Taxes When Leaving Canada

When you move out of Canada, you need to understand how your taxes will be affected. While you’re a Canadian resident, you pay taxes on all the money you earn worldwide. When you leave, Canada requires you to pay a "departure tax" on any increase in the value of your assets, even if you haven’t sold them. After becoming a non-resident, you’ll still be taxed on certain Canadian incomes, like rental income or dividends, to prevent double taxation through agreements called tax treaties. These treaties help decide which country taxes you to avoid paying taxes twice on the same income. Additionally, if you own property or a business in Canada, there are special rules and potential taxes you need to follow even after you leave. Planning ahead, such as selling your home before moving, can help simplify your tax situation

Taxing Your Worldwide Income (Section 2(1))

While you're a resident of Canada, you pay taxes on all the money you earn anywhere in the world. This includes your salary, investment income, and any other earnings, no matter where they come from. This continues until the day you officially become a non-resident.

Under Sections 114 and 128.1 of the Income Tax Act (ITA), when you leave Canada, the government applies a "departure tax" by treating you as if you've sold most of your assets at their fair market value immediately before departure—a concept known as "deemed disposition." This rule ensures you pay taxes on any appreciation in your assets' value that occurred while you were a Canadian resident. For example, if you purchased shares for $10,000 and their value increases to $15,000 by the time you leave Canada, you have an unrealized gain of $5,000. The departure tax requires you to pay tax on that $5,000 gain, even though you haven't actually sold the shares.

If you own property in Canada (Section 116 ITA), like real estate or shares in a Canadian company, and you decide to sell it after you've left, there are special rules. You need to get a "certificate of compliance" from the Canada Revenue Agency (CRA). Plus, the buyer might have to hold back some of the purchase price to cover any taxes you owe. Planning Tip: Sell your home before you exit

Under Section 250(5) of the Income Tax Act (ITA), you're considered a non-resident of Canada for tax purposes if you become a resident of another country under a tax treaty. This change affects how departure tax rules apply to you. Essentially, once you attain non-resident status, Canada taxes you only on specific types of Canadian income .Even after you leave, certain Canadian-source incomes may still be subject to Canadian taxes (Sections 212(1) and (2) ITA). For example, if you receive dividends from a Canadian corporation or rental income from property located in Canada, the country may withhold taxes on these payments before they reach you.

What Are Tax Treaties and Tie-Breaker Rules?

Tax treaties are agreements between countries designed to prevent you from being taxed twice on the same income. If both Canada and your new country consider you a resident, tie-breaker rules determine which country has the primary right to tax you as a resident. Factors considered include your permanent home, personal and economic relations, family, job, and social ties. The notion of a habitual abode is also considered under the Canada-U.S. Tax Treaty. In the case of Lingle v. Canada, an individual was deemed a resident of both Canada and the U.S. The treaty's tie-breaker rules were applied to decide which country had the primary taxing rights, helping to avoid double taxation and clarify tax obligations. Regarding the Canada-UK Treaty (Article 27(2)), cases like Black v. Canada demonstrate that when someone moves from Canada to the UK, the individual isn't unfairly taxed by both countries due to the application of these tie-breaker rules.

The Risk of Being Taxed Twice When You Leave Canada

When you're taxed on the deemed disposition of your assets upon leaving Canada, your new country may also tax you on those same assets when you eventually sell them. This situation can result in paying tax twice on the same gain. To prevent this double taxation, Canada allows you to claim a foreign tax credit under Section 126 of the Income Tax Act (ITA) for taxes you've paid to another country. This credit reduces your Canadian tax by the amount of tax you've paid elsewhere. For example, if you owe $1,000 in Canadian tax on a gain but have paid $600 in tax to your new country on the same gain, you can reduce your Canadian tax by the $600 foreign tax credit, leaving you with $400 to pay to Canada.

Understanding Taxable Canadian Property (Section 2(3)(c))

Even after you become anon-resident, Canada can tax you on certain types of property located in Canada, like real estate or shares in private Canadian companies. If you sell these properties, you'll need to deal with Canadian taxes.

Branch Tax for Non-Resident Business Owners (Section 219)

If you own a business and plan to keep it running in Canada after you leave, Canada will tax the business profits. The branch tax is like a tax on profits that are moved out of Canada. It's Canada's way of taxing foreign businesses that earn money here.

Withholding Taxes (Section 215)

‍Withholding taxes are amounts taken from payments made to non-residents before they receive them. For example, if a Canadian company pays you dividends after you've left Canada, it might withhold a portion for taxes and send it to the CRA.

THE INFORMATION PROVIDED IN THIS ARTICLE IS FOR GENERAL INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE. FISZMAN TAX LAW RECOMMENDS CONSULTING A QUALIFIED LAWYER FOR ADVICE PERTAINING TO YOUR SPECIFIC SITUATION.