Considering leaving Canada? Here’s what you need to know

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Leaving Canada without prudent planning could see assets taxed at rates of more than 50 per cent

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By Simran Arora and Chris Warner

“The grass always looks greener …” goes the trope. With the tax changes in the 2024 federal budget, many successful Canadians seem to be considering whether greener pastures exist abroad. Perhaps it’s the United States for a more accommodating business climate, Saudi Arabia because it has no income tax or Australia for the better weather.

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For those considering a departure, there are many financial considerations. From our perspective as financial planners, the biggest one is tax. Leaving Canada without prudent planning could see assets taxed at rates of more than 50 per cent. If planned ahead, this could be substantially reduced.

But emigration is complex. Everyone considering it should seek advice from a financial team that includes an experienced tax lawyer. Understanding that, here is some helpful general information.

Determining residency

Where one lives matters, but it isn’t the whole story. Someone can become a non-resident without becoming an emigrant. This is called a factual tax resident of Canada.

Fundamentally, a factual tax resident is a Canadian living abroad. Their global income is subject to Canadian tax.

Conversely, an emigrant is considered to have severed ties with Canada. Their global income is typically only subject to tax in the new country.

When you become an emigrant, you can face a departure tax on Canadian assets, which can be significant. Factual residents of Canada living abroad normally avoid departure tax, but have other considerations.

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Determining residency status mainly comes down to time spent outside of Canada and residential ties to Canada.

Canadian-born citizens may become non-residents if they establish residency in another country or spend more than 183 days outside Canada in one tax year. Non-residents may still be factual residents if they maintain residential ties (for example, snowbirds, students and workers who commute internationally).

Residential ties are classified as primary or secondary. These help the Canada Revenue Agency determine residency. Usually, at least one primary tie is essential to factual residency.

Primary ties are a Canadian residence, a spouse or partner residing in Canada and dependents residing in this country.

Secondary ties include personal possessions, Canadian passports or driver’s licences, provincial/territorial health insurance, active Canadian bank accounts and credit facilities, and formal social ties.

Factual resident taxation

Factual residents of Canada are required to pay tax on their global income. They normally receive a credit for taxes paid in other countries, but must still pay any shortfall difference to Canada.

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This becomes critically important to people working in a country with low or no income tax. High-earners who thought they would pay minimal tax could instead pay more than 50 per cent tax.

Double-income taxation could be avoided by an emigrant, who typically only pays tax levied by their current country. However, this must be balanced against the cost of departure tax plus other residency factors.

Emigrant taxation

Emigrants are those who leave Canada, establish a permanent home abroad and have severed Canadian ties. On the date of departure, they are deemed to have disposed of applicable assets at fair market value. This is referred to as the departure tax, though it is really triggering a tax on unrealized capital gains.

There is potential to defer tax on deemed dispositions until the assets are sold, but this can be challenging to implement. A deferral is achieved by establishing a hypothecation (property lien or bank letter of credit) with the CRA and filing a T1244 election by April 30 of the year after emigration.

The types of assets that are deemed sold upon departure are non-registered investments, shares of a private corporation (CCPC), partnership interests and non-Canadian real estate.

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Assets that are usually exempt include Canadian real estate, registered investments (such as registered retirement savings plans (RRSPs), tax-free savings plans (TFSAs) and pensions), employee stock options, life insurance policies (excluding segregated funds) and qualified Canadian business properties.

Investment taxation

As a non-resident, you can maintain registered accounts, but cannot contribute further to them. The accounts may also face new implications based on the tax code of the new country.

For example, the U.S. does not recognize TFSAs, so any investment earnings inside a TFSA, while not taxed in Canada, can be taxed in the U.S.

Non-residents can continue to own Canadian real estate and earn rental income, but they are required to withhold 25 per cent of it. Each year, rental owners can file a Section 216 election to have the withholding tax based on net rental income instead of gross.

Withholding tax must be remitted to the CRA by the 15th of the following month after the rental income is earned. If not, the CRA will charge interest on unpaid amounts, compounded daily.

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Note that if the landlord is not physically in Canada, then either the property manager or the renters themselves will need to complete this.

A non-resident who sells Canadian real estate must inform the CRA before the sale or within 10 days of the closing date. Those who fail to do so will be subject to a 25 per cent withholding tax on all sale proceeds, plus face a penalty of up to $2,500.

By informing the CRA, a seller receives a compliance certificate, allowing the withholding tax to be reduced to 25 per cent of any capital gain arising.

If the seller is liable for tax on sale proceeds in their new country, it is advisable to file a Canadian tax return that year to reduce the risk of double taxation.

Emigrants have their private corporation shares deemed sold on departure. Any unrealized gain between the share’s cost basis and market value is taxed as a capital gain, even if the holdings in the corporation are not sold.

Additionally, a corporation will likely lose its CCPC status if it is no longer controlled by Canadian residents, eliminating access to the small-business deduction and other benefits.

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Recommended from Editorial

As you can see, leaving Canada is complicated. There is a significant amount of planning involved to ensure all financial and tax considerations are addressed. Will the grass actually be greener? Speak to your financial team to know for sure.

Simran Arora, CFP, CIM, CIWM, is a wealth advisor and portfolio manager at Nicola Wealth Management Inc., and Chris Warner, FCSI, CIM, CFP, PFP, is a wealth adviser there.

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