Leaving Canada for good can be an exciting and life-changing decision, but it comes with significant financial implications. Whether you’re retiring abroad, moving for work, or relocating for personal reasons, understanding the tax consequences of becoming a non-resident is crucial. One of the most important aspects to consider is departure tax and withholding tax for non-residents.
In this guide, we’ll walk you through the tax obligations you may face when leaving Canada, what to expect, and how to minimize your tax burden as a departing resident.
Table of Contents
- What is Departure Tax in Canada?
- When Does Departure Tax Apply?
- How Departure Tax is Calculated
- Withholding Tax for Non-Residents
- How to Minimize Departure and Withholding Taxes
- Key Considerations When Leaving Canada
- Conclusion
1. What is Departure Tax in Canada?
Departure tax is a tax imposed by the Canada Revenue Agency (CRA) on individuals who cease to be Canadian residents. When you leave Canada and become a non-resident, the CRA considers this as if you have “disposed” of all your worldwide assets, and you may be subject to tax on any capital gains you’ve earned from those assets.
This means you could be taxed on the increase in value of properties, stocks, bonds, and other investments held in your name, as though you sold them on the day you left Canada.
2. When Does Departure Tax Apply?
Departure tax applies when you:
- Cease to be a Canadian resident for tax purposes.
- Move abroad and sever significant ties with Canada (e.g., selling your home, closing bank accounts, etc.).
You are generally considered a non-resident for tax purposes once you are no longer a resident of Canada under the Income Tax Act. For example, if you move to another country and live there for more than 183 days in a year, you may qualify as a non-resident.
3. How Departure Tax is Calculated
The departure tax is based on the unrealized capital gains of assets you own at the time of departure. The CRA treats these gains as if you had sold your assets on the date you leave Canada. These assets include:
- Real estate (property, land, etc.)
- Investments (stocks, bonds, mutual funds)
- Pensions, retirement savings (RRSPs)
Here’s how the departure tax works:
- Valuation of Assets: You must determine the fair market value of your assets on the date you leave Canada.
- Calculate Gains: The CRA compares the value of your assets when you leave Canada to their cost base (original purchase price).
- Tax on Gains: The capital gains tax will apply to the difference between the sale price (or fair market value) and the original cost of the assets.
For example, if you own stocks worth $100,000 and they originally cost you $50,000, you will have a capital gain of $50,000, and you will be taxed on this gain.
4. Withholding Tax for Non-Residents
What is Withholding Tax?
Withholding tax is a tax deducted at source on income earned by non-residents in Canada. When you move abroad and become a non-resident, this tax is typically applied to income you continue to earn in Canada, such as rental income, dividends, or royalties.
Withholding tax applies to various types of income and is deducted by the payor (such as a bank, employer, or corporation) before the payment is made to you. It is important to note that withholding tax is final, meaning you won’t have to file a tax return in Canada for this income.
Common Withholding Tax Rates
The withholding tax rates for non-residents in Canada vary depending on the type of income:
| Type of Income | Withholding Tax Rate |
|---|---|
| Rental Income | 25% (can be reduced to 15% if filed under tax treaty) |
| Dividends | 25% (can be reduced to 15% or 5% depending on the tax treaty) |
| Interest Income | 25% (can be reduced depending on the tax treaty) |
| Royalties | 25% |
These rates can be reduced or eliminated if your country of residence has a tax treaty with Canada. It’s important to check the specific tax treaty between Canada and your new country of residence.
5. How to Minimize Departure and Withholding Taxes
There are several strategies to minimize your tax liability when leaving Canada:
a. Tax Treaty Benefits
Many countries have tax treaties with Canada that can reduce or eliminate withholding taxes. Before leaving Canada, check if your new country of residence has a treaty with Canada, and consider filing for treaty benefits.
b. Tax Deferrals for Certain Assets
In some cases, you may be able to defer departure tax by transferring assets to certain tax-deferred accounts, such as RRSPs, before you leave Canada. This strategy allows you to avoid immediate tax consequences on capital gains.
c. Selling Assets Before Departure
If possible, consider selling high-value assets like real estate, stocks, or other investments before leaving Canada to trigger any capital gains taxes while you are still a resident.
d. Consult a Tax Professional
Departure taxes and withholding taxes can be complex. To fully understand your tax obligations and plan ahead, it is advisable to consult a tax professional who specializes in non-resident taxation.
6. Key Considerations When Leaving Canada
- Final Tax Return: You must file a final tax return for the year you leave Canada. This will report your income up until the date of departure and ensure any outstanding taxes are settled.
- Severing Ties with Canada: Ensure you sever significant residential ties with Canada (e.g., sell your home, cancel health insurance) to confirm non-residency status.
- Tax on Foreign Income: As a non-resident, you may be subject to tax on income earned within Canada, but you may also be taxed on foreign income in your new country.
7. Conclusion
Leaving Canada as a non-resident comes with specific tax obligations, including departure tax on unrealized capital gains and withholding tax on certain types of income. By understanding these taxes, planning ahead, and consulting a tax professional, you can navigate the tax implications of leaving Canada smoothly and potentially reduce your tax burden.
