During the Year of emigration here are a few things you can expect:
Income Reporting Split
For the part of the tax year that you were a resident of Canada you have to report your world income (income from all sources, both inside and outside Canada) on your Canadian tax return.
For the part of the tax year that you were not a resident of Canada you pay Canadian income tax only on your Canadian source income.
In general, if you cease to be a resident of Canada, you’ll be deemed to have disposed of and reacquired your capital property at its Fair Market Value (FMV) on that date. You’ll be subject to tax on any taxable capital gain resulting from this deemed disposition.
These deemed disposition rules apply to all capital property unless specifically excluded. Such excluded property includes:
- Canadian real or immovable property
- Canadian business property (including inventory) if the business is carried on through a permanent establishment in Canada;
- Pensions and similar rights, including registered retirement savings plans (RRSP), pooled registered pension plans (PRPP), registered education savings plans (RESP), tax-free savings accounts (TFSA)
- Interests in life insurance policies in Canada
- stock options and interest in some trusts. Shares in a private company are not exempt from these rules.
Therefore, if you own such shares, you must report a deemed disposition at FMV. Professional assistance will likely be required to obtain this value.
You can either pay the tax on the deemed disposition when you file your tax return for the year of emigration or you can opt to post security in lieu of paying tax for any particular property. The security will remain in place until the property is actually disposed of or until the taxpayer returns to Canada and “unwinds” the deemed disposition. As a relieving measure, security is not required with respect to the tax on the first $100,000 of capital gains that arise as a result of the deemed disposition rule.
If you subsequently dispose of property that has been excluded from the deemed disposition rules, you’re generally required to file a Canadian income tax return and pay tax on any resulting gain. In some cases, a return is not required, but the proceeds of disposition will be subject to non-resident withholding tax. Other filings may also be required. There are also special rules if you leave Canada for only a few years to work or study. The rules in this area are complex, and professional tax assistance is required. Review the tax implications with your tax adviser prior to departure.
Withdrawals of RRSP
Although you cannot elect to dispose of your RRSP, you can withdrawal your RRSP prior to emigration. Such a withdrawal will be subject to tax at the personal marginal tax rates.
Determining whether or not a withdrawal from RRSP should be made would require an analysis of multiple factors such as the personal marginal tax rates on your final Canadian return versus non-resident withholding rate.
If you emigrate from Canada, you’re required to report your property holdings to the CRA if you own “reportable property” with a total value of more than $25,000 at the date of departure from Canada. Exceptions will be provided for personal-use property with a value of less than $10,000. Other exceptions include cash (including bank deposits) and the value of pension plans, annuities, RRSPs, RRIFs, retirement compensation arrangements, employee benefit plans and deferred benefit plans.
A T1161 Form must be filed regardless of whether you’re subject to the departure tax discussed above. The requirement is also independent of the tax return requirement—you must file Form T1161 regardless of whether you’re otherwise required to file a return for the year of emigration. To avoid late-filing penalties, this form must be filed on or before your filing due date for the year of emigration from Canada.
After you leave Canada you become a non-resident for income tax purposes. As a non-resident, you pay tax on income you receive from sources in Canada.
If you continue to earn rental income on your Canadian property, the rental income will be subject to a 25% withholding tax on the gross rent and you will be required to file and annual section 216 income tax return.
Actual Disposition of property
Canadian Real or Immovable Property
As a non-resident you must notify the CRA about the disposition within 10 days of the date the property was disposed of. You must file the following forms:
• Form T2062 Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property
• Form T2062A Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Canadian Resource and Timber Resource Property, Canadian Real Property (other than Capital Property) or Depreciable Taxable Canadian Property
With these forms you are required to pay the CRA 25% of the net gain in income taxes. These forms are required to be filed regardless if you elected to declare a deemed disposition upon emigration. The only difference between making the election and not making it is the amount of capital gain reported on the forms as discussed above.
A similar filing must be made with the Revenue Quebec Agency, if the real or immovable property is located in Québec. A payment equivalent to 12.875% of the net gain must be made.
In addition, you will also be required to file a Canadian income tax return for the year in which the disposition was made. The tax rate on the Canadian income tax return depends on which income tax bracket you fall into. Therefore it may result in a tax refund if you fall into the 22% or 15% tax bracket or additional taxes if you fall into the 26% or 29% tax bracket.
As you are no longer a Canadian resident, any subsequent disposition of your investment portfolio will not result in any Canadian tax obligations (as long as you do not hold 25% or more of a Canadian publicly listed company).
Unlisted shares of Canadian corporations
If the shares of your private corporation derive more than 50% of their fair market value from taxable Canadian real or immovable property the same procedures mentioned above under Canadian real or immovable property must be performed.
If a corporation does not meet the above conditions, an analysis must be performed to determine whether the corporation emigrated from Canada and whether corporate departure tax applies.
Once you’ve left Canada, the earnings and growth inside the RRSP or RRIF continue to grow tax-deferred, however; there will be a non-resident withholding tax imposed on all payments out of the plans. The rate of withholding varies from zero to 25%, depending on the amount, the country of emigration and any tax treaties that Canada has entered into with foreign jurisdictions.
If you hold a TFSA when you leave Canada, you can keep it and continue to benefit from the exemption from Canadian tax on investment income and withdrawals. However, you cannot contribute to your TFSA while you are a non-resident of Canada, and your contribution room will not increase.
RESP is a contract between the account owner and the promoter (usually a financial institution).
Under the contract, the account owner selects one or more beneficiaries and agrees to make contributions for them, and the promoter agrees to pay education assistance payments to the beneficiaries.
A non-resident account owner can open an RESP account, make contributions, receive grants and initiate withdrawals. However; the RESP beneficiary must be a Canadian resident to receive the RESP grant. If the beneficiary is a non-resident of Canada, they can still use the RESP for their education, but the RESP grants will be returned to the government. If the beneficiary moves back to Canada and re-establishes Canadian residency, contributions can again be made and grants will be paid on contributions.
The tax-sheltered status of the RESP only applies to Canadian residents. When you, as the account owner, become a non-resident, you might have to pay taxes on any income earned in the RESP according to the income tax rules in country you reside.