Deferring Departure Tax
When a Canadian resident leaves the country and becomes a non-resident for tax purposes, the Income Tax Act deems them to have disposed of most of their property at fair market value. This deemed disposition can create a significant capital gain, triggering what is known as the departure tax. However, Canadian residents who emigrate may be eligible to defer payment of this tax if certain conditions are met.
A Toronto tax lawyer can help assess eligibility and ensure the required filings are properly made.
When Departure Tax Arises
Departure tax generally applies to investments such as shares, mutual funds, and private company interests. It does not apply to Canadian real estate, RRSPs, TFSAs, pensions, or other registered plans. The deemed disposition occurs immediately before the individual ceases to be a resident of Canada. The tax applies to the increase in value of the property since its acquisition, similar to a capital gain that would have arisen had the property actually been sold.
Electing to Defer Departure Tax
Under subsection 220(4.5) of the Income Tax Act, individuals may elect to defer payment of the departure tax until they actually dispose of the property. To do this, the taxpayer must file Form T1244, Election to Defer the Payment of Tax on Income Relating to the Deemed Disposition of Property, together with their departure return for the year they emigrate.
If the total amount of departure tax owing exceeds $16,500, or $13,777 for Quebec residents, the taxpayer must provide acceptable security to the Canada Revenue Agency (CRA). Security typically takes the form of a letter of credit, bank guarantee, or charge on Canadian assets. If the total tax liability is below this threshold, no security is required. A Toronto tax lawyer can assist in preparing the necessary election and advising on what form of security the CRA will accept.
Duration of the Deferral
The deferral of departure tax can remain in place indefinitely, as long as the taxpayer continues to meet the conditions of the election and maintains any required security. The deferred tax becomes payable when the property is actually sold, deemed disposed of, or upon the taxpayer’s death.
If the taxpayer later returns to Canada and re-establishes residency, subsection 128.1(6) of the Income Tax Act allows the deemed disposition to be reversed, effectively unwinding the departure tax. A Toronto tax lawyer can help determine whether a reversal applies and assist in notifying the CRA.
Common Issues with Departure Tax Deferrals
Common problems with departure tax deferrals include failing to file Form T1244 on time, providing insufficient or unacceptable security, misstating fair market values, or failing to report a later sale of the property.
These errors can invalidate the election and result in immediate payment demands with interest and penalties. Working with a Toronto tax lawyer experienced in CRA departure tax administration helps ensure the election is valid and the CRA’s requirements are fully met.
Kirshen Tax Law Can Help
The rules surrounding deferring departure tax in Canada are complex and require careful compliance with the Income Tax Act and CRA administrative requirements. At Kirshen Tax Law, we assist clients in reviewing departure tax calculations, coordinating the completion of Form T1244, and negotiating acceptable security with the CRA. We also advise on reversing departure tax assessments for taxpayers who later return to Canada.
To discuss your situation confidentially with a Toronto tax lawyer, contact Kirshen Tax Law today for a free consultation.
Jeff Kirshen BA, JD (CA), JD (US)
Tax Lawyer | Founder, Kirshen Tax Law
Disclaimer
The content on this website, including articles and blog posts, is provided for general informational purposes only. It reflects the laws and regulations as of the date of publication, which may have since changed. This content is not intended to serve as legal advice and should not be relied upon as such. Tax laws and situations can be complex and unique to each individual. The information provided may not apply to your specific circumstances. For personalized advice regarding your tax or legal matters, we recommend consulting a qualified lawyer.