Moving Abroad? How to Handle Taxes and Avoid Surprises

Planning to move out of Canada? Before you leave and officially become a non-resident for tax purposes, there can be significant tax consequences. You will generally need to file a final Canadian tax return covering the period you were resident in Canada, complete several specific forms, and in many cases obtain professional tax advice. This guide summarizes the key tax rules to consider before emigrating.

Changing your tax residency

Canadian tax residency is based on where you live, and while you are a resident you must report your worldwide income in Canadian dollars. When you cease to be a resident, you must file a final T1 return up to your departure date to report income earned while still resident. Emigrants may also face a deemed disposition of certain property on departure, which can trigger a so-called departure tax.

Tax form filing requirements

If the fair market value (FMV) of all property you own on the date you emigrate exceeds $25,000, you must complete and attach form T1161 List of Property of an Emigrant of Canada to your T1 return. Even if you do not otherwise file a T1, failure to submit T1161 by your tax filing deadline can result in penalties.

To calculate any capital gain or loss from the deemed disposition of property at departure, complete and attach form T1243 Deemed Disposition of Property by an Emigrant of Canada to your final T1 return. Specific exceptions can apply depending on the asset type and your circumstances.

If you owe tax when you leave but cannot or do not want to sell the property that generated the taxable gain, you may be able to defer payment by filing form T1244 Election to Defer the Payment of Tax on Income Relating to the Deemed Disposition of Property. In many deferral cases the Canada Revenue Agency will require security, particularly where the capital gain exceeds $100,000.

Exceptions to reporting requirements

Certain types of property do not need to be reported on departure. These exempt assets typically include:

• Cash and bank deposits
• Pension plans, annuities, registered retirement savings plans (RRSPs), pooled registered pension plans, and registered retirement income funds (RRIFs)
• Registered education savings plans (RESPs), registered disability savings plans (RDSPs), and tax-free savings accounts (TFSAs)
• Deferred profit-sharing plans, employee profit-sharing plans, employee benefit plans, salary deferral arrangements, retirement compensation arrangements, employee life and health trusts, and certain other trust interests

Keep in mind that Canadian-source pension payments to non-residents are generally subject to a 25% withholding tax, deducted at source by the payer. Non-residents may apply periodically to reduce withholding using form NR5, and tax treaty provisions with your new country of residence may modify the withholding rate. For most non-residents, withholding on pension income is a final tax and no additional Canadian filing will be required for that income source.

If you plan to receive Old Age Security (OAS) while living abroad, continuing to file an annual Canadian tax return is a prerequisite to maintain eligibility. To qualify for OAS abroad you must also have been a Canadian citizen or legal resident at the time you left and have lived in Canada for at least 20 years after age 18.

Certain categories of property classified as “taxable Canadian property” do not require reporting at departure, but must be reported when they are actually sold. These include:

• Canadian real property, Canadian resource properties, and timber resource properties
• Canadian business property (including inventory) if the business is carried on through a permanent establishment in Canada

You can choose to report the FMV of taxable Canadian property on departure by filing form T2061 Election by an Emigrant to Report Deemed Dispositions. Electing on departure can change the timing of tax owing and reporting.

Non-registered investment assets held in brokerage or other investment accounts must be reported on your final return at their FMV as of your chosen departure date, so it is important to consider the timing of that date. Your final T1 return is generally due by April 30 of the year following the year you leave.

Personal-use property with a combined FMV above $10,000 must also be reported on exit. This can include cars, boats, jewelry, antiques, collectibles and family heirlooms if their total value exceeds the $10,000 threshold.

Different rules for immigrants

Special rules apply to individuals who were themselves immigrants to Canada and now intend to leave. If you became a resident of Canada within the last 10 years and your period of residency in Canada was 60 months or less during the 10-year period before emigration, you may not have to pay departure tax on property you owned when you first became a resident (or property inherited afterward). This relief generally does not apply to trusts or to property that constitutes taxable Canadian property.

Penalties for failing to file forms

Missing your final T1 filing or failing to submit form T1161 can lead to penalties and interest. T1161 must be filed on or before your tax filing due date whether or not you otherwise file a T1. The penalty for not filing T1161 on time is $25 per day, with a minimum penalty of $100 and a maximum of $2,500, plus any applicable interest on unpaid tax balances.

What about provincial taxes?

Canadian taxes are residency-based, not citizenship-based, and your provincial tax obligation is normally determined by where you lived on December 31 of the tax year. When you emigrate, your provincial residency for tax purposes is generally determined by your date of departure, which can affect the provincial portion of your tax liability for that year.

Returning to live in Canada

If you later resume Canadian residency and still own the property you reported at departure, it is often possible to unwind part or all of the departure tax. Specific elections and adjustments are available for taxable Canadian property and for other assets, allowing you to reduce previously reported gains subject to precise conditions. These reversals and elections can be legally and administratively complex, so professional tax advice is recommended.

Know before you go

Emigrating from Canada involves a range of tax consequences that can be complicated, particularly if you own a business, real estate, or significant investments. Working with a cross-border tax specialist is a wise investment to avoid surprises, plan the timing of your departure, and understand potential double-taxation issues with your new country of residence.

At minimum, obtain up-to-date valuations of all taxable assets before you set a departure date so you can estimate potential tax liabilities and choose an optimal emigration date from a tax perspective.

Read more about tax planning:

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