Departing Canada (and the tax requirements)
Leaving Canada and becoming a non-resident of Canada results in a departure tax. This means that on departure, you are deemed to have disposed of all your assets (with some exceptions) at fair market value and reacquired them at fair market value, resulting in capital gain on these assets.
Some properties that fall within the exemption are:
- Canadian real or immovable property (e.g. land and building)
- Canadian business property (including inventory) if the business is carried on through a permanent establishment in Canada
- Pension plans
Owning Shares of a Corporation
If you have a business in Canada and you are departing Canada, these shares would also be subject to the deemed disposition rules. A deferral of the tax payment can be applied for by posting security (such as the shares of the company) with the CRA. The deferral allows you to defer the tax payment until such property is actually sold.
Alternatively, you may be able to claim your lifetime capital gains exemption on the deemed disposition of your shares. The lifetime capital gains exemption allows for a deduction on the gain of your corporate shares, up to a maximum of $971,190 (for 2023 – indexed each year). However, the exemption is only available if the shares are that of a Qualified Small Business Corporation. We would be happy to help you analyze further if your shares qualify. Claiming the lifetime capital gains exemption generally makes sense if you plan to sell the shares to a third party at a later date, or if combination of withholding tax and the tax in the new country is lower than taxes here in Canada.
The deemed disposition inherently results in double taxation. The first level of tax is when paying the departure tax, and the second is when you extract the value by ways of dividends (even when security is pledged or a lifetime capital gains exemption is claimed). Planning can be put in place with our tax team to mitigate double taxation.
For example, if you were to own shares in a company worth $2,500,000 upon leaving Canada you’d pay the following:
- Departure tax when leaving Canada: $620,000
- Withholding tax on dividends: $ 625,000
- Total tax paid in Canada: $1,245,000
Various strategies could be put into place to help mitigate the double taxation. For example, dividends or claiming the lifetime capital gains exemption can be utilized to reduce the tax burden.
Renting Real Estate
Though Canadian Real Estate is not subject to the deemed disposition rules, there are rules to be aware of when it comes to non-resident-owning real estate. As a non-resident owning real estate, you will be subject to withholding in Canada. A Canadian Agent is required to withhold and remit your withholding taxes to the CRA on a monthly basis. If you do not have a Canadian Agent, your tenant may be liable for this.
The withholding tax is 25% of the GROSS rental income. You can file an NR-6 to request that the withholding be 25% of NET income instead.
Your agent will also need to issue you an NR4 – showing you the amount of tax that was remitted.
Lastly, you can file a section 216 return. A Section 216 Return allows you to pay tax on your net Canadian rental income instead of the gross amount. If the non-resident tax that the agent withheld is more than the amount of tax payable on your Section 216 return, the CRA will refund the difference to you. If you filed the NR6 and the CRA approved it, you have to file a Section 216 return as well.
Underused Housing Tax (UHT)
A new Underused Housing Tax (UHT) was introduced in 2022. This is a new tax on underused homes in Canada. The tax is 1% of the taxable value of the home, or 1% of its most recent sale price, whichever is greater. There are some exceptions that apply. One of the exceptions is Canadian citizens and permanent residents. If you are departing Canada, you must determine if the UHT applies to you. You can click here to read our blog post about the legislation.
If you are planning on leaving Canada in the near or distant future, we can help make the process as seamless and stress-free as possible. Book a consultation with our team.
Disclaimer: Any tax information published on this blog is based on the facts provided to us and on current tax law (including judicial and administrative interpretation) during the time of publication. This does not constitute legal advice. Tax law can change (at times on a retroactive basis) and these changes may result in additional taxes, interest, or penalties. Practice due diligence and if in doubt, speak with a member of our team.