Moving abroad? Think about the tax consequences – MoneySense

Change your tax residence

Canadian residents must report their ‘world income’ in Canadian funds. When they become non-residents, they must file a final tax return from the date of emigration to declare income for the period of stay in Canada and, in some cases, pay a departure tax.

Tax Form Filing Requirements

To begin with, if the fair market value (FMV) of all property on the date of emigration is more than $25,000, you must complete and submit the form form T1161 List of property owned by an emigrant to Canada. This document must be attached to your T1 declaration. Even if you don’t file a T1, failure to file this form by the due date of your tax return will result in penalties.

To calculate a capital gain or loss on your deemed disposition, complete the form form T1243, Dear Ownership by an Emigrant from Canada and add it to your T1 declaration. In both cases, some exceptions apply, which are discussed below.

If you owe money upon departure, but cannot pay because you have not sold your home or do not want to, there is another important form: T1244, Election, under subsection 220(4.5) of the Income Tax Act, to defer payment of tax on income relating to the deemed disposition of property. In these cases, expect to provide security if the capital gain is greater than $100,000.

Exceptions to reporting obligations

You do not need to declare the following assets when you leave Canada:

• Cash (including bank deposits)
• Retirement plans, annuities, registered retirement savings plans (RRSPs), pooled registered pension plans, registered retirement income funds
• Registered Education Savings Plans (RESPs), Registered Disability Savings Plans, Tax-Free Savings Accounts (TFSAs)
• Deferred profit sharing plans, employee profit sharing plans, employee benefit plans, salary deferral plans, retirement compensation plans, employee life and health trusts, and rights or interests in certain other trusts

Please note that in the case of your Canadian pensions, non-residents are subject to a 25% withholding tax on income paid, which is withheld at source by the pension fund. Non-residents can submit an application for a reduction in withholding tax every five years via a form NR5. There may be differences in tax treaties, but normally this would be a final tax due to Canada, with no further tax reporting obligations for this source of income.

Please note that filing a tax return annually is a prerequisite to receiving Old Age Security (OAS) if you live abroad. Recipients must meet two other criteria. They must have:

• Have been a Canadian citizen or legal resident of Canada on the day before leaving Canada
• Lived in Canada for at least 20 years since he was 18

If you own the following taxable property when you leave Canada, you do not need to report them before you leave. The future disposition of these “taxable Canadian property” will require reporting when these assets are actually disposed of:

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• Canadian real estate or real estate, Canadian resources and timber properties
• Canadian business property (including inventory) if the business is conducted through a permanent establishment in Canada

You can choose to report the FMV of these properties upon departure by means of a declaration form T2061. This is known as a Election by an emigrant to report deemed dispositions of property and resulting capital gain or loss.

That leaves the unrecorded financial assets in investment accounts on your balance sheet to take into account. They must be registered with their FMV upon final return, so choose your departure date carefully. Please note that you do not need to file your T1 return until April 30 of the year after your departure.

Even if you don’t have any investments or real estate or business assets to report, you may not be off the hook: Personal use property with a fair market value of more than $10,000 must be reported upon exit. That includes cars, boats, jewelry, antiques, collections and family heirlooms if these items are collectively worth more than $10,000.

Different rules for immigrants

The rules are different rules for immigrants who now want to move on. There is no need to pay departure tax on property owned when the person last became a resident of Canada (or property inherited subsequently) if the stay in Canada was 60 months or less during the 10-year period before emigration. However, this rule does not apply if the person is a trust and the property is not “taxable Canadian property.”

Penalties for failure to submit forms

A penalty will be imposed if you do not submit the final T1 return. Form T1161 – your list of assets – also carries its own penalties. Whether you file a T1 or not, the T1161 must be filed on or before your filing due date. The penalty for failure to file is $25 for each day it is late, with a minimum of $100 and a maximum fine of $2,500. Interest on the balance due and penalties are additional.

What about provincial taxes?

Please note that Canada’s tax filing system is based on residency, not citizenship. This means reporting all your worldwide income in Canadian funds on your Canadian tax return. Your provincial share is normally based on where you lived on December 31 of the tax year. But this also changes for your emigration date if you leave the country, for the purpose of determining provincial tax residence.

I’m coming to live in Canada again

If you ultimately change your mind about emigrating or an overseas job opportunity arises, it is possible to settle your departure tax when you become a resident of Canada again, as long as you still own the property you previously declared to FMV when you left Canada. The Canada Revenue Agency (CRA) notes that if you make this election on previously reported taxable Canadian property, you can reduce the gain up to the amount of gain you reported.

For other properties, you must reduce the amount of disposition proceeds you declared on your tax return by the lesser of the amount of gain reported on your final T1 upon departure, the FMV of the property upon return, or another amount to the lesser of these two amounts. At this point your tax situation has become complex, so you will probably need professional help to get this right. Dealing with the rating agency on these compliance issues can be very time consuming.