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Establishing the date of departure
Effective October 01, 1996, major tax changes were made which effect Canadian residents who emigrate from Canada. In view of these changes it is advisable for anyone who is contemplating leaving Canada to review how this and previous legislation will impact upon his/her tax liability. We are highlighting some of the issues which need to be considered, however, this memo is not to be considered as advice to be acted upon and each individual needs to review their personal situation with his/her professional.
For the year of departure, a return needs to be filed as of the date of departure, reporting world income to that time. For the balance of the year and thereafter, the individual will be taxed as a non-resident of Canada, being liable for tax on business income earned in Canada, real estate situated in Canada and other taxable Canadian property. Investment income which is derived in Canada will be subject solely to withholding tax at source, the rates depending upon the new country of residence. The date of departure will be based upon the facts such as the dates of; a) the termination of employment and the commencement of new employment; b) the disposition of a residence or the termination of a lease; c) the actual moving day for personal belongings (retain moving invoices); d) the closing of bank accounts and the resignation from clubs etc. Although all of these dates will vary, there should be an effort to accomplish most of these within a concentrated period of time to obviate a departure date.
Deeded disposition on date of departure
Of great significance is that the departing individual will be deemed to have disposed of all of his capital assets and reacquired them at the fair market value on the day of departure. These gains or losses will have to be reported on his final return as a resident as of that date.
Exceptions to deemed disposition rule
There are a few exceptions to the deemed disposition rule and these include;
It should be noted that shares of private Canadian corporations are no longer exempt from the deemed disposition rule.
Relieving provisions related to deemed dispositions
The payment of the tax may be delayed, without interest, until the property is sold, if an election is filed on or before the last year's balance-due date, and if the potential tax exceeds $25,000, adequate security is provided to the government, The property so elected will become Taxable Canadian Property and will be deemed not to have been sold, the result being that any growth in their value after departure will continue to be taxed in Canada when the property is actually sold.
If the property is disposed of prior to 2007, Canada will grant credit for foreign taxes paid to a treaty country where the individual resides. For real estate, there is no date for the elimination of the credit.
If a capital property is sold at a loss after emigration, subject to certain limitations, an election may be made to carry back the loss to reduce the capital gain on departure.
If the individual returns to Canada within five years, the gains on departure are eliminated. Any increase in value in property that was not taxable Canadian property during the years away will also not be taxed. A taxpayer cannot avoid the deemed dispositions rule on departure simply by asserting their intention to return to Canada as a resident at some future time.
Tax planning for departure
A) Pay the tax on departure?
The decision to elect to defer the tax on departure exposes oneself to future Canadian taxes on the growth of these capital assets. It will be necessary to weigh the taxpayers ability to fund the tax cost verses the expectations of the future growth of each asset. Where the tax rates of the new country of residence is lower than Canada's rates, it would be desirable to settle up with Canada on departure, no longer being concerned with Canadian taxes. A taxpayer can also elect to have disposed of all of his property including Taxable Canadian Property and pay tax on the resulting gain.
B) Americans returning to the United States?
For Americans who are Canadian residents that are returning to the U.S.A., they can pay the Canadian tax on departure and also declare the gain in the U.S. at the same time to benefit from the tax credits available in both countries. Otherwise, the Canadian tax paid will not be available to reduce the U.S. taxes payable upon the later sale.
C) Sell before departure?
For emigration to the United States, assets acquired in Canada before departure will continue to have a cost base for U.S. tax purposes equal to the original cost and not the fair market value on date of departure. The tax paid on departure from Canada will not be available as a credit against U.S. taxes when the asset is sold years later. There will be double taxation encouraging people to actually dispose of the capital assets prior to departure paying only the Canadian taxes.
D) Sell the principle residence before departure.
If the residence is sold after departure, the entire gain may be taxable in the new country of residence, whereas in Canada residences are non-taxable. The U.S. allows an increase in the cost basis to the fair market value of a principle residence owned by a resident of Canada who moves to the U.S. If the property is not sold but leased instead, consider electing not to change the use from a personal residence to avoid taxation on capital gains should you return to Canada and return to the property.
E) Maximize your RRSP contributions before departure.
Any availability accumulated in the contribution amount available in a RRSP should be topped up to allow for the maximum deduction on the final return, in all probable at high rates of tax. This allows for the future accumulation of income on the amount tax free and perhaps lower taxes on subsequent withdrawal. Acquaint yourself with the rules related to the later withdrawal of these funds as a non-resident.
F) Control of a Canadian Private corporation.
It should be noted that if the individual controls a private Canadian Corporation, it will no longer be taxed as a Canadian controlled corporation, losing the advantage of the lower tax rate, etc. and the foreign shareholder will not benefit from the Canadian system of gross up and credit on dividends from Canadian Companies. He (she) will not be eligible for the capital gains exemption on his disposition.
G) If an emigree continues to own Canadian real estate, ensure that appropriate elections are made to reduce the withholding taxes after departure which otherwise would be onerous.
H) When disposing of taxable Canadian property as a non-resident, ensure that you obtain the necessary clearance certificates.
I) Review the aspects and rules related to all your health and pension plans and the possibility of continuing same.
J) Acquaint yourself with the tax convention between Canada and the new country of residence and its tax structure to identify the possible planning decisions prior to departure.
RESTRICTION
This memo is intended to provide an insight to the issues to be considered and dealt with before departure from Canada and is not intended as advice for specific taxpayers. Each individual needs to review and evaluate his or her own situation and the probabilities with regard to the potential of their capital assets and situs and duration of his/her future residency. We do not take responsibility for any actions taken as a result of the information contained herein.
