Canadian Departure Tax: What You Need to Know Before Moving to the U.S.

Most people moving to the United States are focused on the visa, the house and the school district. The tax bill that arrives because they left Canada tends to be a surprise, and for anyone with a portfolio or a corporation it is rarely small.

Canada does not charge you for leaving. It settles up on the way out. On the day you stop being a Canadian resident for tax purposes, the CRA treats you as having sold most of what you own at fair market value, whether you sold anything or not, and the gain is taxable in your final return. That is what people mean by the Canada departure tax, or the Canada exit tax.

At Webtaxonline, we see it most often after the fact, when someone calls in April about a return that needed decisions made the previous autumn.

What is the Canadian Departure Tax?

It is capital gains tax on the growth in your assets while you were a Canadian resident. There is no separate exit levy. The mechanism is a deemed disposition: you are treated as having sold your property at fair market value on your departure date and immediately bought it back at the same value, so you are not taxed twice on that growth later.

The logic is that gains built up while Canada was your tax home should be taxed by Canada rather than escaping when you move somewhere cheaper. The catch is cash flow. You may owe tax on a gain you have not realised, on assets you have no intention of selling, in the same year you are paying for an international move.

Who Has To Pay Departure Tax In Canada?

Anyone who ceases to be a Canadian resident for tax purposes. That is a question of fact, and the CRA looks at your residential ties. Primary ties carry the most weight: a home available to you in Canada, a spouse or partner who stays, dependants who stay. Secondary ties include a driver’s licence, provincial health coverage, bank accounts and memberships.

Your departure date is generally the latest of three dates: the day you leave, the day your immediate family leaves, and the day you become resident of your new country. A few weeks either side of a year end can change which tax year the deemed disposition falls into, so if your ties are mixed, get a residency determination from our cross border tax accountants before you go rather than arguing it afterwards.

Which Assets Are Subject To Canada’s Exit Tax?

Canadian real estate is excluded for a practical reason rather than a generous one. Canada keeps the right to tax it whenever you sell, so there is no need to deem a sale now. Selling later as a non-resident brings its own requirements, including a section 116 clearance certificate.

Private company shares are what catch people out. For an owner-manager that is usually where the largest unrealised gain sits, and unlike a stock portfolio, there is no market price to point at, so you will need a proper valuation.

How is Departure Tax Calculated?

Four steps. Establish the fair market value of each affected asset on your departure date. Subtract the adjusted cost base to get the gain. Apply the capital gains inclusion rate. Report the taxable amount on your final Canadian return, where it is taxed at your marginal rate.

A simple illustration. Say a non-registered portfolio is worth $600,000 on the day you leave and your adjusted cost base is $350,000. The gain is $250,000. At a one-half inclusion rate, $125,000 becomes taxable income in your final year, on top of whatever else you earned as a resident.

The inclusion rate has been the subject of proposed changes in recent years, so confirm the rate in force for your departure year before you rely on any figure. This is one of several reasons we would not recommend working from last year’s assumptions.

What Do You Have to File When You Leave Canada?

More than most people realise, and the penalties attach to the forms rather than the tax.

Your final T1 is filed as an emigrant, with the departure date on the first page. You report worldwide income for the resident part of the year and Canadian-source income after that. Schedule 3 reports the deemed dispositions, and Form T1243 sets out the calculation.

Form T1161 lists the properties you owned on departure and is required where their total fair market value exceeds $25,000, with some exclusions. The penalty is $25 for each day late, minimum $100 and maximum $2,500, and it applies whether or not you owe any tax. If you held specified foreign property worth more than $100,000 at any point while resident, a T1135 is still due for that year.

To defer payment rather than pay now, Form T1244 postpones the tax until you actually dispose of the property. It is due by April 30 of the year following emigration, and the CRA can require security where the amount is significant.

Can You Reduce or Defer the Departure Tax?

Yes, with planning done before you go rather than after.

Designating your Canadian home as your principal residence for the years you owned it can shelter the gain accrued while resident. Selling loss positions before departure lets those losses offset the gains the deemed disposition creates. The T1244 election defers the cash outflow where liquidity, rather than the liability itself, is the problem.

For business owners, a pre-departure reorganisation or estate freeze can fix the current value of your shares and direct future growth elsewhere. That is a structural decision with consequences well beyond your move, so it belongs in a conversation with an advisor rather than on a checklist.

What Happens to Your Corporation When You Emigrate?

This is the part that gets missed, and it is often the most expensive.

Your shares are caught by the deemed disposition, so you may owe personal tax on a company you still own and run. That alone requires a valuation and a plan.

The larger issue is what happens to the company. Canadian-controlled private corporation status depends on the corporation not being controlled by non-residents. When a controlling shareholder becomes a non-resident, the corporation can cease to qualify as a CCPC. The consequences are significant: the small business deduction goes, the treatment of investment income changes, and the capital dividend account and refundable tax mechanics no longer work the way they did.

The corporation also keeps filing. A T2 corporate return is still due each year, financial statements still have to be prepared, and dividends paid to you as a non-resident shareholder now attract Part XIII withholding rather than being reported the way you are used to.

None of this makes emigrating a mistake. It does mean that if you own a corporation, your move is a corporate tax event as much as a personal one, and the two need to be planned together.

What About the U.S. Side?

The Canada-U.S. tax treaty exists partly to stop the same gain being taxed twice, and there are elections available to coordinate your Canadian departure with your U.S. arrival. Aligning the dates and the cost base treatment is the whole exercise.

Two things to raise early with a U.S. advisor. State tax treatment varies and does not always follow the treaty. And Canadian mutual funds and ETFs held by a U.S. person can fall under the punitive PFIC rules, which is usually worth restructuring before you become a U.S. resident rather than after. Withdrawals from an RRSP or RRIF as a non-resident face Canadian withholding, at 25% by default and often reduced by treaty. Our non-resident tax and international tax teams handle these filings.

Why This is Not a Return to File Yourself

Plenty of people file their own taxes competently for years and then hit this one. It is a different exercise, for three reasons worth being blunt about.

The information is not on a slip. Nobody sends you a summary of your adjusted cost base across fifteen years of purchases, or a valuation for shares in your own company. You have to build those numbers and be able to defend them.

The forms are unforgiving. T1161 carries a penalty that applies even when no tax is owed, and software will not prompt you for a form you did not know existed.

And if you own a corporation, the personal and corporate sides interact. A decision that lowers your personal departure tax can affect your company’s CCPC status, its filings and how you take money out afterwards. Handling one without the other is how people end up paying twice.

Talk to us before you leave, not after. Webtaxonline handles relocations to the U.S. across our corporate tax, personal tax and cross border services, so the departure return, the corporate filings and the U.S. coordination are one piece of work rather than three.

Offices in Toronto, Mississauga and Brampton, plus remote clients across the GTA. Get in touch for a consultation or call 289-752-1215. The earlier you call, the more we can actually do.

This article is general information, not tax advice. Your situation depends on facts specific to you, and rules change. Speak to a professional before acting.

FAQs

Does Canada have an exit tax?

Not a separate one. Canada taxes the accrued gains on most of your property through a deemed disposition on the day you cease to be a resident, which is why people call it a departure or exit tax.

How much is the Canadian departure tax?

There is no fixed rate. It depends on the unrealised gain across your affected assets, the inclusion rate in force for your departure year, and your marginal rate in your final year as a resident.

Do I pay departure tax on my house?

No. Canadian real property is excluded, because Canada keeps the right to tax it when you actually sell. Selling as a non-resident brings its own obligations, including a section 116 clearance certificate and withholding on the proceeds.

Do RRSPs and TFSAs get taxed when I leave Canada?

They are not caught by the deemed disposition. RRSPs, RRIFs, TFSAs, RESPs, RDSPs and registered pensions are all excluded. Later withdrawals as a non-resident face Canadian withholding tax, generally 25% and often reduced under the treaty.

Can I delay paying the departure tax?

Yes. Form T1244 defers payment until you dispose of the property. It must be filed by April 30 of the year after you emigrate, and the CRA may require security. The liability does not disappear, it simply is not payable yet.

What happens to my corporation if I move to the U.S.?

Your shares are caught by the deemed disposition, so you may owe personal tax on a company you have not sold. And if control passes to a non-resident, the corporation can lose its CCPC status, which affects the small business deduction and the taxation of investment income. The company still files a T2, and dividends paid to you as a non-resident attract withholding tax.