Timing of Departure from Canada
There is a number of Canadian income tax rules that should be considered and their consequences optimized to make emigration from Canada as economically effective as possible from the tax perspective.
First it must be established that an individual became a non-resident.
Termination of Canadian Residence
Residency determination was discussed in detail in another post. I will only mention that it is not always a straight forward process, depends on many factors and is a question of fact and law. Actions and intentions of the individual are very important.
For example, if the emigrating individual’s return to Canada is foreseen before his or her departure, CRA will conclude that the individual never ceased to be a resident of Canada. An individual can make the occasional return visits for business or personal reasons but if visits are on a regular basis then this may indicate that the individual continues to be a resident of Canada.
If the individual has been absent for less than 2 years, it may be presumed that s/he has retained Canadian residence unless all ties to Canada have been severed. Some of the steps to take to be considered a non-resident of Canada include:
- Inform the banks of the change in residence and provide a foreign address;
- Inform Canadian remitters of income, such as mutual funds and securities brokers to ensure that they withhold tax on payments of certain types of income, including Canadian Registered Retirement Savings Plan (“RRSP”) and Canadian Registered Retirement Income Fund (“RRIF”) accounts;
- Advise social clubs and professional associations of the change of status from a resident member to a non-resident member or have them discontinue the memberships if they don’t allow non-resident members;
- Ensure that a residence is not available in Canada for personal use during the period of non-residence by either selling or leasing the home;
- Cancel provincial health care coverage.
The date of departure is generally the latest of:
- The date the individual leaves Canada;
- The date the individual’s spouse/dependents leave Canada; or
- The date the individual becomes a resident of a country to which he or she is immigrating. Hence, if the individual is a resident elsewhere already, the departure day may be the date the individual flying out of Canada, subject to the statement immediately above.
Once a taxpayer decides to emigrate and is about to do all the steps to establish non-residency various obligations under the Canadian Income Tax Act (ITA) should be considered.
Canada’s taxation system is based on residence. Residents of Canada are subject to taxation on their worldwide income while non-residents are only subject to taxation on certain types of Canadian source income. When an individual ceases to be a resident, the ITA taxes the individual on all his or her income earned up to the date that residence terminates (date of departure), especially the income that will not be taxable once the individual becomes a non-resident. This tax is referred to as the “departure tax” and was discussed in another post.
Year of Emigration
Individuals who leave Canada permanently before the year end are considered to be part year residents of Canada in the year this change occurs. That income and taxes on income are calculated differently for resident portion of the year – worldwide income less all available deductions, some of which may be prorated; and non-resident part of that year – income earned in Canada less some deductions, some of which may be prorated.
Based on the emigrant’s type of income and assets the date of departure may be very important. There are also elections that may be beneficial for the departing taxpayer that must be made within a certain time limit.
Here are some examples where one may consider his or her assets and whether to dispose of them before departure, availability of certain assets before and after departure and decide whether to utilize them before leaving. These considerations may determine the departure date as dealing with some of them may take time for planning and implementation.
Capital Gains Exemption
- The capital gains exemption is available for the period of residence, provided the emigrant was a resident of Canada throughout the immediately preceding year.
- In determining each personal tax credit for the period of residence, only the following personal credit amounts may be claimed to the extent they are considered applicable to the period of residence. As a practical matter, CRA interprets this to mean they are pro rated for the period of residence. For example:
- Basic personal amount;
- Age amount;
- Dependent amount;
- Disability amount;
- Disability amount transferred to relative;
- Unused credits transferred from a spouse;
- Unused tuition/education amounts transferred from child.
- The following personal amounts are wholly available for the period of non-residence to the extent they are related to that period:
- Charitable donations;
- Tuition fees for the emigrant, if they qualify under Canadian rules;
- Disability amount for the emigrant;
- CPP contributions;
- EI premiums;
- All other personal amounts may be deducted if at least 90% of world income for the calendar year is included on the return, no matter how long the period of non-residence.
- Medical expenses paid in any twelve month period ending between January 1 and the date of non-residence may be claimed, except expenses already deducted in the previous year may not be claimed. The claim cannot include medical expenses paid after the date of non-residence, even if they were incurred prior to that date.
- While a resident of Canada, non-capital losses and net capital losses may be deducted, subject to limitations. Such losses may be carried over to other years of residency within normal carryover period limits;
- Losses from a business carried on in Canada can be carried over into periods of non-residence;
- The emigrant cannot carry over losses incurred in the resident portion of the year to the period of non-residence of the same year.
Election under Section 217 for non-residents
- Generally the following amounts are subject to a flat withholding tax rate of 25% unless decreased by a Tax Treaty and must be withheld by the Canadian payer: pension benefits, employment insurance benefits, retiring allowances, or amounts out of RRSPs, RRIFs or Deferred Profit Sharing Plans (“DPSPs”).
- It will be advantageous to the non-resident to make a section 217 election if the non-resident’s effective Canadian tax on these amounts, after applying allowable deductions and tax credits, is less than the flat rate tax to be withheld.
- Charitable donations may be claimed for the periods of residence and non-residence limited to 75% of the net income for that period.
This list is not exhaustive and before leaving the country an individual should get tax advice.