Strategies for Handling Tax Obligations for Individuals Moving Away from Canada
For individuals planning to leave Canada permanently, it's essential to understand the implications of the Canadian departure tax and tax treaties. This article aims to provide a clear and straightforward explanation of these topics.
The Canadian Departure Tax
The Canadian departure tax is triggered when an individual ceases to be a resident of Canada for tax purposes. The government treats you as though you've sold all your assets – real estate, business, stocks, personal property – the day before you leave. This is known as a 'deemed disposition' of assets, and it means you are taxed as if you have sold everything you own.
The departure tax is calculated by subtracting the deemed profits for each asset from its adjusted cost base. The first CAD$100,000 is exempt from taxation in the departure tax calculation. Withdrawals from RRSPs and RRIFs after becoming a non-resident are subject to Canadian withholding tax.
When a non-resident sells Canadian real estate, gains are subject to Canadian capital gains tax, and a significant withholding tax is required. Reporting the departure tax is the final step in gaining freedom from the Canadian tax system.
Becoming a Non-Resident for Tax Purposes
To become a non-resident for tax purposes in Canada, you must show that you intend to cut ties with Canada. This includes listing all properties owned on the date of leaving Canada using Form T1161. To claim benefits under a tax treaty, one must indicate this on their Canadian tax return and disclose their residency status in their new country.
Tax Treaties
Double taxation is avoided through tax treaties between Canada and other countries, which determine which country has the primary right to tax specific types of income. Canada maintains double taxation avoidance agreements (DTAs) with numerous countries, including Austria and Kazakhstan. These treaties, signed in 1976 and 2004 respectively, have been modified by the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).
These treaties help to protect income and often offer ways to lower taxable income. For example, a foreign corporation that does not operate in Canada and meets the requirements of a Canadian tax treaty can submit a 'treaty-based' corporate tax return to reclaim taxes withheld under Regulation 105.
Forms for the Departure Tax and Capital Gains Calculation
Form T1244 is used if one plans to defer payment of tax on income relating to the deemed disposition of property. Form T1243 is used to calculate capital gains (or losses) on the deemed disposition of assets.
In summary, understanding the Canadian departure tax and tax treaties is crucial for individuals planning to leave Canada permanently. By being aware of the forms required and the implications of the departure tax, individuals can ensure a smooth transition out of the Canadian tax system.
