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What Is Departure Tax in Canada?

Posted on the 28 January 2025 by Billah Associates

Leaving Canada can be an exciting new chapter, whether you are moving for work, retirement, or personal reasons. However, before making the move, it’s crucial to understand the tax implications of leaving Canada, as this can significantly affect your financial situation. In this guide we’ll cover what is departure tax in Canada and how seeking help from professional personal tax accountant can be beneficial.

Is there a departure tax when leaving Canada?

When you leave Canada, the Canada Revenue Agency (CRA) considers that you have sold specific types of property at their fair market value (FMV), regardless of whether you have actually sold them. This is referred to as a deemed disposition. As a result, you might be required to report a capital gain, commonly known as departure tax. This is where a professional tax accountant becomes invaluable, helping you navigate the complex tax laws to ensure you make the right decisions.

Understanding Residency for Tax Purposes

The first thing to understand when leaving Canada is how the Canada Revenue Agency (CRA) determines your residency status. Canadian tax law is based on residency rather than citizenship, which means that your tax obligations depend on whether the CRA considers you a resident or non-resident of Canada for tax purposes.

When you leave Canada, the CRA may classify you as a non-resident or a “deemed non-resident” if they no longer consider you a resident. The CRA uses various factors to determine residency status, including your ties to Canada (home, spouse, dependents, etc.), as well as your intent to reside in another country.

If you are a non-resident, you are generally only taxed on Canadian-sourced income, such as rental income from Canadian properties or income from Canadian businesses. However, you may still be subject to taxes on worldwide income if you maintain ties to Canada or if you are considered a deemed resident.

Canadian Tax Obligations After Departure

Even after leaving, you may still have Canadian tax obligations, particularly if you retain Canadian-sourced income such as dividends or rental income. A 25% withholding tax generally applies to Canadian income earned by non-residents.

However, tax treaties may lower this rate depending on the country you move to. If you rent out Canadian property, your tenant or agent must withhold tax on the rental income. If you decide to sell the property, a portion of the sale proceeds (typically 25%, or 50% in some cases) must be withheld.

Departure Tax & Departure Returns

One of the most significant tax implications of leaving Canada is the departure tax. The departure tax is essentially a tax on the unrealized capital gains of your property when you cease to be a Canadian resident. The CRA taxes any increase in the value of your assets, such as real estate, stocks, and retirement accounts, as if you sold them on the day you left Canada. This can result in a large tax bill.

The departure tax applies to most assets, including your investments, real estate, and personal property. However, there are some exceptions, such as Canadian real estate that qualifies for the principal residence exemption. A tax accountant can help identify which assets are subject to departure tax and how to mitigate the tax burden through planning.

You are also required to file a departure return with the CRA, which includes all income and tax obligations up until the date you left Canada. This is where the expertise of a professional tax accountant becomes essential. Filing a departure return requires understanding Canadian tax laws, including reporting capital gains, foreign income, and residency-related matters.

Income from Foreign Sources

Once you become a non-resident, you may still earn income from Canadian sources, which is subject to withholding taxes. For example, rental income from properties in Canada or dividends from Canadian corporations will be taxed at source. A tax accountant applies tax treaties between Canada and your new country to minimize withholding taxes on foreign income.

If you earn income from your home country or worldwide sources, you might face taxes in both Canada and your new country. This is where understanding tax treaties becomes critical. A tax accountant helps you understand tax treaties, ensuring you avoid paying taxes twice on the same income.

Retirement Savings and Benefits

If you have contributed to retirement savings plans such as the Canada Pension Plan (CPP), Old Age Security (OAS), or registered retirement savings plans (RRSPs), leaving Canada may have significant implications for these accounts.

Leaving Canada may affect your eligibility to receive CPP and OAS payments. RRSP withdrawals as a non-resident may incur Canadian taxes. Guide you on how to manage these accounts and the most tax-efficient way to access your retirement savings while minimizing tax penalties.

How a Tax Accountant Can Help?

Dealing the tax implications of leaving Canada can be complex, but working with a professional tax accountant can streamline the process.

Here’s how a tax accountant can help you:

  1. Residency and Tax Status Determination: Help you determine your residency status and clarify what taxes apply based on your situation.
  2. Managing Departure Tax: Help you understand the departure tax and how it will impact your financial situation.
  3. Minimizing Tax Liability: Provide strategies to minimize the tax burden on your investments, real estate, and retirement savings.
  4. Filing Your Departure Return: File your departure return accurately and on time to reduce the risk of penalties or audits.
  5. Guidance on Foreign Income: Help you understand foreign tax obligations and how to avoid double taxation through tax treaties.

Conclusion

Leaving Canada is an exciting decision, but it comes with significant tax responsibilities. Understanding the tax implications and how to navigate them is critical for your financial well-being.

A professional tax accountant helps you manage your tax obligations efficiently and avoid costly mistakes. A tax accountant helps determine your residency status and manage departure tax for a smooth transition to life abroad.


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