There’s a lot to know as you make the move “Tax issues for Canadians moving to the U.S.” blog but for today, we’re zooming in on departure tax and residency determination.
Defining Departure Tax
What is departure tax? Departure tax is defined as a fee charged when a person is leaving for residency or tax purposes. When it comes to what countries have departure tax, they look different from country to country. For example, countries including China and Thailand collect departure tax as part of standard airfare charges. But when it comes to the Canada departure tax, it’s not quite as simple.
What Departure Tax Means For You
As discussed, the departure tax and its implications are two-fold. First, when you leave Canada like you’re leaving a scorned lover, something happens whether you like it or not. Upon leaving, you are automatically considered to have sold certain types of property at their fair market value, and then immediately re-acquired them for the same amount. Yes — even when you never actually sold or bought anything. This is called a deemed disposition. What does it mean for you? Well, it means you may have to report a capital gain or loss on your next tax return as a result, as determined by the T1161 List of Properties by an Emigrant of Canada form.
After that, you must pay the CRA to account for the time where you were still a Canadian resident, up until your termination date, under the Canadian Income Tax Act. Canada departure tax is not related to when you leave the country, as with the examples above; it’s when you terminate your status as a Canadian resident. That’s because in Canada, income tax is based on residency.
Determining Canadian Residency
Above all, Canada departure tax is based on residency but how is Canadian residency determined? The Canada Revenue Agency (CRA) has that part covered with Form NR73 and Form NR74. Form NR73 applies to what we’re talking about here today. It’s the “Determination of Residency Status – Leaving Canada” form. Form NR74 is the “Determination of Residency Status – Entering Canada” for people entering the country. The CRA determines residency using information that includes any ties you have within the country, such as:
- Whether you have a spouse or dependents who are Canadian residents
- Whether you have property in Canada
- Whether you have personal possessions including vehicles, clothing, and pets in the country
- Whether your license and passport are Canada-issued
- Whether you bank accounts and credit cards are through Canadian financial institutions
- Length of time and intent while living inside and outside of Canada
Depending on the criteria you meet, until you successfully sever these ties (and others), you are likely to be seen as a Canadian resident in the eyes of the CRA. As such, you’re expected to pay taxes to the CRA as a resident for as long as you’re considered a resident. Even when the breakup becomes official, and you successfully sever residential ties and terminate your residency part-way through the year, you must still report your income and will owe the CRA taxes for the part of the year that you were a resident of Canada.
Conclusion
Knowing what you owe, when, and why will help your transition from Canada to the U.S. go a lot smoother. Just like you’d turn to a family member or trusted friend during a complicated breakup, relying on experienced tax professionals who can help you navigate the nuances of leaving the country will offer you peace of mind during a confusing time. Here’s to new beginnings!
If you’d like to learn more about tax laws and your business, we at Akif CPA are here to help. Do you have unique issues or concerns not discussed in this blog? Then please contact us by email or phone. We are here to help.
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