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Image courtesy of Bill Longshaw
It’s not uncommon for a Canadian to be drawn south to the United States for work, personal or family reasons. Leaving home to take advantage of a new opportunity is quite exciting and often opens the door to future opportunities. However; before you leave Canada there are many tax issues that need to be considered. While rarely at the top of anyone’s list, tax planning is essential to ensure you are in the best position possible after the relocation. This applies to both tax in the United States and Canada as well. Depending on how you structure the transaction you (and your family) may be required to pay the Canadian departure tax. To help clients, prospects and other understand the tax and conditions under which it is assessed; RSW Accounting & Consulting has provided a summary below.

 
Tax Residency
The departure tax is levied on Canadians that while leaving the country have elected to change their tax residency status. It’s important to note that changing a tax residency status has nothing to do with one’s immigration status. For example, if a Canadian is going to be working in the United States for many years they can change their tax residency status and remain a Canadian citizen. This is often times done to reduce the tax burden of the emigrated individual or family and reduce the overall taxes that need to pay to the Canadian Revenue Agency (CRA). Remember, that if you are a resident of Canada for tax purposes you will need to pay the CRA tax on your global income. So many elect to become a non-resident and are only required to pay taxes on their Canadian earned income.

Changing Status
There are several rules that must be followed in order to become a non-resident for tax purposes. Primarily, the CRA requires that you sever your residential ties and that of course you have left the country. Broadly speaking, when one has severed residential ties this means your permanent home is located outside of Canada, you have moved your spouse and other members of the family and you currently reside outside of Canada. Essentially you have to demonstrate that you have actually left the country with the intent of settling in the United States. If these conditions have not been met then the CRA will not permit a change of status.

Taxable Assets
Upon exiting Canada the CRA requires the sale of specific assets must occur. This means that taxable account securities and non-registered securities are subject to the departure tax. Such accounts may include stocks, bonds, mutual funds, EFTs and stocks in Limited and general partnerships. In addition, specific personal property and non-Canadian real estate holdings are also subject to the departure tax. Assets such as annuities in Canada, registered retirement income funds, education saving plans, retirement income funds Canadian trusts, employee benefit programs, life insurance and Canadian business capital property are exempt from the tax.

The CRA requires that qualifying assets be disposed of on the day of exit at fair market value. This means if there are any gains (and generally there are) the taxpayer need to pay a departure tax. Now it’s important to note that the departure tax is just the capital gains tax by another name. Unfortunately, this means that 50% of any gain on any qualifying asset is added to the taxpayer’s income for tax purposes in the year of exit. This can represent quite a significant and unexpected increase in income and thus tax.

Contact Us
It’s clear why significant planning needs to be implemented before leaving Canada. Many individuals often find they needlessly pay a significant departure tax that proper tax planning could have helped to defer or minimize. If you are consider leaving Canada and have questions about your tax situation, contact us today! For additional information on international tax planning click here to contact RSW Accounting + Consulting. We look forward to helping you plan the future!