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Many Canadians wishing to retire soon but are not looking forward to the miserable weather that takes up more than half of each year and the high cost of living, are faced with a certain dilemma, and that is the departure tax. According to the Broadbent Institute, a very small minority (around 15 to 20%) of middle-income Canadians without an employer pension plan have saved sufficient funds to retire comfortably, as such, many soon to retire workers seek places outside of Canada where the cost of living hovers around $2000 per month for a couple. It is imperative to understand the intricacies of departure tax for retirees seeking a life outside Canada post-retirement.
When leaving Canada, one is considered to have sold their property even though they may not have sold it in reality, and the same property is also considered to have been reacquired for the same amount, which is the fair market value of the property in question. This is called deemed dispositions, and one must report the capital gain on their Canadian tax return.
There are exceptions for departure tax, and they are as follows:
1. Exclusive principle residence will not give rise to any tax as the rise will be offset by the principal residence exemption. However, if the property in question is rented out upon departure, “change of use” rules will cause capital gains and tax to accrue thereafter.
2. Canadian business property, including inventory, if the business is carried on through a permanent establishment in Canada.
3. Registered accounts such as RRSPs, TFSAs, employer pension plans.
4. The other exception is for short-term residents, whereby no departure tax is payable on the property you owned when you last became a resident of Canada, or property 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:
– Real taste outside of Canada
– Unincorporated businesses outside of Canada
– Mutual funds units in and outside of Canada
– Private or public company shares in or outside of Canada
– Personal use property as well as listed personal property (such as art, coins, jewelry etc.)
– Partnership interests
– Interests in non-resident inter vivos trust
In sum, departure tax is important to take into consideration once moving abroad, it is incumbent to consult expert tax advice to ensure proper asset management in the most tax-efficient manner possible. Contact our tax professionals for more information.