Leaving Canada? Departure Tax and Non-Resident Withholding Tax

Canada taxes its residents on their worldwide income. If you live in Canada for tax purposes, you must declare income from both Canadian and foreign sources on your Canadian tax return.

Taxes paid to a foreign government can typically be claimed as a foreign tax credit on your Canadian return, which reduces the Canadian tax due. This mechanism is designed to prevent the same income from being taxed twice.

But what changes when a Canadian resident moves abroad and becomes a non-resident for tax purposes?

How to declare yourself a non-resident of Canada for tax purposes

To be treated as a non-resident for Canadian tax purposes, you generally must both move to another country and sever significant residential ties with Canada. The Canada Revenue Agency (CRA) focuses on whether you have maintained enough connections to still be considered a resident.

Common steps that indicate you have severed residential ties include:

• Selling your Canadian home or converting it to a rental property when you move abroad
• Your spouse and dependants leaving Canada with you

Other actions that support a non-resident status are closing or transferring Canadian bank accounts, cancelling provincial health coverage, surrendering your driver’s licence, ending club or professional memberships, and establishing similar ties in the new country of residence.

Even if you move, you could still be a factual resident of Canada if you keep many of those ties. In some cases, a tax treaty between Canada and the country you move to will determine which country considers you a resident for tax purposes.

Departure tax in Canada

When you leave Canada and become a non-resident, you must report and pay tax on income you earned up to the day you cease residency. Your tax return for the year of departure is due like any other: April 30, or June 15 if you are self-employed.

Leaving Canada can trigger an exit tax, commonly known as a departure tax. Under the deemed disposition rules, you are treated as having sold most of your capital property at fair market value on the date you leave, which can create taxable capital gains.

Exemptions from the departure tax

Not all assets are subject to the deemed disposition. Certain accounts and pensions are exempt, including registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), and many pension plans. These accounts may continue to enjoy tax-deferred or tax-free treatment in Canada, though foreign tax treatment can differ—TFSAs in particular are often taxable in jurisdictions that do not recognize them.

Taxable capital assets held in non-registered accounts will generally trigger deferred capital gains at departure, as if they were sold. Private company shares are also deemed disposed of, although the lifetime capital gains exemption may reduce or eliminate tax for qualifying small-business corporation shares or eligible farm or fishing properties.

Canadian real estate is treated differently: primary residences and other property in Canada are not subject to deemed disposition on departure. Capital gains on Canadian property remain payable on a later sale. Note that the principal residence exemption will not apply for years after you leave Canada.

Short-term residents

There is a relief for short-term residents. If you were resident in Canada for fewer than 60 months in the 10 years before you left, you may be able to exclude property that you owned when you last became a resident from the deemed disposition rules. Property acquired by inheritance after you became a resident can also be excluded for short-term residents.

Deferring departure tax

You can generally defer payment of the departure tax. No interest charges apply during the deferral period, and the tax may be collected later when the asset is actually sold.

If the federal tax owing on deemed dispositions exceeds $16,500, you must provide the CRA with adequate security to defer the tax. For residents of Quebec the threshold is $13,777.50 for federal tax. Acceptable security can include the assets themselves or a letter of credit from a financial institution. The CRA typically reviews the security annually to determine whether the deferral can continue.

Unwinding a deemed disposition

If you leave Canada and later return and re-establish Canadian residency, you can elect to reverse the earlier deemed disposition. This election cancels the deferred tax liability as of the date you resume residency. However, when you eventually sell the assets, tax will be payable based on the original cost base. Any security posted to secure the deferred tax would generally be released if the deemed disposition is unwound.

Non-resident withholding tax in Canada

After you become a non-resident, Canadian-source income may be subject to withholding tax instead of regular Canadian income tax reporting, although certain returns and elections remain possible or required.

For example, if you receive Canada Pension Plan (CPP) benefits, Old Age Security (OAS), defined benefit pension income, RRSP or RRIF withdrawals, or other Canadian-source amounts after departure, you may be eligible to elect under section 217 of the Income Tax Act to file a Canadian return. Making this election can sometimes produce a refund if withholding at source (often 15% to 25%, depending on your country of residence) exceeds the tax you would owe if taxed as a Canadian resident on that income.

Income from Canadian real estate is an exception: rental income and proceeds from the sale of Canadian property must be reported on a Canadian tax return even after you become a non-resident.

If non-residents control a private Canadian company, the corporation may lose its status as a Canadian-controlled private corporation (CCPC). Losing CCPC status can affect eligibility for the small-business deduction and change the tax rates applied to active business income and investment income.

Other considerations before leaving

There are several practical and financial issues to consider before you move. Outstanding balances under the Home Buyers’ Plan (HBP) or Lifelong Learning Plan (LLP) may become repayable. Some Canadian financial institutions restrict services to non-residents, and certain investments—such as some Canadian mutual funds—may not be available to you once you move. Your provincial health coverage and other benefits may lapse, and you should revisit estate planning documents to reflect your new residency.

Leaving Canada can reduce tax for some people—especially those moving to countries with lower tax rates—but it can also create an exit tax and change how your Canadian-source income and assets are taxed going forward.

Getting professional tax and financial advice before you depart will help you plan ahead, manage potential tax liabilities, and avoid surprises after your move.

Read more about taxes in Canada:

• Should Canadians keep their investment accounts when retiring abroad?
• The tax implications of working abroad for residents and non-residents of Canada
• Do non-residents pay tax on CPP? What if you live in the U.S.?
• Where do we pay income tax if we retire abroad?