This blog has been written by Rahul Sharma, Partner, Fasken Martineau DuMoulin LLP, Toronto

My blog posts so far this year have focused on the significant volume of new residents to Canada and the associated tax and legal considerations, particularly where new residents are entering the Canadian tax system with assets and investments in their countries of origin or other global jurisdictions.  In this blog post, I flip the discussion to the, albeit smaller, number of existing or older Canadians who are looking to leave Canada and to cease being Canadian resident taxpayers.

While Canada continues to take in a very high volume of new residents, certain Canadians are looking to sever their residential ties with the country.  The number of inquiries about leaving Canada seems to be increasing.  The reasons for leaving Canada are often tax motivated, but that is not universally the case.  An increasing number of inquiries from Canadian residents looking to leave might be telling of the times, or it may be a simpler reflection of the country’s aging population, the greater ease with which people can travel and work from different locations today, and the large number of baby boomers who are looking to retire in sunnier spots.  In many cases, Canadians leave the country due to different work and business opportunities.

This is not a scholarly article or paper on the tax and legal implications of ceasing to be resident in Canada, or on residency considerations.  Such discussions are well beyond the scope of this blog post; there are good papers and chapters that cover the topic in greater and more technical depth and detail.  The simple purpose of this blog post is to raise and briefly discuss certain issues that arise when Canadian residents look to leave the country and to establish residential ties in another jurisdiction.  In many ways, the title of this post says it all.

In very general terms, the tax implications of emigration from Canada are addressed in subsection 128.1(4) of the Income Tax Act (Canada) (the “Act”).  In an earlier blog post, I mentioned that, upon immigration to Canada, a new resident is generally subject to a deemed disposition and reacquisition of property at fair market value (with certain notable exceptions).  The same is true, in reverse (and again with notable exceptions), when a Canadian taxpayer ceases to be a resident of the country—the taxable capital gain that arises as a result of emigration is often referred to within the Canadian tax community as “departure tax”.  The emigrating taxpayer could include an individual, corporation or trust.  However, I focus largely on individuals in this blog post.

Take the straightforward example of an individual who, at the time of cessation of Canadian tax residency, has only a bank account with a Canadian financial institution in which cash funds are deposited in Canadian dollars.  The individual would have a theoretical deemed disposition and reacquisition of assets at fair market value on departure.  However, with cash funds denominated in Canadian dollars as the individual’s only asset, the individual is unlikely to have any departure tax payable as a result of emigration from Canada.  The tax consequences of the individual’s emigration will increase depending on the assets owned by the individual at the time of departure.  If the individual personally owns a house in Canada, together with the Canadian dollar funds held in a Canadian bank account, there should again be minimal implications associated with the individual’s emigration, as the personally owned real property in Canada may be exempt from departure tax.  Instead, Canadian tax may be payable when the property is ultimately disposed of.  The complication in this case could be that the property is sold when the individual is no longer a Canadian tax resident, requiring compliance with additional measures, including the provisions of section 116 of the Act.

The individual in our example could be subject to departure tax if, in addition to the Canadian home and bank account, the individual also owns shares in the capital of Canadian corporations.  If the shares are of a private Canadian corporation and are subject to significant accrued capital gains, there could be departure tax payable and perhaps little-to-no liquidity to satisfy the payment.  The Act includes measures designed to provide potential relief to emigrating taxpayers by enabling them to defer departure tax payable by providing the Canada Revenue Agency with adequate security for the departure tax.  The departure tax payable could be theoretically reversed on the individual’s return to Canada as a taxpayer.  Whether the posting of security for departure tax payable is possible or practical will depend on an individual’s personal and financial circumstances at the time of departure.  It goes without saying that the more complicated a person’s asset ownership at the time of emigration, the greater the potential departure tax implications.  And clichéd as it is, every case turns on its own fact and the devil is, as always, in the details.

But departure tax implications aside, what does it mean to actually cease being a Canadian tax resident?  A UK-based practitioner recently commented to me that she was surprised by the level of residential ties and links to Canada that an individual had to sever, or the closer links that the individual had to establish in another jurisdiction, in order to cease being a Canadian tax resident.  The Canada Revenue Agency has a detailed folio on the subject (see Income Tax Folio S5-F1-C1).  There is also a fairly large volume of jurisprudence and it is, once again, well beyond the scope of this post to discuss or summarise it.  Suffice it to say that an individual needs to be careful about the residential ties maintained in Canada, and those established in another jurisdiction, if the individual is looking to cease being a tax resident.  For jurisdictions with which Canada has a tax treaty, determining the specific jurisdiction in which an individual is resident as between two countries may fall to the application of “tie-breaker” rules that look to, inter alia, the place of the individual’s permanent home and, where such a home exists in both countries, the individual’s centre of vital interests.  This is, commonly, the level of business, financial, economic and personal ties to one country over the other.

Where an individual’s residence is determined by application of treaty tie-breaker rules to be outside of Canada, the individual will not be resident in Canada and will instead be resident in the other [treaty] country under subsection 250(5) of the Act.  In cases where an individual’s tax residence is to be determined as between Canada and a country with which Canada does not have a tax treaty, common law rules and principles will apply to determine residency.  The Act’s “sojourner” provision in paragraph 250(1)(a) could also apply to deem an individual to be resident in Canada during a particular taxation year if the individual “sojourned” in Canada for 183 days or more during the year.

Often enough, individuals looking to establish residential ties in another jurisdiction receive legal or tax advice in that jurisdiction and do not contemporaneously seek Canadian legal and tax assistance.  That can be problematic.  If structures are established in a country other than Canada, including perhaps for pre-immigration planning to that country, there could be Canadian tax reporting complications, either until ties are severed with Canada, or even thereafter.  Trusts and foundations established in foreign countries, including to hold vacation or other properties in such countries, are a common issue.  In many cases, Canadian taxpayers who might be looking to leave Canada one day (or who might otherwise be buying only a vacation property in a warmer climate) do not realise that there are potentially complex Canadian tax payment and reporting obligations tied to the ownership structure that has been established for them in another country.  As a best practice, emigration planning from Canada and immigration planning to another country should occur contemporaneously, with advice being provided by competent professionals in both jurisdictions.

Finally, individuals’ estate planning is complicated by the ownership of assets in multiple global jurisdictions and/or where intended beneficiaries may be resident in multiple jurisdictions.  Returning to the simple example of the individual departing Canada with only a bank account at a Canadian financial institution, on the individual’s death, that institution might require a local grant of probate.  That could be complicated, including depending on the jurisdiction in Canada in which the account is situated.  It follows that just as tax planning needs to be coordinated as an individual emigrates from one country and immigrates to another, so too does estate and succession planning.

I reiterate that there is no substitute for good and competent legal and tax advice in this area.  If you are thinking about ceasing to be a Canadian tax resident, please consult as soon as possible with tax and legal professionals in Canada, as well as in the jurisdiction to which you are looking to immigrate.