CANADIAN TAXATION OF EMIGRANTS
A person who is resident in Canada during a taxation year is subject to Canadian
income tax on his or her worldwide income from all sources. A taxpayer who
emigrates from Canada may be subject to a tax upon ceasing to be resident in
Canada (referred to as â€œdeparture taxâ€).
Following departure from Canada, a non-Canadian resident may be subject to
Canadian tax on Canadian source income. This may include employment
income earned in Canada, income from carrying on a business in Canada,
taxable capital gains from the disposition of taxable Canadian property and other
Canadian source income such as interest, dividends, royalties, registered plan
withdrawals and Canadian trust distributions. Special rules apply for an
individual who is resident in Canada for only part of a taxation year.
Set forth below are general comments regarding tax consequences that may
apply to an individual ceasing Canadian residence. Special rules, which are not
covered in this Guide, may apply where an entity other than an individual ceases
to be resident in Canada.
The term â€œresidentâ€ is not defined in Canadian income tax legislation. The Courts
have held that an individual is ordinarily resident in Canada for tax purposes if
Canada is the place where the individual, in the settled routine of his or her life,
regularly, normally or customarily lives. In making a determination of residence
status (generally referred to as the â€œfactual residenceâ€), all of the relevant facts in
each case must be considered, including residential ties with Canada and length
of time, object, intention and continuity with respect to stays in Canada and
Apart from the factual residence, an individual may also be deemed to be
resident in Canada or deemed not to be resident in Canada in certain situations.
Â Â In determining whether or not an individual leaving Canada remains resident or
ceases to be resident in Canada for tax purposes, remaining residential ties with
Canada while he or she is abroad are considered. Unless an individual severs
all significant residential ties with Canada upon leaving Canada, the individual
may continue to be a factual resident of Canada. The residence status of an
individual can only be determined on a case by case basis after taking into
consideration all of the relevant facts.
Useful information regarding various considerations that may be taken into
account by the tax authorities when determining whether or not a taxpayer has
significant residential ties in Canada for the purposes of the factual residency test
can be found in the Canada Revenue Agency (â€œCRAâ€)
Interpretation Bulletin IT-221R3-(Consolidated), entitled â€œDetermination of an
Individual’s Residence Statusâ€.
According to CRAâ€™s views, primary residential ties for the purposes of
determining residence status of an individual will generally include the following:
ô€‚™ Dwelling place or places (see IT-221R3-(Consolidated), par. 6):
â€œWhere an individual who leaves Canada keeps a dwelling place in
Canada (whether owned or leased), available for his or her
occupation, that dwelling place will be considered to be a significant
residential tie with Canada during the individualâ€™s stay abroad.
However, if an individual leases a dwelling place located in Canada
to a third party on armâ€™s length terms and conditions, the CRA will
take into account all of the circumstances of the situation (including
the relationship between the individual and the third party, the real
estate market at the time of the individualâ€™s departure from Canada,
and the purpose of the stay abroad), and may not consider the
dwelling place to be a significant residential tie with Canada except
when taken together with other residential ties.â€
ô€‚™ Spouse or common-law partner or dependants (see IT-221R3-(Consolidated),
â€œIf an individual who is married or cohabiting with a common-law
partner leaves Canada, but his or her spouse or common-law
partner remains in Canada, then that spouse or common-law
partner will usually be a significant residential tie with Canada
during the individualâ€™s absence from Canada. Similarly, if an
individual with dependants leaves Canada, but his or her
dependants remain behind, then those dependants will usually be
considered to be a significant residential tie with Canada while the
individual is abroad. Where an individual was living separate and
apart from his or her spouse or common-law partner prior to leaving
Canada, by reason of a breakdown of their marriage or commonlaw
partnership, that spouse or common-law partner will not be
considered to be a significant tie with Canada.â€
Secondary residential ties must be looked at collectively in order to evaluate the
significance of any one such tie, so that a single secondary factor, taken in
isolation, will not be determinative of an individualâ€™s residency in Canada while
abroad. Secondary residential ties that will be taken into account in determining
the residence status of an individual while outside Canada include the following
(see IT-221R3-(Consolidated), par. 8):
ô€‚™ Personal property in Canada such as furniture, clothing, automobiles and
ô€‚™ Social ties with Canada such as memberships in Canadian recreational and
ô€‚™ Economic ties with Canada such as employment with a Canadian employer
and active involvement in a Canadian business, and Canadian bank
accounts, retirement savings plans, credit cards, and securities accounts;
ô€‚™ Landed immigrant status or appropriate work permits in Canada;
ô€‚™ Hospitalization and medical insurance coverage from a province or territory of
ô€‚™ A driverâ€™s license from a province or territory of Canada;
ô€‚™ A vehicle registered in a province or territory of Canada;
ô€‚™ A seasonal dwelling place in Canada or a leased dwelling place;
ô€‚™ A Canadian passport; and
ô€‚™ Memberships in Canadian unions or professional organizations.
The above list is not exhaustive, and various other considerations must also be
taken into account. Determination as to the date an individual leaving Canada
becomes a non-resident is a question of fact. Note that an individual who plans
to leave Canada may consider submitting CRAâ€™s Form NR73, Determination of
Residency Status (Leaving Canada), in order to obtain CRAâ€™s opinion on the
individualâ€™s residency status based on the information provided by the individual.
Â Apart from the factual residence, an individual may also be deemed, under the
tax legislation, to be resident in Canada in certain situations. This may include
persons sojourning in Canada for a total of 183 days or more in any calendar
year and categories of persons specified in the tax legislation such as members
of the Canadian Forces.
Â It should be noted that an individual who is a resident of Canada for tax purposes
may also be a resident of another country for tax purposes under the laws of the
other country. In such a case, the tax treaty between Canada and that country
may provide “tie breaker rules” to determine in which country the individual will
be resident for purposes of the other provisions of the treaty. If, at any time, such
“tie breaker rules” apply and it is determined that an individual is a resident of
another country for purposes of a tax treaty between Canada and that country,
then the individual who is otherwise resident in Canada (whether factual or
deemed) will be deemed not to be resident in Canada at that time. Departure tax
may apply in such circumstances where an individual ceases to be resident in
Canada under such deeming provisions.
Canadian tax legislation treats a taxpayer that ceases to be resident in Canada
as having disposed of his or her property for proceeds equal to fair market value.
For individuals who emigrate from Canada after October 1, 1996, the departure
tax applies to all property, other than:
ô€‚™ Real property situated in Canada, a Canadian resource property or a timber
ô€‚™ Property of a business carried on by the taxpayer, at the emigration time,
through a permanent establishment in Canada;
ô€‚™ Property of a returning former resident who has elected to unwind the
deemed disposition on departure; and
ô€‚™ An excluded right or interest (as defined below) of the taxpayer.
An excluded right or interest (excluded from the deemed disposition by
individuals) is defined to include:
ô€‚™ Rights under or an interest in a trust governed by a registered plan and other
plans providing specified pension and similar payments (including for
example, RPPs, IPPs, RRSPs, RRIFs, RESPs, DPSPs, and RCAs.);
ô€‚™ Certain rights under an employee benefit plan;
ô€‚™ Stock option rights for shares of the employer corporation (or a related
corporation) or units of a mutual fund trust;
ô€‚™ A retiring allowance;
ô€‚™ Rights under certain trusts such as an employee trust, an amateur athlete
trust and an eligible funeral arrangement;
ô€‚™ Rights to benefits under the Canada Pension Plan, the Quebec Pension Plan,
the Old Age Security Act and the Saskatchewan Pension Plan and benefits
under foreign social security arrangements;
ô€‚™ Interests in certain personal trusts resident in Canada;
ô€‚™ Interest in certain non-resident testamentary trusts; and
ô€‚™ Interests in life insurance policies in Canada, other than certain interests in
segregated fund policies.
The departure tax will, therefore, apply to the following assets upon departure
from Canada (this list is not intended to be exhaustive):
ô€‚™ Real estate outside Canada;
ô€‚™ Unincorporated businesses outside of Canada;
ô€‚™ Private or public company shares in Canada or outside Canada;
ô€‚™ Mutual funds units in Canada or outside Canada;
ô€‚™ Partnership interests;
ô€‚™ Interests in non-resident inter vivos trusts;
ô€‚™ Other portfolio investments; and
ô€‚™ Personal use property as well as listed personal property (such as works of
art, jewelry, stamps, coins, and rare manuscripts).
SECURITY FOR DEPARTURE TAX
Departure tax could potentially pose a severe hardship to an individual, where
there is a deemed sale but no actual sale proceeds in connection with the assets
subject to departure tax. An individual is allowed to elect, on giving security
acceptable to the tax authorities, to defer payment of departure tax that is owing
as a result of the deemed disposition of a particular property until the property is
actually disposed of. If such an election is made, interest does not start to
accrue on the amount secured until such time as the amount becomes
unsecured and relief is provided from penalties as they relate to the unpaid tax.
The election has to be made in a prescribed manner to defer the amount of the
tax owing. The tax authorities will review the amount of security on an annual
basis and determine whether it continues to be adequate.
An individual is not required to furnish acceptable security for the first $100,000
of capital gains as an individual is deemed to have furnished acceptable security
for the tax on up to $50,000 of taxable capital gains in the top tax bracket.
An individual who ceases Canadian residency must file with the tax authorities, in
prescribed form, a list of all the reportable properties that the individual owned at
emigration time. This reporting requirement only applies where an individual
owns reportable properties at emigration time having a fair market value greater
than $25,000. Reportable property of an individual includes most property other
ô€‚™ Money that is legal tender in Canada and deposits of such money;
ô€‚™ Most (but not all) property that is an excluded right or interest defined above;
ô€‚™ Any item of personal-use property the fair market value of which is less than
PLANNING FOR THE DEPARTURE TAX
Potential departure tax exposure has to be determined at the appropriate time in
light of all of the facts. Planning strategies may be considered in certain
circumstances prior to departure from Canada. As well, planning strategies may
be considered following departure from Canada. For example, post-departure
losses may, in certain circumstances, be carried back against deemed gains
from the date of emigration. Qualified professional assistance is highly advisable
when departure from Canada is considered.
IMPACT ON CANADIAN PLANNING STRATEGIES
Various tax planning strategies may be implemented in order to provide benefits
to Canadian resident taxpayers from a Canadian tax perspective. When a
Canadian resident taxpayer is considering ceasing Canadian residence in the
future, Canadian departure tax considerations as well as tax considerations in
the new taxing jurisdiction after departure may significantly impact on the
advisability of implementing such planning strategies. Therefore, the opportunity
to implement Canadian tax planning strategies must be reviewed in light of an
individualâ€™s specific future plans with respect to Canadian residency.
Due to the general nature of the bulletin, it should not be relied upon as legal or taxÂ advice.
Resident of Canada
Â Relevant Law
Section 2, Section 3, Subsection 250(5), Article IV of the Canada-Us Income Tax Convention (â€œthe Treatyâ€).
Pursuant to sections 2 and 3 of the Canadian Income tax Act (Act), a person who is â€œresidentâ€ in Canada during a taxation year is subject to Canadian income tax on his or her worldwide income from all sources. However, the term resident is not defined in the Act.
The concept of residency has been the subject of much jurisprudence, from which some general principles have been derived.Â Canada Revenue Agency (â€œCRAâ€) has adopted many of these principles and they are outlined in IT-221R3.
Â In paragraphs 2, 4, and 5 of IT-221R3, CRA states
â€œâ€¦. the Courts have held â€œresidenceâ€ to be â€œa matter of the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living with its accessories in social relations, interests and conveniences at or in the place in question.â€
â€œThe most important factor to be considered in determining whether or not an individual leaving Canada remains resident in Canada for tax purposes is whether or not the individual maintains residential ties with Canada while he or she is abroad.â€
â€œThe residential ties of an individual that will almost always be significant residential ties for the purpose of determining residence status are the individual’s
dwelling place (or places),
spouse or common-law partner, and
As stated in paragraph 8 of IT-221R3 these â€œsecondary tiesâ€ must be looked at
collectively and not in isolationÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â
A person shall be deemed to be resident in
The jurisdiction in which the taxpayer has a permanent home;
If the taxpayer has a home in both jurisdictions or in neither, where the taxpayer’s centerÂ of vital interests lieÂ (economic and personal relations);
If the center of vital interests cannot be determined, where the taxpayer has an habitual abode, or if the taxpayer has a habitual abode in both jurisdictions or in neither, the taxpayer’s citizenship; and (Refer to Allchin vs. The Queen)
If the taxpayer is a citizen of both countries or neither county, the matter shall be settled by agreement between the competent authorities of both countries.
CRA position with respect to permanent home is outlined in paragraph 26 of IT-221R3:
â€œA â€œpermanent homeâ€ (as that term is used in income tax treaties) may be any kind of dwelling place that the individual retains for his or her permanent (as opposed to occasional) use, whether that dwelling place is rented or purchased or otherwise occupied on a permanent basis. Therefore, an individual may have two permanent homes while living outside Canada (for example, a dwelling place rented by the individual abroad and a property owned by the individual in Canada that continues to be available for his or her use, such as a home that is not leased to a third party on arm’s length terms and conditions as described in Â¶ 6) and the â€œpermanent homeâ€ test will not result in a residency determination
Center of Vital Interests
CRAâ€™s position with respect to the center of vital interests test is also found in paragraph 26 of IT-221 R3.
â€œThe â€œcenter of vital interestsâ€ test requires a close examination of the individual’s personal and economic ties with each country in question, in order to determine with which country those ties are closer. The personal and economic ties to be examined are similar to those used in determining factual residence for purposes of Canadian income tax (see especially Â¶s 4 to 9). There are other tests that will apply if the â€œcenter of vital interestsâ€ test is inconclusive.â€
As stated above, the interests to be examined are similar to those used to determine residency.Â
In paragraph 10 of IT-221R3 CRA states:
â€œWhere an individual has not severed all of his or her residential ties with Canada, but is physically absent from Canada for a considerable period of time (that is, for a period of time extending over several months or years), the Courts have generally focused on the term â€œordinarily residentâ€ in determining the individual’s residence status while abroad. The strong trend in decisions of the Courts on this issue is to regard temporary absence from Canada, even on an extended basis, as insufficient to avoid Canadian residence for tax purposes. Accordingly, where an individual maintains residential ties with Canada while abroad, the following factors will be taken into account in evaluating the significance of those ties:
- evidence of intention to permanently sever residential ties with Canada,Â
- regularity and length of visits to Canada, and residential ties outside Canada.
Â For greater certainty, the CRA does not consider that intention to return to Canada, in and of itself and in the absence of any residential ties, is a factor whose presence is sufficient to lead to a determination that an individual is resident in Canada while abroad.â€
CRA recently addressed a similar fact pattern in Technical Interpretation 2003-0042855 in respect of a couple moving to Australia to commence an overseas assignment.Â (The Canada-Australia Income Tax Convention also has residency tiebreaker rules similar to those outlined above).Â In this interpretation CRA states:
â€œIf your clients have leased their only home in Canada to unrelated third parties â€¦ under arm’s length terms and conditions, then it is quite possible that the first tie-breaker rule (i.e. the â€œpermanent homeâ€ rule) will settle the tie in favour of Australia. In this regard, the dwelling (whether owned or leased) that your clients live in while in Australia will generally constitute a permanent home available to them in Australia for purposes of paragraph 3(a) of Article 4 of the Convention. Therefore, you may wish to consult paragraph 24 of IT-221R3, as subsection 250(5) of the Income Tax Act may apply and deem your clients not to be resident of Canada after they move to Australia. If subsection 250(5) applies, your clients will be considered to be a non-resident of Canada from the earliest date that it applies.â€
Subsection 250(5) states:
â€œNotwithstanding any other provision of this Act (other than paragraph 126(1.1)(a)), a person is deemed not to be resident in Canada at a time if, at that time, the person would, but for this subsection and any tax treaty, be resident in Canada for the purposes of this Act but is, under a tax treaty with another country, resident in the other country and not resident in Canada.â€
Due to the general nature of the bulletin, it should not be relied upon as legal or taxÂ advice.