This isn’t a question I get through every day and Canada isn’t the only place where you need to know the tax implications when leaving any country and moving to a new one, or back home. There are ways you can structure your assets and finances to make sure you are tax-efficient. For example, if you are moving back to the UK there are ways you can strategically place assets to reduce tax.
When contemplating a permanent departure from Canada, it becomes crucial to grasp the intricacies of the tax system, which is known for its comprehensiveness. The Canada Revenue Agency (CRA) provides essential guidance for individuals deciding to emigrate.
If you have any questions, please email me using the button at the bottom of the page.
Departure Tax: A Primary Concern
One of the foremost concerns when bidding farewell to Canada is the departure tax.
The CRA deems that certain types of property were sold at their fair market value (FMV) on the day preceding your departure, even if no actual sale took place. This is referred to as a “deemed disposition.”
A deemed disposition means that the CRA treats you as if you’ve liquidated your assets, including shares, jewellery, artwork, and collections, even if you haven’t done so. This can result in a capital gain, often referred to as the departure tax.
If the combined FMV of all your possessions at the time of your departure exceeded $25,000, you are required to complete Form T1161, List of Properties by an Emigrant of Canada. However, it’s essential to be aware that certain exemptions may apply, potentially reducing your tax liability.
Tax on Inherited assets in Canada
Probate Fees: While there is no federal inheritance tax, some provinces in Canada impose probate fees or estate administration taxes. These fees are levied on the total value of the deceased person’s estate and are typically collected when the will is submitted for probate. The rates and rules for probate fees vary from province to province, and not all provinces have them. In some provinces, smaller estates or assets passed directly to a surviving spouse may be exempt from or subject to reduced probate fees.
Capital Gains Tax: When you inherit assets such as real estate, stocks, or other investments, you might be subject to capital gains tax when you sell those assets in the future. The tax would be based on the increase in the value of the assets from the time you inherited them to the time you sold them.
Tax on Registered Accounts: If you inherit a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), these accounts are typically subject to tax upon withdrawal, and the tax liability may fall to the beneficiary.
Income Tax on Certain Assets: If you inherit non-registered investments, income generated from those investments (e.g., interest, dividends, capital gains) may be subject to income tax in your hands.
Gift Tax: Canada does not have a gift tax per se, but if someone gives away significant assets shortly before their death, the Canada Revenue Agency (CRA) may scrutinize these transactions to ensure that they were not done to avoid taxes.
Tax on Investment platforms
Capital Gains:
- Taxation Rate: In Canada, 50% of capital gains are included in your taxable income. This means that you are only taxed on half of the capital gains you realize.
- Tax Bracket: The amount of tax you pay on your capital gains depends on your total taxable income and your tax bracket. Higher-income individuals may pay a higher rate of tax on their capital gains.
- Tax Deferral: Capital gains tax is deferred until you sell the asset. This means that you can potentially defer the tax liability by holding onto the investment.
Dividends:
- Eligible Dividends: Eligible dividends from Canadian corporations receive favourable tax treatment. Gross-up and tax credit system applies to eligible dividends, which results in a lower effective tax rate for most individuals.
- Non-Eligible Dividends: Non-eligible dividends from Canadian corporations are taxed at a higher rate than eligible dividends but are still subject to a gross-up and tax credit system.
- Foreign Dividends: Dividends from foreign corporations may be subject to different tax rules, including withholding tax. Canada has tax treaties with many countries that can affect the taxation of foreign dividends.
Interest Income:
Interest income is typically fully taxable at your marginal tax rate. This means you’ll pay tax on the full amount of interest income earned.
Registered Accounts:
Investments held in Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) enjoy tax advantages. In an RRSP, contributions are tax-deductible, and investment gains are tax-deferred until withdrawal. In a TFSA, investment gains are tax-free, and withdrawals are not subject to income tax.
- Tax-Efficient Investing: Some investment platforms offer tax-efficient investment options, such as low-turnover ETFs, which can help minimize taxable capital gains and income.
- Tax Reporting: Investment platforms are required to provide tax reporting documents, such as T-slips, that detail your income from investments. Be sure to report this income accurately on your tax return.
- Capital Losses: Capital losses can be used to offset capital gains, reducing your overall tax liability. Be mindful of the rules regarding the application of capital losses.
Transitioning to Non-Resident Tax Status
Upon permanently leaving Canada, your tax status shifts to that of a non-resident, and this change has implications for tax reporting and payment.
It is advisable to inform Canadian payers and financial institutions of your non-resident status upon leaving Canada. This ensures that you are only subject to taxation on income originating in Canada.
Even as a non-resident, you may still need to file a Canadian tax return, particularly if you owe taxes or wish to claim a refund. The CRA provides specific guidelines on which income tax package to use, based on your last place of residence in Canada.
Tax Treaties and Mitigating Double Taxation
Canada has entered into tax treaties with numerous countries to prevent double taxation for individuals making a permanent exit from Canada.
These treaties are designed to ensure that your income is not subject to taxation in both Canada and your new country of residence. It is essential to research whether Canada has a tax treaty with your new country to take advantage of these agreements.
If you continue to receive specific income from Canada after your departure, the Canadian payer is obligated to withhold non-resident tax. However, you can include this income on your tax return by making an election under Section 217 of the Income Tax Act, potentially benefiting from a reduced tax rate.
Embracing a New Financial Chapter Beyond Canada
The decision to bid Canada farewell for good marks a significant juncture in your financial journey, necessitating a comprehensive reassessment of your investment strategy.
Canadian Investment Accounts: RRSPs and TFSAs
Before departing Canada permanently, it is imperative to evaluate the status of your RRSPs (Registered Retirement Savings Plans) and TFSAs (Tax-Free Savings Accounts). While you have the option to retain these accounts, there are intricacies to bear in mind:
RRSPs can remain intact even after you depart from Canada. However, any withdrawals made as a non-resident are subject to a non-resident withholding tax.
Familiarizing yourself with the tax treaty between Canada and your new country of residence is pivotal, as it can impact the withholding tax rate.
TFSAs present a more complex scenario. While you can maintain your TFSA after leaving Canada, contributing further funds will result in penalties. Moreover, the tax-free status of a TFSA might not be recognized in your new country, potentially leading to tax implications.
Exploring International Investment Opportunities
Diversifying your investment portfolio assumes even greater importance after you depart from Canada. It’s not solely about spreading your assets but also about comprehending the financial landscape in your new abode:
Consider investing in local stocks and bonds to tap into the local economy while safeguarding against currency fluctuations. However, always remain vigilant about the tax implications in your new jurisdiction.
Mutual funds can be a prudent choice for expatriates, offering diversification and professional management. Nonetheless, it is imperative to be well-versed in potential tax consequences, especially if these funds generate income outside your new country of residence.
Strategies for Comprehensive Diversification
Geographic diversification takes on heightened significance as you embark on your journey beyond Canada. This isn’t merely about risk dispersion but also about seizing opportunities across different markets:
- Safeguard your portfolio against regional economic downturns by distributing investments across diverse regions. In the event of a recession in one market, the thriving prospects in another can offset potential losses.
- Currency fluctuations can substantially impact your returns when managing multiple currencies post-departure from Canada. Consider assets denominated in various currencies to mitigate this risk.
- Different countries boast strengths in diverse sectors; for instance, one nation may serve as a technology hub while another abounds in natural resources. By diversifying across sectors, you can harness the unique strengths of various markets for your financial benefit.
Canadian Pension Plans: Navigating the CPP
The Canada Pension Plan (CPP) assumes significant importance for individuals embarking on a permanent departure from Canada. The CPP retirement pension serves as a monthly, taxable benefit designed to replace a portion of your income during retirement.
Key Considerations:
Eligibility: To qualify for the CPP retirement pension, you must be at least 60 years old and have made at least one valid contribution to the CPP. These contributions can stem from employment in Canada or credits acquired through a former spouse or common-law partner.
Application: CPP payments are not automatically disbursed. If you are departing Canada for good, it is imperative to remember to apply. It is advisable to submit your application in advance of your desired pension commencement date.
Pension Amount: The amount you receive hinges on your average earnings over your working years, your contributions to the CPP, and the age at which you choose to commence your CPP retirement pension. You can opt to begin receiving it as early as age 60 or as late as age 70. Commencing earlier results in a smaller monthly sum, while delaying results in a larger monthly payment.
CPP Enhancement: Since 2019, the CPP has been undergoing enhancements aimed at benefiting today’s workforce through a slight increase in their CPP contributions. These enhancements encompass the base CPP, a first additional component phased in between 2019 and 2023, and a second component set to be phased in between 2024 and 2025.
Exploring Foreign Pension Plans
As you embark on your permanent departure from Canada, it is crucial to acquaint yourself with the pension system in your new country of residence. Each nation boasts its distinct retirement benefits, contribution prerequisites, and eligibility criteria.
What Brokerage accounts are open for Canadian expats?
Canadian expats have several options for investment brokerage accounts, but the availability of these accounts may depend on the expat’s new country of residence and the brokerage’s policies. Here are some common types of investment brokerage accounts that Canadian expats may consider:
International Brokerage Accounts: Many well-known international brokerage firms, such as Interactive Brokers, TD Ameritrade, Charles Schwab, and E*TRADE, may offer brokerage accounts to Canadian expats. These accounts allow you to trade a wide range of financial instruments, including stocks, bonds, ETFs, and more.
Local Brokerage Accounts: Depending on your new country of residence, you may be able to open a brokerage account with a local financial institution. Local banks and brokerage firms often offer accounts tailored to residents, and some may accept expat clients.
Online Investment Platforms: Online investment platforms like Wealthsimple Trade and Questrade in Canada sometimes offer options for Canadian expats. These platforms may provide access to Canadian and international markets, depending on the account type.
Robo-Advisory Services: Robo-advisors like Wealthsimple and Questwealth Portfolios offer automated investment services to Canadian expats. They create and manage diversified portfolios based on your risk tolerance and financial goals.
Offshore Brokerage Accounts: Some expats opt for offshore brokerage accounts in tax-friendly jurisdictions. These accounts can provide access to international markets and may offer additional privacy and tax advantages. However, they often come with higher fees and more complex regulatory requirements.
Canadian Investment Accounts: In some cases, Canadian expats may choose to maintain their Canadian investment accounts, such as RRSPs and TFSAs, even after leaving Canada. However, managing these accounts from abroad may require extra effort and compliance with Canadian tax regulations.
When choosing an investment brokerage account as a Canadian expat, consider factors such as account fees, trading commissions, available investment options, regulatory compliance, and tax implications in both your new country of residence and Canada. It’s advisable to consult with a financial advisor or tax professional who specializes in expat financial matters to make informed decisions about your investment strategy and account selection. Additionally, due diligence is essential to ensure that the chosen brokerage complies with local regulations and is a reputable and secure institution.
If you require more information about being a Canadian expat and you have amounts over $250,000 please feel free to contact me by using the button at the bottom of the page or by visiting my contact page.
FAQs
What is the Departure Tax in Canada?
The Departure Tax is a tax imposed by the Canada Revenue Agency (CRA) when you leave Canada permanently. The CRA deems that certain types of property were sold at their fair market value (FMV) on the day preceding your departure, even if no actual sale took place. This is referred to as a “deemed disposition.” If the combined FMV of all your possessions at the time of your departure exceeded $25,000, you are required to complete Form T1161, List of Properties by an Emigrant of Canada.
What are the tax implications for inherited assets in Canada?
In Canada, while there is no federal inheritance tax, some provinces impose probate fees or estate administration taxes. When you inherit assets such as real estate, stocks, or other investments, you might be subject to capital gains tax when you sell those assets in the future. If you inherit a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), these accounts are typically subject to tax upon withdrawal, and the tax liability may fall to the beneficiary.
What are the tax considerations for Canadian expats?
Upon permanently leaving Canada, your tax status shifts to that of a non-resident, and this change has implications for tax reporting and payment. It is advisable to inform Canadian payers and financial institutions of your non-resident status upon leaving Canada. This ensures that you are only subject to taxation on income originating in Canada. Even as a non-resident, you may still need to file a Canadian tax return, particularly if you owe taxes or wish to claim a refund.
Other Resources
- What Investment Platforms Can Canadian Expats Use?
- What Advisor-Led Investment Platform is Best For an Expat?
- Transferred Your Pension Offshore?
