Canada's departure tax, explained

Most jurisdictions make you prove you have left. Canada makes you pay for it.

The United Kingdom, for all its complexity, has no general exit charge on individuals. Canada does. Section 128.1(4) of the Income Tax Act deems an emigrant to have disposed of most of their property at fair market value immediately before ceasing to be resident, and to have reacquired it at the same figure. The gain is real, the tax is due with the departure-year return, and nothing has been sold.

This is not a penalty. It is the price of Canada surrendering the right to tax a gain that accrued while you lived there. Once you are gone, the accrued appreciation would otherwise leave the Canadian net entirely; the deemed disposition closes it before you do. Understanding it that way makes the exclusions intelligible, because everything Canada can still tax after you leave is excluded from the charge.

What the charge catches

Everything not on the excluded list, valued at fair market value on the day residence ceases. In practice that means:

• shares in public and private corporations, including shares of the company you built;
• mutual funds, ETFs and other non-registered portfolio holdings;
• interests in partnerships and most trusts;
• real property situated outside Canada, including a holiday home abroad;
• cryptocurrency and other digital assets;
• personal-use property above the ordinary threshold, and listed personal property.

The inclusion of foreign real estate surprises people, and it is the mirror image of the exclusion for Canadian real estate: Canada keeps taxing rights over land within its borders after you leave, so that land need not be taxed on the way out. Land elsewhere it will never see again, so it is caught now.

What escapes

Four classes, each for the same underlying reason.

Canadian real property, Canadian resource property and timber resource property. These remain taxable Canadian property in a non-resident’s hands, so the charge is unnecessary. Your Toronto condominium is not deemed disposed of on departure — but it is not exempt either, and its disposition later will require a clearance certificate and withholding.

Property used in a business carried on through a permanent establishment in Canada. Same logic: Canada retains jurisdiction.

Excluded rights or interests under s. 128.1(10). This is the largest and most reassuring category. RRSPs, RRIFs, TFSAs, RESPs, RDSPs, registered pension plans, deferred profit sharing plans, most employee benefit and stock option rights, and rights under Canadian life insurance policies all sit outside the deemed disposition. Registered savings are not marked to market on your way out of the country. Note that a TFSA escaping the charge does not make it a good thing to keep: contribution room stops accruing, contributions made while non-resident attract a monthly penalty tax, and several countries — the United States among them — do not recognise the wrapper at all.

Short-term residents. If you owned property when you arrived, or acquired it by inheritance while resident, and you were resident in Canada for no more than five of the preceding ten years, you may elect out of the deemed disposition for that property. The provision exists so that a posting to Canada does not tax appreciation that had nothing to do with Canada.

The election to defer

You are not required to fund the tax on a sale that has not happened. Under s. 220(4.5) you may elect, on Form T1244 filed with your departure-year return, to defer payment of the tax attributable to the deemed disposition until the property is actually disposed of. Interest does not accrue during the deferral.

The election is not free of conditions. The CRA requires acceptable security — a letter of credit, a pledge of the property, or similar — for federal tax owing above a published threshold, and no security below it. The deferral covers payment, not reporting: the gain still goes on the departure return, and the election preserves the timing rather than the amount.

A companion election under s. 128.1(4)(d), made on Form T2061A, lets you elect to treat taxable Canadian property as though it too had been disposed of. That is a losses election in disguise, and it is worth modelling where accrued Canadian losses would otherwise be stranded.

The forms

Three matter, and one of them is missed more often than the other two combined.

T1243 reports the deemed dispositions and the gains arising. T1244 makes the deferral election. T1161 lists every property you owned on the date you ceased residence, and it is required whenever the total fair market value of the listed property exceeds the reporting threshold — whether or not any departure tax is payable. It is an information return, its penalty runs on a daily basis to a fixed maximum, and people who correctly conclude they owe nothing routinely fail to file it.

Note also that emigration ends your Canadian filing year. The final return is a part-year return with personal credits pro-rated, and it is where the departure date first becomes a matter of record.

When residency actually ceases

This is the question everything above depends on, and Canada does not answer it with a calendar.

Residence for these purposes is factual, determined on residential ties under CRA folio S5-F1-C1. Significant ties are a dwelling place in Canada available for your use, a spouse or common-law partner in Canada, and dependants in Canada. Secondary ties include personal property, bank and brokerage accounts, a provincial driving licence, provincial health insurance, professional and social memberships, and a Canadian passport. No single tie decides; the significant ones weigh far more heavily, and retaining all three is close to conclusive that you never left.

The CRA generally takes the date of departure as the latest of the date you left Canada, the date your spouse and dependants left, and the date you became a resident of the country you settled in. A move that empties the house in March but leaves the family until July is a July departure.

Two further points. The optional Form NR73 invites the CRA to opine on your status; the opinion is not binding and the form volunteers a great deal. And a treaty tie-breaker that makes you resident elsewhere can render you a deemed non-resident under s. 250(5) — which triggers the same deemed disposition, on the date the tie-breaker bites.

Day counting has one distinct role here. Sojourning in Canada for 183 days or more in a calendar year makes you a deemed resident of Canada for the whole year regardless of ties, which is a different route to the same status. The sojourner rule sets it out.

What Residay tracks for this

Departure tax is decided on ties rather than days, so no counter determines it. What a counter can do is fix the date on which the deemed disposition is measured, and that date sets every valuation on the T1243.

Residay holds a dated, contemporaneous record of where each day was spent on either side of a move, so the departure date is documented rather than asserted three years later when a valuation is questioned. It runs the sojourner count for return visits, because a former resident who winters back in Canada can re-establish residence by presence alone. It keeps the same ledger against the United States tests, which is what the same person usually needs next. And it stores the record on your device, exportable for the accountant preparing the final return.

Planning notes

• Fix the departure date before the year end, not in the following spring. It determines the valuation of every asset caught by the charge.
• Get valuations contemporaneously for anything without a market price — private company shares above all. A retrospective valuation is the weakest document in the file.
• File Form T1161 even when you owe nothing. It is the cheapest form in the set and the most commonly forgotten.
• Consider realising accrued losses, or making the s. 128.1(4)(d) election, in the departure year rather than after. Losses do not travel well across a change of residence.
• If you intend to return, keep the sojourner count for every visit. Residence re-established by presence resets the whole analysis.