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Thinking of leaving Canada? Here’s what you need to know
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Leaving Canada without prudent planning could result in assets being taxed at rates of more than 50 percent
Published on July 7, 2024 • Last updated 7 hours ago • 5 minute read
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People line up before entering the security zone at Pearson International Airport in Toronto on August 5, 2022. Photo by THE CANADIAN PRESS/Nathan Denette
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By Simran Arora and Chris Warner
“The grass always seems greener…” goes the trope. With tax changes in 2024 Federal BudgetMany successful Canadians seem to be considering whether greener pastures exist abroad. Perhaps it’s the United States for a more flexible business climate, Saudi Arabia for its no income tax, or Australia for its better climate.
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For those considering an exit, there are many financial considerations. From our perspective as financial planners, the biggest one is tax. Leaving Canada without prudent planning can result in assets being taxed at rates of over 50 per cent. If planned in advance, this can be substantially reduced.
But emigration is complex. Anyone considering it should seek advice from a financial team that includes an experienced tax attorney. With that in mind, here is some helpful background information.
Determining residency
Where you live matters, but it’s not the whole story. Someone can become a non-resident without becoming an emigrant. This is called being a factual tax resident of Canada.
Fundamentally, a factual tax resident is a Canadian living abroad. Their global income is subject to Canadian tax.
On the other hand, an emigrant is considered to have severed ties with Canada. His or her global income is typically only subject to tax in the new country.
When you become an emigrant, you may face a boarding fee on Canadian assets, which can be significant. De facto residents of Canada living abroad typically avoid exit tax, but they have other considerations.
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Determination of residency status depends primarily on time spent outside Canada and residential ties to Canada.
Citizens born in Canada can become non-residents if they establish residence in another country or spend more than 183 days outside Canada in a tax year. Non-residents may still be de facto residents if they maintain residential ties (e.g., snowbirds, students and internationally commuting workers).
Residential ties are classified as primary or secondary. They help the Canada Revenue Agency determine residence. Typically, at least one primary link is essential for factual residence.
The primary ties are a Canadian residence, a spouse or partner who resides in Canada and dependents who reside in this country.
Secondary ties include personal assets, Canadian passports or driver’s licenses, provincial/territorial health insurance, active Canadian bank accounts and lines of credit, and formal social ties.
Taxation of factual residents
De facto residents Canadians are required to pay tax on their global income. They typically receive a credit for taxes paid in other countries, but must still pay any shortfall to Canada.
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This becomes critically important for people working in a country with low or no income tax. High-income earners who thought they would pay minimal tax could instead pay more than 50 percent in tax.
Double taxation of income can be avoided by an emigrant, who typically only pays taxes levied by his or her current country. However, this must be balanced against the cost of exit tax plus other residency factors.
Taxation of emigrants
Emigrants are those who leave Canada, establish a permanent home abroad and sever Canadian ties. On the date of departure, they are considered to have disposed of the applicable assets at fair market value. This is known as an exit tax, although it is actually triggering a tax on unrealized capital gains.
There is potential to defer taxes on deemed dispositions until the assets are sold, but this can be challenging to implement. A deferral is obtained by establishing a mortgage (property lien or bank letter of credit) with the CRA and filing a T1244 election until April 30 of the year following emigration.
The types of assets considered to be sold at exit are unregistered investments, shares in a privately held corporation (CCPC), interests in partnerships, and non-Canadian real estate.
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Assets that are generally exempt include Canadian real estate, registered investments (such as registered retirement savings plans (RRSPs), tax-exempt savings plans (TFSAs) and pensions), employee stock options, life insurance policies (excluding segregated funds) and qualified Canadian business property.
Taxation of investments
As a nonresident, you can maintain registered accounts, but you can no longer contribute to them. The accounts may also face new implications based on the new country’s tax code.
For example, the US does not recognize TFSAs, so any investment gains within a TFSA, while not taxed in Canada, may be taxed in the US.
Nonresidents can continue to own Canadian real estate and earn rental income, but are required to withhold 25 percent of that income. Each year, rental property owners can file a Section 216 election to have tax withheld based on net rental income rather than gross.
The tax withheld at source must be remitted to the CRA by the 15th of the month following receipt of the rental income. Otherwise, the CRA will charge interest on the unpaid amounts, compounded daily.
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Please note that if the landlord is not physically in Canada, the property manager or the tenants themselves will need to complete this form.
A non-resident selling Canadian real estate must notify the CRA prior to the sale or within 10 days of the closing date. Those who fail to do so will be subject to a 25 percent withholding tax on all proceeds from the sale, in addition to facing a penalty of up to $2,500.
By reporting to the CRA, the seller receives a certificate of compliance, allowing the withholding tax to be reduced to 25% of any resulting capital gain.
If the seller is liable for tax on the proceeds of the sale in their new country, it is advisable to file a Canadian income tax return that year to reduce the risk of double taxation.
Emigrants have their shares in private corporations considered sold upon departure. Any unrealized gain between the cost basis of the stock and the market value is taxed as capital gains, even if the interests in the corporation are not sold.
Additionally, a business will likely lose its CCPC status if it is no longer controlled by Canadian residents, eliminating access to the small business deduction and other benefits.
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As you can see, leaving Canada is complicated. There is a significant amount of planning involved to ensure all financial and tax considerations are addressed. Will the grass really be greener? Talk to your financial team to be sure.
Simran Arora, CFP, CIM, CIWM, is a financial advisor and portfolio manager at Nicola Wealth Management Inc., and Chris Warner, FCSI, CIM, CFP, PFP, is a financial advisor there.
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