When a Canadian resident departs from Canada with the intent to live abroad, they may face specific tax implications, especially if they intend to sever their Canadian residency for tax purposes. Here’s a breakdown of the primary tax considerations:
1. Residency Status Determination
The Canadian Revenue Agency (CRA) uses various criteria to determine if a person remains a resident for tax purposes. Departing Canadians can be classified as one of three types:
Resident: You’re taxed on worldwide income as if you never left.
Non-Resident: You’re taxed only on Canadian-source income.
Deemed Resident: This applies to certain individuals, like government employees or individuals who maintain strong residential ties to Canada.
Residency status depends on the strength of residential ties (like having a home, spouse, or dependents in Canada), secondary ties (bank accounts, memberships), and the length of time spent in Canada. If you maintain strong ties, you may still be considered a resident and therefore be subject to Canadian taxes on global income.
2. Departure Tax (Deemed Disposition)
When severing Canadian tax residency, you’re generally considered to have disposed of your assets at their fair market value, a process known as deemed disposition. This “departure tax” triggers capital gains tax on any increase in value of your assets, even if you haven’t actually sold them. Assets affected include:
Investment accounts (stocks, bonds, mutual funds)
Real estate properties outside of Canada
Shares in private corporations
Interests in trusts and partnerships
Exceptions: Certain assets, like Canadian real estate, registered accounts (RRSPs, TFSAs), and certain pension plans, are exempt from the deemed disposition rule.
Payment Options: If this tax creates a financial burden, you may defer it by posting security with the CRA. T he CRA will send you an notice annually to ensure the sitation remains same.
3. Ongoing Canadian Income
After departing, any income earned from Canadian sources, such as rental income, dividends, and certain pensions, may still be subject to Canadian tax, generally as withholding tax at rates between 15-25% under Canadian law or treaty rates if there’s a tax treaty between Canada and your new country of residence.
Canadian Pension Plan (CPP) and Old Age Security (OAS): These are often still taxable in Canada. OAS payments may also be subject to the OAS Clawback if income exceeds a certain threshold.
RRSP Withdrawals: Withdrawals from RRSPs are taxed at a withholding tax rate, depending on your residency country.
4. Filing a Final Tax Return and the NR73 Form
The year you depart, you’ll need to file a final Canadian tax return and indicate your departure date. This return should cover:
Reporting any worldwide income earned up until your departure date.
Declaring any departure tax (deemed disposition).
You may also complete Form NR73 (Determination of Residency Status) if you want the CRA to confirm your non-resident status. This is optional but can be helpful for clarity.
5. Foreign Tax Credits and Double Taxation
If you establish residency in a country that has a tax treaty with Canada, the treaty can help avoid double taxation. Canada has treaties with over 90 countries, allowing taxpayers to use foreign tax credits and other provisions to reduce tax obligations in both countries.
6. Investment Accounts and Canadian Retirement Savings
RRSPs and TFSAs: These accounts can remain open, though future contributions to RRSPs may not be tax-deductible. You also won’t accumulate additional TFSA contribution room while non-resident.
RESPs and RDSPs: These can stay open, but grants or bonds from the government may be affected by your departure.
7. Returning to Canada
If you plan to return, it’s essential to track your ties to Canada and understand the tax implications of reestablishing residency. Upon returning, you’ll resume being taxed on your global income and may have to declare any new assets acquired while abroad.
Here are practical Steps to take before departing
Inform CRA of your departure date and sever residential ties if needed.
Settle any outstanding tax balances or consider applying for deferred payment of departure tax.
Notify Canadian financial institutions of your non-residency status, as withholding tax rates on Canadian investments change for non-residents.
Keep records of your exit and any supporting documents for residency status determination.
Severing Canadian residency has significant tax implications, so consulting with a Canadian tax professional can ensure you meet all requirements and avoid unexpected tax liabilities. Let me know if you’d like further details on any of these aspects!
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