Important

Leaving Canada: Departure Tax

When you leave Canada and become a non-resident, the CRA triggers a deemed disposition of most of your assets at fair market value. This "departure tax" can create a significant tax bill on unrealized gains. Certain assets like Canadian real property and RRSP/RRIF accounts are excluded from the deemed disposition.

Key Points

  • Deemed disposition applies to most capital property at fair market value on your departure date.
  • Principal residence, RRSP, RRIF, and Canadian real property are exempt from deemed disposition.
  • You can elect to post security with CRA and defer payment of departure tax.
  • The US does not recognize the deemed disposition, creating a potential cost-basis mismatch.
  • Form T1161 (List of Properties) must be filed with your final Canadian return.

Action Items

  1. 1.Obtain fair market valuations for all capital property on your departure date.
  2. 2.File a Canadian departure return and Form T1161 listing all deemed-disposed properties.
  3. 3.Consider electing to post security with CRA to defer departure tax payments.
  4. 4.Adjust your US cost basis to match the Canadian deemed disposition values to avoid future double taxation.
  5. 5.Notify all Canadian institutions of your change in residency status.

Frequently Asked Questions

Can I avoid departure tax by keeping my Canadian home?

Keeping a home does not avoid departure tax on other assets. However, your principal residence is exempt from deemed disposition. Retaining it may also complicate your residency determination.

How do I prevent double taxation on the deemed disposition gain?

You can step up your US cost basis to the FMV at departure. If Canada taxes the gain on departure, you may claim a future foreign tax credit when you eventually sell the asset in the US.

Related Scenarios

Critical

TFSA US Tax Trap

The Tax-Free Savings Account is tax-exempt in Canada but receives no treaty protection in the US. The IRS classifies a TFSA as a foreign grantor trust, requiring Forms 3520 and 3520-A annually. Failure to file can result in penalties starting at $10,000 per form per year.

Critical

FBAR Filing Requirements

The Report of Foreign Bank and Financial Accounts (FBAR) must be filed by any US person with foreign financial accounts exceeding $10,000 in aggregate at any point during the year. The FBAR is filed electronically with FinCEN, not the IRS, and has its own deadline and penalty regime.

Core

Substantial Presence Test

The Substantial Presence Test (SPT) uses a weighted formula across three years to determine if a foreign national is a US tax resident. If you meet the test, you are taxed on worldwide income. Understanding the SPT is essential for snowbirds and anyone splitting time between Canada and the US.

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