Leaving Canada permanently? Here’s what you need to know about departure tax
As baby boomers begin to retire, many are choosing to live their golden years outside of Canada. There are a whole host of reasons that Canadians are moving abroad to retire. Two of the big ones are a reduced cost of living and the desire to live in a better climate.
There are many places where your retirement dollars will go a lot further than they will in Canada and that is very appealing, especially to those with limited retirement assets.
Currently, approximately 9.8 million Canadian baby boomers are approaching retirement. By 2020, the number of Canadians retiring each year will be 425,000.
The Broadbent Institute released a study in 2016 that showed that only a small minority (roughly 15 to 20%) of middle-income Canadians retiring without an employer pension plan have saved enough for retirement. The majority of these families with annual incomes of $50,000 or more will be hard pressed to save enough in their remaining period to retirement (less than 10 years) to avoid a significant fall in income at retirement. Additionally, for single people over 65 without pension income, their median income is under $20,000.
Many places around the world offer a cost of living of under $2,000 per month for a couple, and in many cases, a warmer climate to enjoy. Retirees are flocking to these destinations in order to live a better quality of life than they would be able to afford here in Canada. It’s not only those with low incomes that are retiring abroad, as many other retirees are simply seeking a higher standard of living for fewer dollars.
If you decide to leave Canada, it will be important to understand departure tax. When you leave Canada, you are considered to have sold certain types of property (even if you have not sold them) at their fair market value, and to have immediately reacquired them for the same amount. This is called a “deemed disposition,” and you may have to report a capital gain on your Canadian tax return.
Exceptions to departure tax
- Canadian real property (real estate) that was exclusively a principal residence will not give rise to tax as any gains will be offset by the principal residence exemption.
However, if you decide to keep your principal residence and rent it out upon leaving Canada, “change of use” rules will cause capital gains and tax to accrue thereafter.
- Canadian business property (including inventory) if the business is carried on through a permanent establishment in Canada.
- Your registered accounts will not be subject to departure tax. This would include RRSPs, TFSAs, employer pension plans, etc. (see complete list).
- The other exception is for short term residents, whereby no departure tax is payable on property you owned when you last became a resident of Canada, or property you inherited after you last became a resident of Canada. This applies if you were a resident of Canada for 60 months or less during the 10-year period before you emigrated.
Assets eligible for departure tax
The departure tax will apply to the following assets upon departure from Canada:
- Real estate outside Canada
- Unincorporated businesses outside of Canada
- Private or public company shares in Canada or outside Canada
- Mutual funds units in Canada or outside Canada
- Partnership interests
- Interests in non-resident inter vivos trusts
- Other portfolio investments
- Personal use property as well as listed personal property (such as works of art, jewelry, stamps, coins, and rare manuscripts)
Departure tax could potentially pose a challenge for an individual, where there is a deemed sale but no actual sale proceeds in connection with the assets subject to departure tax. You are able to elect to defer the payment of tax by providing security that is acceptable to the CRA, to defer payment of departure tax until the property is actually disposed of.
Departure tax is one of so many things to take into consideration when moving abroad. It is important to understand your personal tax implications when you leave Canada. In addition, it is prudent to consult an expert to help you to put a plan in place, to ensure that you are managing your assets in the most tax efficient manner possible, and understand the tax implications of your move. Departure tax is just one tax implication of leaving Canada permanently and other Canadian and international taxes need to be considered.