Upon ceasing to be resident in Canada, an individual is deemed to have disposed of their capital property at fair market value, which can create tax liability on accrued capital gains. The individual is then deemed to have reacquired the property at a cost equal to the same fair market value. The purpose of this deemed disposition and reacquisition is to allow Canada to tax any accrued gains up to the date of departure. Such tax is often referred to as a “departure tax,” and can be quite onerous if not planned for appropriately.
Some properties that are subject to the deemed disposition rules are:
Some capital properties that are not subject to a deemed disposition on departure are:
The deemed disposition is triggered even though the individual may still own the property after leaving Canada.
To minimize the “departure tax” liability, an emigrating individual may elect to dispose of certain excluded property and trigger accrued losses to offset accrued gains, under paragraph 128.1(4)(d) of the Income Tax Act. Property subject to this election is:
However, accrued losses triggered using this election are limited to the accrued gains triggered from emigration. In order to make this election, the emigrating individual must file Form T2061A along with their departure tax return.
There are provisions to allow an individual to post security to the Canada Revenue Agency for the tax created from the deemed disposition in order to defer the cash flow burden until there is liquidity.
In some situations, relief from the tax on departure may be available where certain capital properties have decreased in value after emigration. For example, suppose an individual sells private operating company shares, after emigrating from Canada, for proceeds less than their fair market value at the date of departure. If the individual emigrated prior to March 5, 2010 the individual can elect to carryback the realized capital loss against capital gains reported on departure.
However, as a result of the 2010 Federal Budget, individuals who emigrate after March 4, 2010 will not be able to use this election on shares of private companies unless such shares derive more than 50% of their fair market value from real property situated in Canada at any particular time during the 60 months before the departure date.
If you are planning on emigrating from Canada, speak to your advisor about the potential tax consequences, including the deemed disposition of property.
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