If you plan on leaving Canada, whether for the U.S. or another country, here are some things to know:
- Each country has its own rules for taxing individuals. Canada will tax you on your worldwide income if you are considered a “Canadian resident” whether you live in Canada or temporarily somewhere else or are a Canadian citizen or not;
- If you become a non-resident of Canada then Canada wants to tax you on the value of certain property before you go (see “Exit Tax” below). After that time, Canada will only tax you on certain Canadian source income; and
- Whether you remain a Canadian tax resident depends on your fact and circumstances. For example
- Do you plan on returning to Canada and is your family staying behind?
- Are you keeping your house/condo and will it be available for your use?
- Will you keep your provincial driver’s license, provincial health care and your memberships (e.g. social, professional)?
Canada wants to tax your accrued gains (i.e. the appreciation) on ALL property before you go with exceptions:
(as Canada will tax future income or gains after you leave):
- Canadian real estate (and resource and timber property);
- RRPS, RRIFs, RESPs, TFSAs, stock option plans, CPP, OAS and certain other types of pension/retirement/profit sharing plans; and
- Interests in certain personal trusts (i.e. you didn’t pay anything to be a beneficiary) such as a Canadian family trust or a non-resident (offshore) personal trusts; and
- Property you owned when you last became a tax resident (i.e. when you came to Canada), which you still own and you’ve been in Canada (i.e. a tax resident) no more than 60 months (5 years) during the last 120 months (10 years) (i.e. short-term resident)
Common examples of property which will trigger the Exit Tax include:
- Publicly traded securities (e.g. shares, debt such as corporate bonds), shares of a mutual fund corporation and units of a mutual fund trust;
- Real estate outside Canada (e.g. your Phoenix or Palm Springs condo); and
- Shares of private companies (e.g. your family operating or holding company);
Example: You purchased a condo in Phoenix in 2012 for US$100,000 (Cdn $100,000). The condo is now worth US$150,000 (Cdn$200,000). If you became a non-resident of Canada, you would be deemed to have sold the condo and would need to report a taxable capital gain of Cdn$50,000 (1/2 of the Cdn $100,000 gain) on your income tax return and pay Exit Tax of up to $25,000 even though you haven’t sold the property.
- Canadian Tax: you may be able to elect to defer this tax (with limits), post security or trigger (or elect to trigger) losses on exempted property (e.g. Canadian real estate) to reduce the Exit Tax. In some cases, you may also elect to carryback a subsequent loss or undo a triggered gain (e.g. you move back to Canada); and
- Foreign Tax: Best to consult with an advisor in the country on whether steps can be taken to avoid double tax should the new country otherwise tax all or a portion of the same gain.
What to do BEFORE you leave?
- Prepare a list of all of your assets and the estimated fair market values and the cost of each. You may need to have valuations or assessments done for private company shares (e.g. your holding or operating company);
- Notify your bank and investment advisors that you are planning to leave and when you will be a non-resident of Canada for tax purposes;
- If you have a private company (holding, investment, or operating company) then review the corporate structure. Consider steps to minimize the Exit Tax and ongoing Canadian (and potentially foreign) taxesfor both you and the company;
- Review trust filing requirements if you are a trustee or a beneficiary of a Canadian trust (such as a discretionary family trust). Canadian tax pitfalls may trigger additional taxes and reporting requirements;
- Consider the impact of provincial or municipal real estate taxes (i.e. Vancouver Empty Homes Tax and the BC Speculation and Vacation Tax) if you plan on keeping Canadian real estate. Watch for withholding tax and filing requirements if you are renting out property and/or if you sell the property while a non-resident; and
- Speak to an adviser in the country to which you are moving, to understand how you will be taxed in your new location.
What NOT to do?
- It’s costly not to plan ahead and do nothing.
If you are moving to the U.S. there are additional considerations. The U.S. has significant reporting requirements for assets held outside of the U.S. and penalties may apply for non-compliance. Each U.S. state has its own rules for taxing residents. More information will be provided in a future blog post.
Please consult DMCL’s Canadian and US tax team if you have any questions and to help you before and after you leave.