If you decide to leave Canada, you need to figure out the tax implications that might apply to you. As a non-resident, you will have no tax obligation on your income earned or received outside Canada but you might face a significant tax bill in the calendar year that you became a non-resident.
Leaving Canada by itself does not necessarily signify a non-residency status. Canadian residency status is generally a question of fact. The CRA has some guidelines to help you determine your residency status. For more detailed information, you may consult CRA’s Income Tax Folio S5-F1-C1. You may also consider completing Form NR73 and requesting the CRA to determine your residential status. In most cases, the CRA will be able to provide an opinion regarding your residency status from the information reported on the completed form. This opinion is based entirely on the facts provided by you in the form. Therefore, it is critical that you provide all of the details concerning your residential ties with Canada and abroad. This opinion is not binding on the CRA and may be subject to a more detailed review at a later date and supporting documentation may be required at that time.
Taxation of income and deemed disposition
If it is established that you became a non-resident during a year, you will be taxed by the CRA on worldwide income for the portion of the year you were a resident of Canada. Additionally, you are deemed to have disposed of and to have immediately reacquired your assets at fair market value. The deemed disposition of assets can have a serious tax implications for you. Let’s assume that you have some stock shares worth of $500,000 and the adjusted cost base (ACB) is $400,000. The deemed disposition rule results in $100,000 capital gain or $50,000 taxable income. Subsection 128.1(4)(b) provides some relief from the general deemed disposition rule by excluding some assets. The exempt assets include:
- Real property situated in Canada;
- Capital property used for a business you carry on through a permanent establishment in Canada;
- Properties defined in the Act as “excluded right or interests”; these include RRSPs, RRIFs, RESPs, DPSPs, EPSPs, employee profit sharing and benefit plans, pension plans, employee stock options and most, but not all, interests in personal trusts, Canadian life insurance policies, and other properties as listed at subsection 128.1(10); and
- For certain short-term residents of Canada (i.e., resident for no longer than 60 months in the 10-year period before emigration), the property you owned when you became a Canadian resident or inherited after becoming a resident of Canada
All the assets subject to the deemed disposition should be reported in Form T1243. The reported items are also reported on Schedule 3 of the T1 personal tax return. The T1243 is attached and filed with the T1 return by the filing due date of your personal tax return which is April 30 of the year following the year of leaving Canada (June 15 if you had a business income).
You can elect to defer payment of tax related to deemed disposition of assets listed in the T1243 until the time of eventual sale, by filing Form T1244. Consequently, reporting the capital gain from the deemed disposition in schedule 3 will be rescinded. If you make this election and the amount of federal tax owing on income from the deemed disposition of property is more than $14,500 ($12,107.50 for former residents of Quebec), you have to provide the CRA with adequate security acceptable to cover the amount. You may also be required to provide security to cover any applicable provincial or territorial tax payable. You should contact the CRA as soon as possible to make acceptable arrangements before the filing due date.
Reporting properties owned in Canada
Regardless of whether you are subject to the deemed disposition provision, you must file Form T1161 to report all the properties you owned when you left Canada if the aggregate value of the properties were more than $25,000. The following properties are excluded and are not part of $25,000 threshold:
- Properties defined in the Act as “excluded right or interests”; these include RRSPs, RRIFs, RESPs, DPSPs, EPSPs, employee profit sharing and benefit plans, pension plans, employee stock options and most, but not all, interests in personal trusts, Canadian life insurance policies, and other properties as listed at subsection 128.1(10);
- For certain short-term residents of Canada (i.e., resident for no longer than 60 months in the 10-year period before emigration), the property you owned when you became a Canadian resident or inherited after becoming a resident of Canada; and
- Any item of personal-use property (such as your household effects, clothing, cars, collectibles) that has a fair market value of less than $10,000.
T1161 should be sent to the CRA on or before your personal tax return filing due date. The penalty for failing to file this form by the due date is $25 per day you are late. There is a minimum penalty of $100, and a maximum penalty of $2,500.
Taxation of rental income
If you own property as a non-resident and you receive a rental income, this rent cannot be paid to you in full directly. A Canadian resident agent has to withhold a non-resident tax at the rate of 25% on the gross rent and remit to the CRA on or before the 15th day of the month following the month the rent was paid. The agent can be the tenant or a property manager or whoever you engage to collect the rent on your behalf.
The agent has to prepare NR4 slip showing the gross amount of your rental income during the year, and the amount of non-resident tax withheld. This slip should be filed with the CRA and a copy should be provided to you.
Generally, the non-resident tax withheld is considered your final tax obligation to Canada on the rental income. However, if you elect under section 216 of the Income Tax Act you may receive a refund of some or all of the non-resident tax withheld. To make such an election you must file the T1159, Income Tax Return for Electing Under Section 216. This tax return should be filed separate from any other tax returns that you might file in Canada. Generally, you have to file T1159 return within two years from the end of the year in which the rent was paid.
You can elect to have tax withheld on your net rental income instead of on the gross amount. This will require you and your agent to complete Form NR6, and send it to the CRA for approval. Please note that if you send Form NR6 and the CRA approves it for a certain year, you have to file a T1159 return for that year. You have to file a return even if you have no tax payable or you are not expecting a refund. Additionally, you have to file your T1159 return on or before June 30 of the following year. If you have a balance owing for the year, you should pay it on or before April 30 of the following year.