July 6, 2020

The Canadian Departure Tax

At Catalyst, we have an entire team of accountants and trusted advisors that specialize in U.S. Tax and Cross Border Tax in Calgary and Alberta. Read below for more information […]

At Catalyst, we have an entire team of accountants and trusted advisors that specialize in U.S. Tax and Cross Border Tax in Calgary and Alberta. Read below for more information on the Canadian Departure Tax.

By: Jeff Fortin CA, CPA (IL) -Tax Partner & James Luo CPA, CA, CPA (MA) – Senior Tax Manager

Many “mobile” Canadians are choosing to relocate themselves and, in some cases, their business outside Canada. Some possible reasons for this are: marginal Canadian income tax rates at close to 50% or more throughout Canada, sales tax rates of between 11% and 15% in all provinces except Alberta where the rate remains at 5%, a carbon tax throughout the country, and high property taxes virtually everywhere.

The disparity between the tax burden in Canada and the United States, for example, is nothing short of stunning.  Also, in the UK for non-domiciled residents, the UK offers a “remittance basis” of taxation meaning that only income brought “onshore” is subject to UK income tax, subject to minimum amounts that are deemed brought onshore.

However, leaving Canada to escape the highly punitive levels of taxation we have in this country comes at a cost: the Canadian “Departure Tax.”

The Canadian Departure Tax is a levy on accrued capital gains on certain types of assets when a person emigrates from Canada. The departing resident is deemed to have disposed of most of their capital assets at their fair market value “(FMV”) on the day before departure and to have reacquired such assets back at the same FMV. The net capital gain is computed by subtracting the individual’s adjusted cost base of each asset from the deemed proceeds of disposition.  Capital losses deemed to arise in this manner will offset capital gains.

There are a few things that are generally exempt from the application of Departure Tax: Canadian real property, Canadian resource property, capital property and inventory used in a business in Canada, shares obtained by an employee under a Canadian controlled private corporation (“CCPC”) stock option plan, deferred retirement plans such as RRSPs, and employment stock options.

There is an election available to defer payment of the Departure Tax to the date of actual disposition of the asset.  In order to make this election, the departing resident must post security with the Canada Revenue Agency for the amount of tax deferred.  A common form of security is a bank letter of credit in favor of the Receiver General.

There are many other aspects concerning departure that should be reviewed prior to moving such as the structure of private investments, investment holding companies, and interests in trusts and partnerships.  It’s important to understand how these investments will be taxed in Canada and the new country of residence beforehand so that planning can be undertaken to minimize or eliminate inefficiencies.

At Catalyst, we are more than prepared and happy to assist you with your Canadian residency departure planning.

Please don’t hesitate to contact your trusted Catalyst Advisor if you have any questions.  You can reach Jeff at (403) 767-1503 or James at (403) 767-1511 or email inquire@thecatalystgroup.ca