Leaving Canada to settle permanently in another country has significant tax implications. Here is a detailed overview of the steps to take when leaving Canada, especially for Quebec residents.
Determining Tax Residency
The Canada Revenue Agency (CRA) distinguishes three tax residency statuses:
- Canadian Resident: You are considered a resident if you have significant residential ties in Canada, such as a home, spouse, or children.
- Deemed Resident: If you leave Canada, you may still be considered a deemed resident for tax purposes if you maintain secondary ties to Canada (bank account, driver’s license, etc.).
- Non-Resident: You become a non-resident if you sever most of your residential ties with Canada and establish your domicile in another country.
What are the Tax Implications of Leaving Canada?
When you decide to leave Canada for more than a year, you must meet the following tax obligations:
- Complete Form T1161: You must declare the properties you own at the time of leaving Canada by completing Form T1161, “List of Properties by an Emigrant of Canada“.
- File a Final Tax Return: You must submit a final income tax return for the period from January 1 to the date of your departure.
Departure Tax: Deemed Disposition of Assets
When leaving, you are deemed to have disposed of certain properties at their fair market value, which may result in taxable capital gains. These properties can include shares, real estate, company shares, etc.
However, there are exceptions, including the sale of your principal residence, Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), etc.
Calculating Capital Gains and Tax Deferral
To calculate your capital gains, you must complete Form T1243, “Deemed Disposition of Property by an Emigrant of Canada“. You can choose to defer the tax on certain capital gains by providing acceptable security to the Canada Revenue Agency (CRA).
Tax Implications for Quebec
When leaving Quebec, you must also file a provincial tax return for the period from January 1 to your departure. Deemed disposition rules also apply provincially, and you may need to pay capital gains tax in Quebec.
Assets and Income After Departure
Canadian-source income you receive after your departure (such as pensions, rental income, or dividends) may be subject to non-resident withholding tax. You can request a reduction in withholding tax by completing Form NR5, “Application for a Reduction in Tax Withholding“.
Certain assets and investments may also be subject to taxation in Quebec and Canada:
- Real Estate: If you retain real estate in Canada, you must report any rental income and may be subject to capital gains tax if you sell these properties.
- Investments: Income from investments (dividends, interest) will also be subject to non-resident withholding tax.
Tax Treaties: Avoiding Double Taxation
Canada has tax treaties with many countries to avoid double taxation. Check if such a treaty exists with your new country of residence and the specific provisions that apply.
You can claim a foreign tax credit for taxes paid in your new country of residence on Canadian-source income.
How to Plan Your Departure?
First, it is strongly recommended to consult a tax advisor before leaving Canada to fully understand the tax implications and effectively plan your departure.
Next, consider reevaluating your asset holdings to minimize tax impacts. For example, you might consider selling certain assets before leaving to avoid deemed disposition.
Finally, ensure you retain copies of all forms and documents related to your departure, as well as proof of your new residence to justify your non-resident status.
Get Advice from Our Certified Tax Experts Before Leaving Canada
As you can see, leaving Canada permanently or temporarily has complex tax implications at both federal and Quebec levels. It is crucial to understand the requirements and plan accordingly to minimize tax impacts and ensure a smooth transition to your new country of residence.
Contact one of our tax accountants to discuss your situation and prepare for your departure from the country!
