Strategies for Tax Management for Individuals Moving Abroad from Canada
The Canadian Departure Tax is a significant tax event for individuals who are leaving Canada for good. This tax is triggered when a person ceases to be a Canadian resident for tax purposes.
The Basics
The tax is based on a 'deemed disposition' of assets, treating the individual as if they've sold everything they own the day before they leave. To calculate the departure tax, one subtracts the deemed profits for each asset from its adjusted cost base (ACB). Form T1243 is used for this purpose.
The tax applies to a wide range of assets, including stocks and bonds, mutual funds and ETFs, cryptocurrency, real estate (with some exceptions), interests in partnerships, shares in private corporations, personal property worth over CAD$10,000, and more.
Exemptions and Treatments
The first CAD$100,000 is exempt from taxation for the departure tax. Canadian real estate is not considered sold when leaving, but it will still be taxed in Canada when sold later.
Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are usually not taxed when leaving, but they will be once a withdrawal is made. Withdrawals from RRSPs and RRIFs after becoming a non-resident are subject to Canadian withholding tax, which may be reduced by a tax treaty.
Residential Ties and Intent to Depart
The Canada Revenue Agency (CRA) determines tax residency through a fact-based assessment that looks at ties to Canada. Significant residential ties include having a home in Canada, a spouse or common-law partner, and dependents living in Canada. Secondary residential ties include Canadian bank accounts, a Canadian driver's license, Canadian credit cards, memberships in Canadian organizations, and maintaining a Canadian mailing address.
To become a non-resident for tax purposes, one must show intent to cut ties with Canada by selling or renting out their Canadian home, moving their family, closing Canadian bank accounts, and notifying the CRA of their departure date and change of residency status.
Avoiding Double Taxation and Treaty Benefits
Tax treaties between Canada and other countries help to prevent double taxation and facilitate international trade and investment. To claim benefits under a tax treaty, one needs to indicate this on their Canadian tax return and disclose their residency status in their new country and identify the specific article of the treaty that applies to their situation.
Minimizing the Departure Tax
To minimize the departure tax, one can carefully time their departure, sell their primary residence before leaving (exempt from capital gains tax), defer the payment of the departure tax in certain circumstances, transfer assets to a spouse, or sell assets at a loss before departure (if very wealthy).
The Nomad Capitalist Team
Navigating the Canadian Departure Tax can be complex. The Nomad Capitalist team consists of international tax consultants and advisors who specialize in helping clients with expatriation taxes in Canada.
In conclusion, understanding the Canadian Departure Tax is crucial for anyone planning to leave Canada permanently. By being aware of the rules and potential exemptions, individuals can make informed decisions and minimise their tax liabilities.
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