So you have decided to leave Canada permanently and settle in another country. Maybe you’ve decided to take that great job in the United States or overseas or you just want to live somewhere where it’s always warm. You’ve finally got your US Green Card (or other immigration clearance) so you call in the movers, pack up the car, hang a ‘for rent’ sign on the old family home, and head south.
Oops, be careful – you have now entered the realm of the dual taxpayer – you are officially a resident of both Canada and the United States (or other jurisdiction). Both countries now expect you to pay taxes to each of them on your entire worldwide income.
Leaving Canada Permanently: U.S.-Canada Dual Residence
You became a resident of the US the moment that you received your Green Card but you’re still a resident Canada according to the CRA. In fact, the CRA may still consider you to be a Canadian resident for at least the next two years if you don’t do anything about it.
A Canadian resident is not defined in the Canadian Income Tax Act but case law has found that just being “gone” from Canada does not necessarily mean that a citizen has relinquished his or her residency. The CRA has determined that residency is a question of fact and is based on factors that have been set out by Canadian courts. Accordingly, the CRA does not consider an absence from Canada for a period of less than two years to be proof that you have left permanently and have no intention of returning.
If you intend to return you may be just a nonresident Canadian still subject to Canadian taxes. You might, however, find it a bit awkward if you continue to receive GST/HST credit payments, Canada Child Tax Benefit payments (or any similar provincial program payments), Universal Child Care Benefit payments, or a benefit under a provincial health plan. Of course, if you receive such payments the IRS is going to want its share plus a share of any rent that you might receive from the old family residence in Canada. You now are in desperate need of professional help to sort out problems that have been created.
Severing Residential Ties with Canada
It is not a routine process to obtain non-resident tax status in Canada since the CRA has an extremely broad definition of residence that is based on rulings by the Canadian courts. Under Canadian law everyone must be a tax resident somewhere. A person claiming to have severed his Canadian residence must prove tax residency in another country or he will be deemed to have retained his Canadian residency status.
To save yourself grief, you need to notify the CRA that you are severing your residential ties with Canada. But you aren’t out of the woods yet. You can’t just say you’re severing your residential ties – you have to actually do it. The CRA will expect you to take the following steps if you’re really leaving:
- Cancel government benefits such as GST/HST, Canada Child Tax Benefit, and Universal Child Care Benefit.
- Cancel your Provincial Healthcare Plan.
- Cancel your Canadian drivers license.
- Cancel your Canadian insurance policies.
- Close your Canadian bank accounts.
- Move your dependant family to your new country.
- Register your automobile in your new state.
- Remove your personal possessions from Canada.
- Dispose of your Canadian home. (If you don’t sell it a long term lease would be an indication that your former home is now a rental property)
- Break social ties, (cancel such things as golf course memberships etc.).
- Inform Canadian mutual funds, financial houses, and security brokers that you are leaving so that they can withhold required taxes.
There must be permanence to your decision to leave Canada. Severance of Canadian residency is almost always predicated on an intention to never return. We have listed a number of the criteria that the CRA uses to determine if you have severed your Canadian residency but there may be others that are seemingly insignificant. For instance, a short-term lease on your former family home, retention of a lease on a real property, possession of a Canadian telephone number, or retaining a Canadian postal address can jeopardize your claim to have left Canada permanently.
Visiting Canada After You Have Emigrated
After you have emigrated from Canada and have become an official resident of another country the CRA can reinstate you as a Canadian resident by reason of your visits to Canada. While the occasional trips for business and family reasons are not necessarily an indication of current residency in Canada, frequent visits and prolonged stays very well could be. If you are present in Canada for 183 days in a calendar year you must file a Canadian tax return but a significant amount of time spent in Canada over an extended period could also trigger Canadian residency status. If your return visits are regular and lengthy it can be shown that you have not developed stronger ties with your new country of residence. This may cause the CRA to find that you have retained your links with Canada and are therefore resident. Just think of it in terms of the US substantial presence or the closer connection tests – on steroids.
You’ve taken most of the above steps so the CRA has accepted that you are really leaving Canada for good. Your tax worries are over – or not. The CRA now expects you to settle your tax bill before you leave. This is called the “departure tax,” and is an excellent example of why you should be diligent about understanding your tax obligations and officially ending your Canadian residency status.
Your departure tax may involve more than just income taxes – the CRA wants any capital gains tax that you might owe as well. In 1996, the departure tax was amended to provided that an emigrant’s property could be taxed at the time of departure. This provision assumes that an emigrant’s property is disposed of at fair market value before departure and provides that departing Canadian residents must pay taxes on that property as part of their departure tax if the aggregate value of that property exceeds certain limits. This is called deemed disposition and excludes only personal use items such as clothing and household goods to a certain value. Certain individuals may be exempt from the departure tax.
The departure tax includes the calculated income tax on your worldwide income for the period that you were a Canadian resident as well as the tax on your Canadian income sources for the period after you have left. Deductions that may normally have been taken during the period that you were a Canadian resident may be disallowed on income from Canadian sources received subsequent to your leaving Canada.
Of course, CRA will also want their share of the capital gains on the assets that they deemed were disposed of the day you left Canada. This could leave you with a substantial tax burden that you cannot afford without actually having to sell your property – but relief can be provided.
Deferring Departure Tax on Certain Property
The tax owing on a deemed disposition of property is due by April 30 of the year following the tax year. However, you can elect to defer the payment of tax on income relating to the deemed disposition of property and pay it later when the property is sold or otherwise disposed of.
For taxpayers ceasing residency in Canada, the deemed disposition rule in paragraph 128.1(4)(b) of the Act applies to all property other than property owned by an individual that is:
- real property situated in Canada, Canadian resource properties and timber resource properties;
- property of a business carried on by the taxpayer, at emigration time, through a permanent establishment in Canada – including capital property, eligible capital property and property described in the inventory of the business;
- property that is an “excluded right or interest” of the taxpayer (see definition below);
- certain property of short-term residents, where the individual (other than a trust) who has been resident in Canada for 60 months or less during the 10 year period preceding the cessation of residency is not deemed to have disposed of any property that the individual owned on becoming a resident of Canada or that the individual inherited after becoming a resident of Canada; and
- certain property of a returning former resident who last emigrated after October 1, 1996, will no longer be treated as having realized accrued gains on departure, if the taxpayer so elects.
If you elect to postpone payment of the tax owing on a deemed disposition you are required to provide acceptable security to cover the deferred taxes that are owed. The tax on certain deemed income as a result of a deemed disposal can not be postponed and must be paid by the April 30 due date.
AG Tax LLP Can Help
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts who can help you with your U.S. and Canadian Tax preparation, Cross-Border Tax consulting, and all of the necessary accounting to satisfy both Canadian and U.S. regulations.
Calculating departure taxes payable can be technical and complicated and in most cases is best left to professional accountants. The cross border tax specialists at Aylett Grant can assist you to prepare the necessary information required by the CRA to facilitate your nonresident status and calculate and file your departure tax. If you decide to defer all or a portion of the tax owing on a deemed disposition our international tax accountants can complete the necessary submissions to the CRA and advise you as to how you can provide the acceptable security that is required. Our accounting experts promise to efficiently and economically handle all your departing tax matters so that you can better concentrate on the many other concerns of your international move.
IRS Circular 230 Disclaimer: Please note that this document is to be considered other written advice. Any tax advice in this document was not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer under the Internal Revenue Code or applicable state or local tax law provisions.
Furthermore, the information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.