Moving Abroad 

Tax Strategy

Moving Abroad

FROM: MAY-JUN 2005 ISSUE | BY DAVID NOLKE

Canadians who choose to live outside the country may be free of Canadian tax responsibilities, since Canadian taxes are based on residency rather than citizenship, as is the case in the United States. But when an individual leaves Canada, he or she is deemed to have disposed of and to have immediately reacquired his or her property at fair market value. Exempt from this rule is property defined in paragraph 128.1(4)(b) of the Income Tax Act.

One such exemption is shares in a private corporation. As a result of the Bronfman Trust ruling in the mid-'90s, shares in a private corporation are subject to tax upon emigration, as emigrants are deemed to have disposed of those shares upon leaving Canada. This rule provides a tremendous barrier to people who hold shares in family-owned businesses.

The deemed disposition of assets results in a tax referred to as a departure tax. Canadian property subject to a departure tax includes:

• private company shares;
• shares of public corporations or mutual fund corporations where a taxpayer or non-arm's length individual owned a minimum of 25 per cent of the issued shares of any class or units at any time in the 60 months before departure; and
• shares of a non-resident private corporation and/or interest in a non-resident trust that derives more than 50 per cent of its value from taxable Canadian property.

Other exceptions to the deemed disposition rules include:

• real estate in Canada;
• Canadian resource properties and timber resource properties;
• eligible capital property and inventory used in a business carried on by a taxpayer through a permanent establishment in Canada;
• property 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).

Reporting

An individual who ceases to be a resident of Canada is required to provide a list, in prescribed form T1243, of all properties owned. This form is not required if the total value of property is less than $25,000. It is important to note that while a property may not be a reportable one, that does not mean it escapes the deemed disposition at fair market value requirement nor the attendant taxes on any accrued capital gain. Excluded from this list are cash, pensions including RRSP holdings and RRIF holdings, and any personal-use property valued at less than $10,000.

Where deemed gains are applicable, individuals have the option to pay the tax immediately or to provide "adequate" security and defer the payment of tax until the property is sold. A determination of the adequacy of the security is made annually by the minister and may mean a letter of credit, bank guarantee, or real property in Canada.

Double Taxation

The possibility of double taxation exists as the departing individual may not get the benefit of an increase in the cost base of property owned at the time of emigration in the new jurisdiction. For example, a deemed gain is taxed in Canada when the individual leaves and the gain is added to the cost base of the asset so that when the asset is disposed of at a later date, the individual will not pay a second tax.

Normally when an actual disposition takes place, a gain is computed by taking the original cost from the actual proceeds of disposition. However, with a deemed emigration gain, the amount of the gain is added to the cost base of the property so that when it is actually disposed of at a later date in Canada, the gain that was deemed to have been realized previously will not be taxed again.

But the new jurisdiction may not recognize the increased cost base of the assets, and might tax the disposition minus the original cost base when the assets are disposed of. As a further note, the departing individual will usually not be entitled to any tax credit relief in the country of migration for any Canadian departure tax paid. To deal in part with this situation, a departing individual is provided with a limited foreign tax credit against his or her Canadian tax for the year of emigration.

When a Canadian non-resident disposes of property subject to the deemed disposition rules, tax may be deducted. The amount is the lesser of the foreign tax paid on the disposition and the amount of tax payable on emigration less the amount that would have been payable if the deemed disposition rules did not apply.

Post Emigration Losses

Suppose an individual has emigrated from Canada and paid tax on what the deemed gain was at the time that he or she left, only to find out that on actual disposition of the assets, the gain is less than the amount reported. For taxable Canadian property, he or she can elect to reduce the deemed proceeds of disposition in the year of departure by the least of three amounts:

• an elected amount;
• the amount of the departure gain otherwise determined;
• the loss on actual disposition using the fair market value deemed proceeds on emigration as the "new" adjusted cost base.

If you are leaving Canada for an extended period, you will want to plan carefully and consider:

• taking steps to make sure you will not be seen to have given up Canadian residency so that the departure tax rules cannot be invoked;
• departing when property valuations are low and there are offsetting gains and losses in order to minimize tax on deemed disposition;
• disposing of exempt property to trigger losses in order to offset gains on the deemed disposition of properties that are not exempt;
• planning for capital gains exemptions for small business corporations, as individuals can access a $500,000 tax-free capital gain on the sale of shares of a small business corporation. It is possible to crystallize this gain to make the cost base of the shares higher.

In conclusion, when Canadians decide to spend extended amounts of time out of the country, the emigration rules in the Income Tax Act should be reviewed to allow for proper planning and to prevent any unpleasant surprises down the road.

[ TOP ]

David Nolke, FCGA, is proprietor of Nolke & Co., Certified General Accountant, in Calgary, and president of Integrated Business Advisory Services Inc., providing tax and management counsel to industry, government and other professionals. E-mail dgn@shawbiz.ca.

"Tax Strategy" is co-ordinated by J. ThomasMcCallum, CBV, FCGA, a business valuation and income tax consultant based in Whitby, Ontario, and author of several CGA-Canada professional development courses. E-mail jtmc@jthomasmccallum.com.

The information appearing in "Tax Strategy" is provided for the interest of the readers. Neither CGA Magazine nor the column authors and co-ordinator assumes any responsibility or liability to any persons relying on the information in the article to perform tax planning and/or compliance of any kind.