Departure Tax Exposed: Wallet Drainage and Travel Plan Ruination!

Departure Tax Exposed: Wallet Drainage and Travel Plan Ruination!

When you leave Canada, you are deemed to dispose of all of your property at its fair market value immediately before you cease to reside in Canada (even if you have not actually sold it). This deemed disposition triggers a departure tax on the gain accrued on this property before your departure.

Some property is specifically excluded from the deemed disposition rule, such as your residence, pension plans (including RRSPs and RRIFs), RESP and stock options.

Home Buyers’ Plan

If you withdrew funds from your RRSP as part of the Home Buyers’ Plan (HBP), the balance is payable at the earlier of the following two dates:

  • Before the date you file an income tax return for the year you become a non-resident;

  • 60 days after leaving Canada.

What do I need to do before leaving Canada?

1. List your property at the time of departure from Canada

If the fair market value of the property you own when you leave Canada is more than $25,000, you have to report this property to the Canada Revenue Agency or, failing this, you could be liable for a penalty of up to $2,500.

Some property is excluded from the mandatory reporting requirement, including:

  • Cash, Pension plans (including RRSPs and RRIFs), RESPs, Personal use property (such as clothing, household effects, automobiles) with a fair market value of less than $10,000.

  • Regardless of whether the above rule applies to you, you are required to complete Form T1161, List of Properties by an Emigrant of Canada. Filing T1161 is a requirement even if you don’t need to file a tax return in the tax year you left Canada. Make sure you file the form before the April 30 tax filing deadline, otherwise you’ll face the same late filing penalties and interest as Canadian residents.

  • The moment a resident leaves Canada, the CRA deems that they have disposed of certain kinds of property at fair market value and immediately reacquired it at the same price. This is known as a deemed disposition and you may have to report a taxable capital gain that is subject to tax (also known as departure tax).

2. Notify Canadian payers of your change of tax residence status

If you plan to keep financial accounts in Canada that generate passive income (interest, dividends), you need to notify your financial institutions of your non-resident status so they can ensure appropriate deductions at source are made on income paid after you leave Canada and issue the appropriate tax slips at year-end.

3. Repay your Home Buyers’ Plan balance

You can repay your HBP balance by making RRSP contributions before you leave Canada. Otherwise, the HBP balance will be included in your taxable income in the year of departure.

4. File a departure tax return

You have to file a tax return by April 30th of the year following the year of your departure from Canada.

The purpose of this tax return is to: The date you leave Canada and change your residence status, Report property you own at the time you leave Canada, Prepare the appropriate tax election forms, Report and pay the departure tax or elect to defer payment of the tax by providing a sufficient guarantee to the tax authorities.

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