tax return by the least of the amount of the gain reported on your final T1 on departure, the FMV of the property when you returned, or any other amount up to the lesser of those two amounts. At this point your tax situation has become complex, so you’ll probably need professional help to get it right. Dealing with the CRA on these compliance issues can be very time-consuming. 

Know before you go

Emigrating from Canada has lots of complex tax consequences. Working with a qualified cross-border tax specialist is a worthwhile investment, especially if you are a business or property owner. There may be double-taxation scenarios depending on the tax laws in the new country as well. 

As a minimum, be sure to you have up-to-date valuations of all your taxable assets so that, if a move is on the horizon, you have a good idea of the potential tax consequences and can choose an optimal emigration date from a tax perspective.

Read more about tax planning:

• How does rent from a family member or common-law partner get taxed?

• Can I still use my FHSA after my spouse bought a condo?

• What’s my RRSP contribution limit?
• Can you save tax by putting severance into a corporation?

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