When a person is ceasing to be a resident of Canada, a person is deemed to have disposed of certain types of property at their fair market value (FMV) when leaving Canada and to have immediately reacquired them for the same amount.
Deemed disposition applies to most properties. Some of the exceptions are:
- Canadian real or immovable property, Canadian resource property, and timber resource property (it is possible to elect to declare a deemed disposition);
- Canadian business property (including inventory) if the business is carried on through a permanent establishment in Canada (it is possible to elect to declare a deemed disposition);
- Pensions and similar rights, including registered retirement savings plans (RRSPs), pooled registered pension plans (PRPPs), registered retirement income funds (RRIFs), registered education savings plans (RESPs), registered disability savings plans (RDSPs), tax-free savings accounts (TFSAs), and deferred profit-sharing plans (DPSPs);
- Rights to certain benefits under employee profit-sharing plans, employee benefit plans, employee trusts, employee life and health trusts, and salary deferral arrangements;
- Certain rights or interests in a trust;
- Property owned when last became a resident of Canada, or property inherited after last became a resident of Canada, if a person was a resident of Canada for 60 months or less during the 10-year period before emigrating;
- Employee security options subject to Canadian tax; and
- Interests in life insurance policies in Canada (other than segregated fund policies).
The shares of Canadian corporations are not listed as excluded properties under section 128.1(4), thus, they will be subject to deemed disposition and any resulting gain will be taxable. Since the time of disposition is before the time the individual becomes a non-resident of Canada, the enhanced capital gain exemption will be available, provided the shares qualify and the lifetime exemption limit has not been exhausted previously.
On the tax return (due on April 30 the year following the departure) a person has to report the capital gain or capital loss that results from the deemed disposition.
List of properties
If the fair market value of all the property a person owned when left Canada is more than $25,000, the person must complete Form T1161, List of Properties by an Emigrant of Canada, to list all of the properties inside and outside Canada and attach it to the tax return.
Excluded from the list is personal-use property valued at less than $10,000. Examples of personal-use properties are:
- household goods; and
April 30 of the year following the year of departure is the filing due date. The penalty for failing to file Form T1161 by the due date is $25 per day it is late with a maximum penalty of $2,500.
Deferring the tax owing
A departing taxpayer can elect to defer the payment of tax on income relating to the deemed disposition of property, regardless of the amount. A departing taxpayer would then pay the tax when the property is disposed of. If such an election is made, interest does not start to accrue on the amount secured until such time as the amount becomes unsecured (the property is disposed).
To make this election, a person must complete Form T1244, Election, Under Subsection 220(4.5) of the Income Tax Act, to Defer the Payment of Tax on Income Relating to the Deemed Disposition of Property. The election must be made on or before April 30 of the year following the departure.
If the amount of federal tax owing from the deemed disposition of property is more than $14,500, a departing taxpayer must provide an adequate security acceptable to the CRA to cover the amount. A security to cover any applicable provincial or territorial tax payable may also be required.
A departing taxpayer must contact CRA as soon as possible to make acceptable arrangements before filing due date. The Income Tax Act does not actually define “adequate security”. It is best to contact CRA for assistance in determining the amount of adequate security.