Today, we’ll be discussing the Canadian Departure Tax—what it is, the types of assets it applies to, and how to calculate it. Let’s dive into the details of this important topic for Canadians moving abroad.
What is Canadian Departure Tax?
When you leave Canada and become a non-resident for tax purposes, the Canada Revenue Agency (CRA) imposes what is known as the departure tax. This tax is based on a “deemed disposition” of certain types of assets. Essentially, the CRA considers that you have disposed of these assets at their fair market value on the day you cease to be a Canadian resident, even if you haven’t actually sold them. The difference between the fair market value and the cost of acquisition is subject to capital gains tax.
Assets Exempt from Departure Tax
Not all assets are subject to the Canadian departure tax. The following are generally exempt:
- Cash: Cash holdings are not subject to deemed disposition.
- Canadian Real Estate: This includes your principal residence, secondary homes, and rental properties.
- Retirement Accounts: RRSPs, RRIFs, TFSAs, RDSPs, and other registered pension plans are exempt.
- Personal Property Valued Under $10,000 CAD: Personal belongings like furniture, clothing, and electronics are generally exempt if their total value is under $10,000 CAD.
- Assets Owned for Less Than 60 Months: If you acquired assets before becoming a Canadian resident and have been a resident for less than 60 months, these assets are generally exempt.
Assets Subject to Departure Tax
The following assets are typically subject to deemed disposition and may incur a departure tax:
- Non-Registered Investment Accounts: This includes stocks, bonds, mutual funds, and other investments held outside registered accounts.
- Foreign Property: Any property owned outside of Canada, such as real estate or investments in foreign companies.
- Other Taxable Canadian Property: This can include certain trusts, partnerships, and other assets not mentioned above.
Calculating Departure Tax
To calculate the departure tax:
- Determine Fair Market Value: Find the fair market value of the taxable assets on the day you cease to be a Canadian resident.
- Calculate Capital Gains: Subtract the original purchase cost from the fair market value.
- Apply Capital Gains Tax: Typically, 50% of the capital gain is taxable.
For example, if you bought an asset for CAD 100 and its fair market value is CAD 150 when you leave Canada, the capital gain is CAD 50. Half of this gain, CAD 25, is taxable.
Impact on Your US Tax Return
The deemed disposition of your assets in Canada can impact your US tax return. The fair market value of your assets on your departure date becomes your cost basis for US tax purposes. This can be crucial for calculating capital gains or losses when you eventually sell these assets in the US. Therefore, it’s important to maintain accurate records and report the deemed disposition correctly on your US tax return to avoid potential issues.
Planning for Your Departure
Leaving Canada involves careful financial planning. Consulting with a cross-border tax professional can help you understand the specific tax implications for your situation and develop strategies to minimize your tax burden. They can also advise on the tax implications of your Canadian assets in the US, ensuring a smooth financial transition to your new home.
Tax Planning for Canadians Moving to the U.S.
If you’re moving to the U.S., it’s crucial to address the departure tax properly. Ensure that appropriate elections are made on your U.S. tax returns to account for any deemed dispositions of Canadian assets. This helps avoid double taxation and manages future gains when you eventually sell these properties.
Conclusion
Understanding the departure tax can help you make informed decisions and avoid unexpected tax liabilities when moving out of Canada. If you have any questions or need assistance with cross-border tax planning, feel free to contact us at Akif CPA. We’re here to help you navigate the complexities of Canadian and U.S. tax laws.
