Thinking of leaving Canada? Important tax considerations when relocating abroad

For some Canadians, there comes a time when moving to another country makes sense, either for work or personal reasons. It could be for a career change, to live with a loved one, or for retirement. Regardless of the reason, some important tax considerations exist for Canadians seeking to permanently live elsewhere.

“It’s not as simple as packing your bags and leaving,” says Frans LeRoij, vice-president and head of wealth planning at Gluskin Sheff. There are several considerations that need to be reviewed with your professional advisors, LeRoij says.

In Canada, an individual’s income tax obligation is based on their residency status. Residents of Canada are subject to Canadian income taxes on their worldwide income from all sources whereas non-residents are only subject to Canadian income taxes on income sourced in Canada. There are various income tax rules and obligations discussed below for Canadians that intend to emigrate to another country and become a non-resident for income tax purposes.

Residency is not strictly defined but is established based on an individual’s facts and circumstances and what “residential ties” they have to Canada. Generally, you are considered an emigrant for income tax purposes if you leave Canada to settle in another country and sever your residential ties with Canada. Residential ties include significant ties such as a permanent home available and spouse/common-law partner and dependants in Canada and other residential ties such as personal belongings, professional and social memberships, driver’s license, health insurance coverage and financial accounts in Canada. There is no specific tie or ties that must be severed in order to cease residency and all ties are reviewed in such a determination.

The date that you become a non-resident of Canada for income tax purposes is the latest of:

-the date you leave Canada

-the date your spouse or common-law partner and dependants leave Canada

-the date you become a resident of the foreign country you settle in

When ceasing residency, you are automatically considered to have sold most types of property you own at fair market value (even if they haven’t actually been sold) and reacquired the property for the same amount. Canadian emigrants may also have to report a capital gain, known as a departure tax, on their tax return for the year of emigration on those assets depending on the appreciation of the assets when they depart.

“Depending on the performance of those assets, the unrealized gains can be significant, so it’s something you should review in advance with your professional advisors,” says Mark Chan, vice-president of wealth planning at Gluskin Sheff.

There are some exceptions to the deemed disposition, Chan notes, such as real estate situated in Canada, pension plans and registered plans like a registered retirement savings plan (RRSP) or tax-free savings account (TFSA).

In some cases, there may be a significant departure tax triggered by the deemed disposition of assets upon emigration. There is the option to post security instead of paying the departure tax. Posting security will defer the departure tax until the property is actually disposed of without interest. Common forms of security accepted by the CRA may include a letter of credit or bank guarantee.

As mentioned above, non-residents are subject to Canadian income taxes on income sources from Canada. Chan says that Canadians who will continue to own an income property or want to rent their home after leaving the country will need to factor in annual reporting and withholding tax obligations as well.

Where individuals are shareholders of a Canadian private corporation or are beneficiaries or executors of a Canadian-resident family trust, additional complexities may arise due to becoming non-resident. This change in status should be addressed with your professional advisors due to the impact on future planning with these types of entities.

Canadians thinking of moving outside of the country should proactively speak to advisors who specialize in the laws and taxes of the destination country. For instance, a cross-border advisor can outline the destination country’s tax rates that apply to employment, pension and investment income, how any Canadian-source income would be taxed in the destination country and the imposition of any potential estate, gift and inheritance taxes. A cross-border advisor can also review any tax treaty between Canada and the destination country to review how its provisions would apply to an individual’s facts and circumstances.

“You want to know what the various rules are before you move to another country so there are no surprises when you make the move,” Chan says.

A departure from Canada is a significant life event that can impact you and your family. How will the move impact your personal cash flow requirements? Are your estate plans up to date and reflective of your wishes?  Do you have sufficient insurance coverage to protect you and provide you with peace of mind? This is often an appropriate time to proactively review your personal and financial priorities with your professional advisors.

“It’s important that Canadians who are leaving take the time to review all the implications of moving to another country,” Chan says.