by Jack Bernstein
Jack Bernstein is with Aird & Berlis LLP in Toronto.
A
s a result of geographical proximity and economic
ties to the United States, many Canadians emigrate to the United States for their education, employment, or retirement. This article reviews the tax issues
that must be considered when a Canadian resident terminates residency in Canada and moves to the United
States.
Canada imposes taxes based on residency rather
than citizenship or domicile. A person resident in
Canada is subject to Canadian tax on worldwide income. Canada is one of a few countries in the world
that levies a departure tax for residents who emigrate.
Basically, a person who ceases to be resident in Canada
is deemed to dispose of some assets at fair market
value immediately before departure. This enables
Canada to collect tax on accrued gains up to the date
of departure.
I. Dual Residents
It is not possible for a person resident in Canada to
become a resident of a country with which Canada
has a tax treaty without terminating Canadian residency and attracting Canadian departure tax. Canada’s
tax treaties contain tiebreaker clauses designed to avoid
double taxation by deeming a person to be resident for
treaty purposes in only one country. As the tiebreaker
provision is limited to treaty items, it enables an individual to retain Canadian residency for domestic tax
purposes. Under the tiebreaker rule, an individual will
be resident in the country in which the individual
maintains a principal residence. If the individual maintains a principal residence in both countries, reference
will be had to the country where the individual has
closer personal and economic interests, generally referred to as the center of vital interests. If this criterion
TAX NOTES INTERNATIONAL
cannot be determined, the individual’s habitual abode
will be considered or, if there is none, the individual’s
citizenship. If the individual’s residency is still uncertain, the competent authorities may intervene. (See Article IV of the Canada-U.S. treaty.)
Subsection 250(5) of the Income Tax Act applies to
any person who would otherwise be resident in
Canada but is, under a tax treaty, resident in another
country and not in Canada. A tax treaty is defined as a
comprehensive agreement for the elimination of double
taxation on income between Canada and the foreign
government that has the force of law in Canada at that
time. This provision deems a taxpayer who becomes a
dual resident not to be a resident of Canada whenever,
under a tax treaty, the taxpayer is resident in another
country and not in Canada. If the taxpayer would
otherwise be resident in Canada but becomes resident
in another country under a tax treaty, the individual
will be subject to departure tax. Individuals who were
dual residents before February 25, 1998, will not be
subject to this provision until the first time after June
27, 1999, that the individual next becomes resident in
another country, under that treaty or a different one. A
person will become a U.S. resident alien if he has obtained permanent residence status (for example, a green
card) or based on a formula has, over three years, been
in the United States for more than 183 days.
This provision may override the Canada Revenue
Agency’s administrative position on severing Canadian
ties and may permit retention of a Canadian home.
II. Termination of Residency
Subject to the dual residency provision, Canada
would only regard an individual as terminating residency if the individual severed his ties with Canada.
APRIL 14, 2008 • 157
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Emigrating to the United States: Tax Planning for
Canadians
SPECIAL REPORTS
• Perhaps the most important factor is the treatment
of the Canadian home. If owned by the departing
resident, it should preferably be sold. In addition
to serving to establish the termination of Canadian residence, the proceeds on the disposition of
the home may be exempt from Canadian tax if it
is sold before departure. If it is impractical to sell
the property (for example, if a reasonable price
cannot be obtained), then the house should be
leased for a minimum period of one year with no
right of cancellation without cause. This would
counter an argument by the CRA that Canadian
residency had not ceased on the basis that the individual continued to have a home available in
Canada.1 If a taxpayer rented residential premises
in Canada, the lease should be canceled or the
premises sublet. The taxpayer should not have a
room available with a relative and should not
maintain a Canadian telephone or post office box.
• When possible, family members and other dependents should not remain in Canada.2 This may
not be feasible when spouses are separated or children wish to complete their education in Canada.
In the latter case, children should not remain in
the home of the departing resident. Rather, the
children should attend boarding school, live in
residence at a university, or perhaps move to their
own apartment.
• The individual should ideally cancel his memberships with all Canadian churches or synagogues,
recreational and social clubs, unions, and professional organizations.3 If an individual wishes to
retain a Canadian membership, the club or organi-
1
IT-221R3 paras. 6 and 8 confirmed that a dwelling would be
one of the primary residential ties of an individual. An individual who leaves Canada but ensures that a dwelling place suitable for year-round occupancy is kept available in Canada for his
occupancy by maintaining it (vacant or otherwise), by leasing it
at non-arm’s-length, or by leasing it at arm’s length with the
right to terminate the lease on short notice (less than three
months) would generally be considered not to have severed his
residential ties within Canada.
2
IT-221R3 paras. 6 and 7 confirm that if a married individual
leaves Canada but his spouse or dependents remain in Canada,
the individual will generally be considered to remain a resident
of Canada during his absence. An exception to this may occur
when an individual and his spouse are legally separated and the
individual has permanently severed all other residential ties
within Canada. See Griffiths v. The Queen, 78 DTC 6286.
3
IT-221R3 paras. 8 and 9 confirmed that when an individual
maintains social ties such as resident club membership within
Canada after his departure, the CRA may examine the reasons
for the retention to determine if these ties are significant enough
to conclude that the individual is a continuing resident of
Canada while absent.
158 • APRIL 14, 2008
• Automobiles, boats, and airplanes should be sold
or transported to the new jurisdiction of residence. The registration of all automobiles, boats,
and airplanes should be changed to reflect the
new residence of the owner.
• Local credit cards should preferably be canceled,
and new credit cards obtained in the new jurisdiction.4 American Express, MasterCard, and Visa
cards may be retained, although those companies
will presumably continue to invoice the holder in
Canadian funds, charging him for the conversion
into foreign currency. Those companies should be
notified of the change of address, and it may be
advisable to request that new credit cards be issued for use outside of Canada (for example, in
U.S. funds). In some circumstances, on receiving
notice of a cross-border change of address, the
issuer of the credit card may withdraw credit
privileges and require the holder to apply for a
new card through a bank in the new jurisdiction.
• The individual should cancel newspaper subscriptions (or have them forwarded to the new jurisdiction if he wishes to keep abreast of Canadian affairs), Canadian safety deposit boxes, Canadian
post office boxes, and Canadian insurance policies, other than insurance policies on his life.
Newspaper subscriptions, safety deposit boxes,
and insurance policies (especially health insurance) should be obtained outside of Canada.
• Arrangements should be made to have mail forwarded to the new address or, alternatively, sent
to a friend or relative in Canada for sorting. The
departing resident should not retain a Canadian
address.
• Stationery, including business cards listing a Canadian address, should be destroyed. A Canadian
post office box should not be maintained. New
stationery should be ordered, and family, friends,
and business acquaintances should be notified of
the change of address.
• Magazines and periodicals should be notified of
the change of address. Also, Canadian life insurance companies and financial institutions with
4
IT-221R3 para. 9.
TAX NOTES INTERNATIONAL
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
zation should be informed of the change of address of the member and, if possible, a nonresident membership should be obtained. The
individual should join similar clubs and organizations in the new jurisdiction, thus substantiating
the change of residence. Also, the individual
should consider making charitable donations to
non-Canadian charities.
The following is a list of some of the indicia relevant
to the termination of a Canadian residency:
SPECIAL REPORTS
TAX NOTES INTERNATIONAL
As an example of economic ties to be considered,
the CRA lists in its bulletin employment with a Canadian employer. The inclusion, however, is too broad
because it fails to consider situations in which, for example, a person is employed by a Canadian employer
but all services are to be performed outside of Canada.
A person who otherwise satisfies the criteria for nonresidency will not be taxable in Canada on employment income pertaining to services performed outside
of the country.
Registered retirement savings plans (RRSPs) are
given as another example of economic ties that are
considered, although they were never previously regarded as a relevant factor for residency. There is no
departure tax on an RRSP retained in Canada by a
taxpayer on emigration from Canada. Canadian withholding tax is levied when payments from the RRSP
are made to the nonresident taxpayer. However, the
ITA does not provide that a person who ceases residency in Canada must be compelled to collapse the
RRSP and pay tax on the RRSP. The Canada-U.S. income tax convention, for example, permits a person
moving to the United States to elect to continue to defer tax on RRSP accumulations.
Although the foregoing lists represent the steps that
ideally should be taken, it may be impossible or impractical to implement fully all recommendations.
Since residence is an issue to be resolved by a review
of all factors, failure to comply with some of the items
in the checklist may not be decisive.
A file should be maintained for correspondence relating to the change of residence. This information
should prove helpful if termination of Canadian residence is later challenged by the CRA.
If an individual moves to the United States or to
another country with which Canada has a tax treaty
and files as a resident of that country under the tiebreaker clause, it is submitted that the person will be
deemed to not be resident in Canada under subsection
250(5) and may not need to dispose of the Canadian
residence, bank accounts, credit cards, and automobiles.
Evidence of Nonresidence
Another factor the CRA will consider in determining whether an individual intended to permanently
sever all residential ties with Canada is whether the
individual complied with the ITA provisions dealing
with the taxation of persons ceasing to be resident in
Canada and the taxation of persons who are not residents of Canada. For example, the CRA will consider
whether the individual advised any Canadian residents
from whom the individual receives payments that he
became a nonresident of Canada and, as a result, was
subject to withholding tax.
APRIL 14, 2008 • 159
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
which the departing resident will continue to have
business relations should be notified of the change
of status and address.
• Canadian bank accounts should be closed. If a
Canadian bank account is essential, a nonresident
account should be opened.
• Active securities accounts with Canadian brokers
should be closed. It is preferable that Canadian
investment counselors not be retained. Canadian
brokers may not be able to retain the account of
an individual who moves to the United States.
• A driver’s license should be obtained in the new
jurisdiction, or an international driver’s license
should be used.
• The individual should cease making contributions
to Canadian pension plans.
• Consideration should be given to resigning from
Canadian directorships and partnerships.
• The individual should endeavor to remain outside
Canada as much as possible for the first year after
emigration, to clearly establish his intent to cease
Canadian residency. It may be necessary to return
in the first year to dispose of Canadian assets, or
in the case of a family tragedy. After this initial
period, the individual will be able to return to
Canada for holidays and social gatherings without
being regarded as a Canadian resident, if the individual spends less than 183 days in each calendar
year in Canada and is not regarded as ordinarily
resident in Canada (discussed below).
• When it is desirable to change domicile, it is suggested that any Canadian burial plot owned by
the individual be transferred to Canadian family
members and that a new will be executed in the
new jurisdiction. For individuals moving to the
United States, it may be advantageous to retain
Canadian domicile to reduce the exposure to U.S.
estate tax on assets outside the United States. (See
below.)
• The individual should ensure that all legal documentation entered into after departure properly
reflect the change of residence. For example, any
legal agreements, pleadings, or deeds should reflect that the individual is a resident of the new
jurisdiction and not of Canada.
• The individual should not continue to be the sole
trustee of a Canadian trust because the residence
of the trust is based on the residency of the
trustee. The trust could be subject to departure
tax.
IT-221R3 also indicates that holding a Canadian
passport may also be a factor. This criterion is puzzling: Canadian taxation is based on residency, not on
citizenship. It is unreasonable to assume that an individual will renounce Canadian citizenship on emigrating from Canada.
SPECIAL REPORTS
Residential Ties Outside of Canada
The CRA will also look at residential ties outside of
Canada to determine the individual’s residence status.
Deemed Residents
The interpretation bulletin also discussed the application of subsection 250(1) of the ITA, under which
some persons (such as some government employees)
are deemed to be residents of Canada. The interpretation bulletin states that the deeming provision will apply only if it has been determined that the person is
not a factual resident of Canada.
Under subsection 250(5), a person who is a factual
resident of Canada under Canadian common-law tests
and a resident of another country under the relevant
treaty is deemed to be a nonresident for Canadian tax
purposes. The individual is treated as a nonresident for
all purposes of the ITA other than paragraph
126(1.1)(a). Subsection 250(5) does not apply to an
individual who, on February 24, 1998, was resident in
another country for treaty purposes but who was otherwise resident in Canada, if the individual has maintained that dual residence status continuously since
that date.
An individual who has not
severed all ties with
Canada may be treated as
ordinarily resident in
Canada.
If the other country in which the individual may be
considered a resident possesses a comprehensive tax
treaty with Canada, the so-called tiebreaker rules set
out in the relevant treaty between Canada and that
other country will operate to determine the individual’s
residence for tax purposes. According to the interpretation bulletin, if the individual is determined to be a
nonresident of Canada under the tiebreaker rules, subsection 250(5) will apply and deem that individual to
be a nonresident for ITA purposes.
The tiebreaker clause involves an examination of the
location of the individual’s permanent home, the center of the individual’s vital interests, habitual abode,
160 • APRIL 14, 2008
and citizenship. Those criteria are examined in the order set out in the tiebreaker clause, and reference is
made to the next criterion only if a specific criterion is
neutralized due to connections to both countries.
In most tax treaties with Canada, the tiebreaker
rules include the ‘‘permanent home’’ test. Under that
test, for purposes of the treaty, an individual is resident
in the country in which the individual has a permanent
home available. The CRA states that a permanent
home may be any kind of dwelling — rented or owned
— that the individual retains for his permanent use. It
is unclear whether the test applies only to a home
owned at the end of the calendar year.
The permanent home test will not resolve the question of residence if an individual has a permanent
home available in both countries. In that case, the second test under the tiebreaker rules will apply.
The center of vital interests test involves a review of
the individual’s social and economic connections in
both countries. The location of business and investment interests, memberships at business or recreational
clubs, and places of worship and involvement in the
community would be relevant.
The next test is habitual abode and is determined by
an examination of where the individual has spent more
time in the year.
In the previous interpretation bulletin, the CRA said
that an individual absent from Canada for two years or
longer would be presumed to have become a nonresident. That presumption had no basis in law, and it was
possible, albeit difficult, for a taxpayer to successfully
rebut that presumption. In Peel v. The Queen, [1995] 2
CTC 2888, the taxpayer successfully rebutted the
CRA’s administrative position. That taxpayer accepted
a position outside of Canada, but returned within a
short period. Despite the short period abroad, the Tax
Court found that the taxpayer severed all ties with
Canada at the time of departure.
In the bulletin, the CRA retracted its position regarding the two-year presumption and adopted the position that no particular length of stay abroad would
necessarily transform a resident into a nonresident. The
CRA may challenge the residency status of an individual and seek to impose Canadian residency when a
person has lived outside Canada for more than two
years. The change in administrative policy seems unnecessary; the CRA could have questioned a person’s
residency status if, for example, the person was ordinarily resident in Canada for the two years (or longer).
The CRA no longer has an administrative rule that
if an individual is absent from Canada for two years or
longer, he will be presumed to have become a nonresident if he has satisfied the other criteria outlined in
TAX NOTES INTERNATIONAL
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Regularity and Length of Visits to Canada
Generally, an individual who has permanently severed all residential ties with Canada will not be considered a resident of Canada simply by virtue of occasional visits, whether for business or pleasure.
However, it may be problematic when the visits occur
on a regular basis and the individual maintained secondary residential ties with Canada after departure.
SPECIAL REPORTS
Ordinarily Resident in Canada
An individual who has not severed all ties with
Canada may be treated as ordinarily resident in
Canada. For example, in McFadyen v. The Queen, 2000
DTC 2473, the Tax Court found that a taxpayer who
left Canada with his family to work in Japan remained
a Canadian resident during that period because he did
not sever all ties with Canada. McFadyen kept two
bank accounts in Canada, his RRSP, a Canadian credit
card, a safety deposit box at a Canadian bank, his
driver’s license, and a professional membership. He
rented his house to an arm’s-length person. Although
McFadyen did not intend to return to Canada, the
Court found that he was a resident because he retained
those items.
The following factors will be considered in determining whether an individual is ordinarily resident in
Canada: evidence of intention to permanently sever
residential ties with Canada, regularity and length of
visits to Canada, and residential ties outside of
Canada.
The CRA has also taken the position that occasional
visits to Canada for either personal or business reasons
will not affect the status of a nonresident.6
However, visits to Canada on a regular basis could
be significant enough for the taxpayer to be considered
a continuing resident. The test laid down in Thomson v.
MNR, 2 DTC 812 (SCC), and followed in Fisher v. The
Queen, 96 DTC 840 (TCC), was whether the taxpayer
had ‘‘in mind and fact settled into or maintained or
centralized his ordinary mode of living with its accessories in social relations, interests and conveniences.’’
Accordingly, the fewer visits to Canada the better, especially within the first year after departure.
5
IT-221R3 in several cases involving university professors who
claim to be nonresidents of Canada during their sabbaticals. The
CRA was successful in arguing that the taxpayers continue to be
ordinarily resident in Canada during their sabbaticals (see, e.g.,
Saunders v. MNR, 80 DTC 1392 (T.R.B.)). An individual who departs Canada and resides on a boat in the Caribbean without
becoming a resident of another country may be challenged by
the CRA.
6
IT-221R3, para. 13.
TAX NOTES INTERNATIONAL
III. Date of Departure
Consideration should be given as to when the CRA
should be informed of the departure. The final Canadian income tax return, which must be filed by April
30 of the year following departure, will indicate the
effective date of termination of Canadian residence. It
is questionable whether notice should be given to the
CRA before departure, because the Minister of National Revenue has the power before or after departure
to demand payment of all tax for which the taxpayer is
or would be liable on departure and to seize assets of
the taxpayer for failure to pay.7 It is better to not request a determination of nonresident status.
An individual will be taxable in Canada on his
worldwide income up to the date of departure. Also,
the date of departure will be the date of deemed disposition for purposes of the departure tax. The individual
will be subject to tax only on Canadian-source income
after departure.
An individual will be
taxable in Canada on his
worldwide income up to the
date of departure.
The CRA takes the administrative position that an
individual ceases to be resident on the later of:
• the date the individual leaves Canada;
• the date his spouse and/or dependents leave
Canada; or
• the date he becomes a resident of the country to
which he is emigrating (Interpretation Bulletin
IT-221R3); residency status should be obtained in
another jurisdiction.
If a person is legally separated from his spouse and
has otherwise severed all residential ties with Canada,
the CRA takes the position that he would generally be
considered a nonresident even if his spouse and dependents remain in Canada.8
There have been many reported cases on the issue
of residency. Individuals who leave Canada to resume
residency in their former country of residence will be
regarded as departing when they leave, even when their
spouses may remain in Canada to dispose of the family residence. (See Schujahn v. MNR, 62 DTC 1225
(ExCt).)
7
Section 226.
IT-221R3, para. 7. See, e.g., York v. MNR, 80 DTC 1749
(T.R.B.).
8
APRIL 14, 2008 • 161
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
that bulletin: severing residential ties with Canada and
establishing residential ties in a new jurisdiction.5
The CRA states in Interpretation Bulletin IT-221R3
that a taxpayer would generally be regarded as a continuing resident of Canada if he left Canada and returned to Canada in the same or the following taxation
year to the same employer or business. Only if the taxpayer could establish that he severed all residential ties
on leaving Canada and there was no evidence that his
return was foreseen at the time of his departure would
he be considered a nonresident of Canada during his
absence.
SPECIAL REPORTS
In summary, the CRA’s position on the date of departure is arbitrary. To ensure that the Canadian tax
authorities do not question the date of departure, it
may be prudent to have the spouse and minor children
accompany the individual when he departs Canada
and ensure that an application is made for residency in
another country.
When a departure tax is triggered, it may be advantageous for an individual who wishes to leave Canada
in November or December to delay the departure until
January of the following year in order to delay the payment of the departure tax by 12 months.
The date of departure is indicated on the Canadian
tax return of the departing individual for the year of
departure; the return must be filed by April 30 of the
year following the year of departure.
IV. Part-Year Residence
Section 114 of the ITA provides rules for computing
the taxable income of an individual who is resident in
Canada for some period in the taxation year and is a
nonresident for the rest of the year. An individual is
treated as a resident of Canada for the part of the year
that the person was resident in Canada and is treated
as a nonresident for the balance of the year. A capital
loss incurred in the calendar year of departure and after departure can be used to offset the departure tax.
Subsection 111(9) enables the carryover of losses for
the part of the year throughout which the taxpayer was
nonresident.
In computing income for the purposes of the final
Canadian tax return, no reserve may be claimed for the
balance of the purchase price owing to the taxpayer in
connection with dispositions of property on an installment basis.9
The individual may also be subject to departure tax.
Any taxable income arising from the deemed disposition would be reported on this final return.
Deductible contributions may be made within the
prescribed limits to an RRSP or registered pension plan
in the year of departure.
Deductions, or tax credits, as the case may be, may
be claimed within the prescribed limits for allowable
capital losses,10 foreign tax credits,11 charitable donations,12 medical expenses,13 and alimony or maintenance payments.14
Deductions are permitted for Canada pension plan
and Quebec pension plan contributions for the period
until departure.
Moving expenses relating to the change of residence
will not be deductible, because the move is not to another location in Canada.15
The individual must prorate the personal tax credits
on a daily basis to the date of departure.16
In David Grant v. The Queen, 2006 DTC 3071 (TCC),
the taxpayer, while resident in Canada, borrowed US
$1 billion on December 24, 1998, due January 4, 1999.
He invested the money with a subsidiary of a bank in
the United States. The accrued interest to December 31
was approximately US $1.7 million. On December 30
he ceased to be resident in Canada and moved to Singapore. He deducted interest paid on December 31 of US
$1.5 million under section 114. He used the cash
method but deducted the interest accrued to December
30. He did not pay tax in Canada on interest income,
on the grounds that he used the cash basis and was not
resident in Canada when the interest was due. The issue was the deductibility of interest expense to December 30, 1998. The court held that based on a ‘‘textual,
contextual and purposive interpretation,’’ no deduction
was available under section 114 for interest paid when
he became a nonresident. Subsection 114(a) does not
permit the deduction on the accrual basis.
V. Deemed Disposition
Subsection 128.1(4) treats a taxpayer who ceases to
be resident in Canada as having disposed of the taxpayer’s property for proceeds equal to fair market
value. This deemed disposition is deemed to have taken
place at a ‘‘time of disposition’’ that is immediately
before the taxpayer ceases to be resident. The time of
10
Para. 111(1)(b).
Section 126.
12
Section 118.1.
13
Section 118.2.
14
Para. 60(b) or 60(c).
15
Section 62.
16
Section 114.
11
This may create a cash flow problem, because the
individual will be taxable on amounts not yet received.
9
Para. 40(2)(a)(i) and para. 20(8)(a)(ii).
162 • APRIL 14, 2008
TAX NOTES INTERNATIONAL
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
A private letter ruling was obtained that a husband
and a wife may be resident in different countries. A
husband and wife were married in Canada, but after
five years, the wife (a U.S. citizen) moved back to the
United States for a better employment opportunity. The
husband and wife jointly owned a home in Canada,
and the wife owned a home in the United States. Most
of their investments were separate, because this was a
second marriage for both of them. The wife spent less
than two months a year in Canada, and the CRA initially determined that the wife could not have terminated her residency because her husband remained in
Canada. Fortunately, a favorable interpretation was
received from the international group of the CRA.
SPECIAL REPORTS
TAX NOTES INTERNATIONAL
erties is a disposition that does not result in any
change in the beneficial ownership of property
and that otherwise meets the conditions set out in
subsection 107.4(1). Subsection 107.4(3) generally
provides for the rollover of property on the disposition. Interests in personal trusts were excluded
because a trust would be subject to departure tax
if it became nonresident, and subsection 107(5)
restricts the rollover of property to a nonresident
beneficiary. Also, there is Part XII.2 tax that may
apply if a trust having nonresident beneficiaries
earns business income or income from real property and there is withholding tax on trust distributions. Double tax could otherwise arise if there
were departure tax on a trust interest without a
corresponding increase in the tax cost of the trust
assets. Paragraph 104(4)(a.3) will trigger a deemed
disposition of trust assets when a beneficiary emigrates if it is reasonable to consider that property
was transferred to the trust on a rollover basis in
anticipation that the individual would later cease
to reside in Canada.
• Interest in nonresident testamentary trusts, if the
interests were never acquired by any person for
consideration.
• Interests in the life insurance policies in Canada,
other than interests in segregated fund policies.
An individual who is resident in Canada at some
time in the particular taxation year and throughout
either the immediately preceding year or the following
taxation year is deemed to be resident in Canada
throughout the taxation year and may claim the capital
gains exemption for some gains arising in the deemed
disposition. The maximum exemption is C $750,000
for qualified farms and shares of a qualified smallbusiness corporation.17
The exemption available in the year may be reduced
if the individual previously claimed the capital gains
exemption or has a cumulative net investment loss (a
defined term) or has deducted an allowable business
investment loss (a defined term) in prior years.
VI. Temporary Residents
On immigrating to Canada, a taxpayer is deemed to
have sold and to have reacquired property, other than
taxable Canadian property, at fair market value. An
individual (other than a trust) who has been resident in
Canada for 60 months or less during the 10 years preceding the cessation of residence is not deemed to dispose of any property that the individual owned on becoming resident in Canada or inherited after becoming
resident here.
17
This exemption was increased to C $750,000 by the 2007
federal budget.
APRIL 14, 2008 • 163
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
cessation of residence is referred to as the ‘‘particular
time’’ and, in the explanatory notes, as the ‘‘emigration
time.’’
The departure tax applies to real estate outside of
Canada; unincorporated businesses outside of Canada;
private or public company shares in Canada or outside
Canada; mutual funds, partnership interest, and interests in nonresident inter vivos trusts and in units of
commercial trusts in Canada or outside Canada; portfolio investments (government or corporate bonds); and
personal use property as well as personal property
(works of art, jewelry, stamps, coins, and rare manuscripts).
For individuals who emigrate from Canada, the departure tax applies to all property other than the following:
• Real property situated in Canada, Canadian resource properties, and timber resource properties.
• Property of a business carried on by the taxpayer,
at the emigration time, through a permanent establishment in Canada — including capital property, eligible capital property, and property described in the inventory of the business (note that
there are provisions requiring a deemed realization if inventory is no longer used in the business,
or if inventory in a Canadian business is moved
outside of Canada).
• Rights to receive specified pension and similar
payments, including (i) rights under RRSPs, registered retirement income funds, and deferred
profit-sharing plans; and (ii) other benefits, including death benefits, retirement allowances, and retirement compensation arrangements.
• Rights to some benefits under employee profitsharing plans, employee benefit plans (EBPs) (except the plans described in the next item on this
list), employee trusts, and salary deferral arrangements.
• Rights to benefits under some EBPs that are in
substance salary deferral arrangements when the
benefit relates to the taxpayer’s service in Canada.
• Some property of short-term residents (see below;
an emigrant who returns to Canada within five
years of emigration will no longer be treated as
having realized accrued gains on departure).
• Employee stock options that are subject to section
7 of the ITA.
• Interest in specified trusts, including a retirement
compensation arrangement, generally linked to
employee compensation (but not including an interest in a trust governed by an EBP).
• Interests in personal trusts resident in Canada, if
the interests were never acquired by any person
for consideration and did not arise through a
qualifying disposition as defined in ITA subsection 107.4(1). A ‘‘qualifying disposition’’ of prop-
SPECIAL REPORTS
VII. Latent Loss on Departure
An election is available to permit an individual
(other than a trust) to choose to treat some of the
properties that would otherwise be exempt from the
deemed disposition as having been disposed of. An
emigrant might take advantage of this if there is a latent loss on a property that may be used to offset other
gains on departure.
VIII. Stop-Loss Rule for Nonresidents
The CRA was concerned that the departure tax on
shares of Canadian private corporations would be circumvented if, after departure, the individual received
actual or deemed dividends (for example, on the redemption or purchase for cancellation of shares) and
then realized a capital loss (a capital loss arises when
the shares have deemed proceeds, which are net of the
deemed dividend and may be less than the adjusted
cost base (tax cost) of the shares) on the disposition of
the shares that was carried back to offset the departure
tax. Rather than being subject to tax at approximately
23.2 percent (the top personal rate on capital gains),
the tax would effectively be reduced to the Canadian
withholding tax rate of 15 percent if a treaty reduction
was available.
Only the gain after
immigration will be subject
to Canadian departure tax
if the individual leaves
after five years.
Subsection 40(3.7) is a stop-loss rule that may reduce the loss of an individual from the disposition of a
property at a particular time, when the individual was
nonresident at any time before the particular time. The
rule applies when an individual has received dividends
while a nonresident and later realizes a loss on the
property (whether a share, an interest in a partnership,
or an interest in the trust) in respect of which the dividends were received.
The individual is deemed to be a corporation regarding dividends while a nonresident. Any taxable
dividends received by the individual are deemed to
have been deductible under section 112 when received.
164 • APRIL 14, 2008
The impact of this rule is to reduce the individual’s
loss on a share, partnership interest, or trust interest to
preclude the carryback to offset the departure tax.
Section 119 provides a special tax credit when the
stop-loss rule applies to an individual (other than a
trust) who ceases to be resident in Canada. An individual who ceases to be resident in Canada may be
subject to a capital gain on departure as a result of the
departure tax. If the individual later receives dividends
from a Canadian corporation, the dividends would be
subject to Canadian withholding tax under Part XIII of
the ITA. Double taxation could arise if relief were not
provided for the Canadian withholding tax on the dividends. In other words, the individual could be taxable
in Canada on both the capital gain and on the dividend. The individual is treated for purposes of section
119 of the ITA as having disposed of the property immediately before returning to Canada. This ensures
that appropriate credit is given for any Canadian withholding tax under Part XIII on the income that triggered the application of the surplus-stripping rule. Section 119 allows a tax credit equal to the Canadian tax
on those dividends up to the amount of the tax on the
capital gain that arose on emigration from Canada. An
individual is permitted to deduct, in computing tax
otherwise payable under Part I for the tax year of departure, the lesser of two amounts:
• the amount of tax attributable to the gain on the
property; or
• the Part XIII withholding tax paid (or deemed to
have been paid) by the individual on actual or
deemed dividends that under the new stop-loss
rule have reduced the individual’s loss from the
disposition of the property. This amount is computed as the proportion of the individual’s Part
XIII tax for dividends in respect of the property
that the subsection 40(3.7) loss reduction is of the
total amount of those dividends.
Necessary adjustments will be made to the assessment of tax to take into account the effect of section
119. Subsection 152(6) includes in its list of carryback
provisions section 119 as well as other provisions. Paragraph 161(7)(a) includes in its list of deductions and
exclusions a deduction under section 119 of the act for
the disposition of taxable Canadian property of the
taxpayer in any later year. This will remove interest.
Similarly, an amendment was made to subsection
164(5) dealing with the effect of a carryback of a loss
on tax refunds. Another amendment avoids alternative
minimum tax.
If the individual had acquired the property for its
fair market value on emigration and disposed of the
property immediately before becoming resident, the
stop-loss rule in section 40(3.7) would apply to reduce
the loss. The individual is treated as having disposed of
the property immediately before emigration, despite the
election not to have the deemed disposition apply. The
TAX NOTES INTERNATIONAL
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
As a result of the step-up in the cost of assets (other
than taxable property) on immigration, it is only the
gain after immigration that will be subject to Canadian
departure tax if the individual leaves after five years.
Non-Canadian assets owned at the date of moving to
Canada would be exempt from departure tax if the
individual leaves within five years.
SPECIAL REPORTS
Assume an individual emigrates from Canada to the
United States. He avoids departure tax (for example,
23.2 percent) on his shares in a private company by
posting security. The company redeems his shares after
he is a nonresident. The deemed dividend arising on
the redemption is subject to Canadian withholding tax
(for example, 15 percent). Also, a capital loss would
arise to offset the departure tax.
Assume FMV of shares of $10 million, ACB and
paid-up capital of nil, and a gain on departure of $10
million. The shares are redeemed for $10 million, resulting in a deemed dividend of $10 million and a
capital loss of $10 million. Effectively, the individual
could convert the 23.2 percent tax on capital gains to
15 percent withholding tax on the deemed dividend.
The stop-loss rule in subsection 40(3.7) prevents the
carryback of the capital loss to offset departure tax if
the loss is from actual or deemed dividends. Section
119 avoids double tax (that is, departure tax and Canadian withholding on dividend) by providing credit
against departure tax for Part XIII withholding tax,
which can be carried back to year of departure.
Assume that Marie, the majority shareholder in a
Canadian controlled private corporation (CCPC), emigrates to the United States in 2007, when her shares
have an FMV of $500,000 and an ACB (tax cost) of
$15,000. Dividends of $35,000 are paid to Marie as a
nonresident in 2008. In 2009 Marie returns to Canada.
The FMV of the shares at that time is $15,000.
Marie is treated as disposing and reacquiring the
shares on her return to Canada. Subsection 40(3.7) operates to deny the loss of $35,000. Marie can elect
deemed proceeds in year of departure as follows:
• If she elects $10,000:
— deemed departure proceeds: emigration ACB
$15,000 + (stop-loss $35,000 - specified
amount $10,000) = $40,000;
— deemed departure gain: deemed proceeds
($40,000) - ACB ($15,000) = $25,000; and
TAX NOTES INTERNATIONAL
— deemed reacquisition cost: deemed ACB
($15,000) - (lesser of stop-loss $35,000 and
specified amount $10,000) = $5,000 (if later
sale at $15,000, capital gain of $10,000).
• If she elects $5,000:
— deemed departure proceeds = $45,000;
— deemed departure gain = $30,000; and
— deemed reacquisition cost = $10,000.
IX. Temporary Nonresidents
When an individual (other than a trust) reestablishes
Canadian residence within 60 months of having ceased
to be a resident, a special rule set out in subsection
128.1(6) enables the individual to exclude all property
from the deemed disposition on the cessation of residence. The objective is to allow the individual to unwind the departure tax in connection with properties
that were owned by the individual throughout the period beginning at the emigration time and ending at
the particular time. If the emigrant returns to Canada
within five years of departure, the emigrant will no
longer be treated as having realized accrued gains on
departure. If the individual provided security under
section 220.1 to defer payment of any tax arising as
the result of emigration, the security will be returned.
Interest or penalties may arise in connection with taxes
arising from the individual’s emigration. Note that if
security was provided, there would be no interest or
penalties arising in connection with the deemed disposition on those assets.
The rules are designed to preclude a resident of
Canada from using the temporary period of nonresidence to extract, as dividends, subject only to a low
rate of withholding tax, value representing accrued
gains.
Separate elections may be made regarding taxable
Canadian property (see revised definition below) and
other property. The first election removes taxable Canadian properties from the deemed disposition and reacquisition on emigration, subject to special rules. The
second election adjusts the emigration proceeds of disposition and the returning ACB of the other properties.
Each election covers all property of the same type, but
the returning resident may choose to make one election
and not the other.
An election is available regarding taxable Canadian
property that may be made at the emigration time and
when the individual was nonresident. If this election is
made, there are special surplus-stripping rules for the
property covered by the election. The objective is to
ensure gains that accrued before emigration from
Canada and that have been extracted in the form of
dividends during the individual’s residence abroad are
subject to Canadian tax as gains. Surplus stripping operates when a loss has accrued on the property during
the individual’s period of nonresidence.
APRIL 14, 2008 • 165
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
individual’s proceeds of disposition at that time are
deemed to be the total of the adjusted cost base (ACB)
of the property on emigration and the amount, if any,
by which the notional loss reduction under the stoploss rule in subsection 40(3.7) exceeds the lesser of (1)
the ACB on emigration and (2) the amounts chosen by
the individual. The individual is treated as having reacquired the property on emigration, at a cost equal to
the excess, if any, of the property’s ACB on emigration
over the lesser of the notional loss reduction under
subsection 40(3.7) and the amount chosen by the individual. The practical result is that the income (dividend) that gives rise to the notional subsection 40(3.7)
loss reduction is recharacterized as gains. Those gains
are, subject to election, distributed between the postreturn and the deemed disposition on emigration.
SPECIAL REPORTS
X. Postdeparture Loss — Taxable Canadian
Property
Subsection 128.1(8) provides relief to an individual
(other than a trust) who disposes of a taxable Cana-
166 • APRIL 14, 2008
dian property after having emigrated from Canada for
proceeds that are less than the deemed proceeds that
arose when the individual emigrated. The objective is
to enable the individual to reduce the gain on departure to reflect the postmigration loss realized on the
property. This is accomplished by means of an election
to reduce the proceeds of disposition on departure by
the lesser of (i) the amounts specified by the individual, (ii) the amount that would be the individual’s
gain from the deemed disposition, and (iii) the amount
that would be the individual’s loss from the disposition
of the property when the property is actually disposed
of, if the loss were determined with reference to the
various stop-loss rules. The same amount is added to
the individual’s proceeds of disposition, realized at the
time of the actual disposition.
Assume an individual sells his shares after departure
for actual proceeds less than the deemed proceeds on
departure. He can elect to reduce the departure proceeds by the least of the amount specified, the gain
from the deemed disposition, and the loss from the
actual disposition (considering stop loss), as shown in
the following table:
2006 FMV on departure
$100,000
ACB
$10,000
Gain on departure
$90,000
Deemed cost
$100,000
2008 actual sale (no dividends)
$80,000
Loss
$20,000
Elect to reduce proceeds on departure by
$20,000
Gain on departure
$70,000
Add $20,000 to actual proceeds
(note: doesn’t affect deemed cost)
$100,000
Revised proceeds in actual sale
$100,000
Cost
$100,000
XI. Substituted Shares
Section 128.3 of the act ensures that the shares received in exchange for other shares on a tax-deferred
basis under the rollovers for convertible property, transfers of property to a Canadian corporation in consideration for share, a share-for-share exchange, or an
amalgamation are deemed to be the old shares.
XII. Employee Stock Options
As indicated above, an unexercised employee stock
option will not be subject to departure tax. If an individual emigrates from Canada holding shares of a
TAX NOTES INTERNATIONAL
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Assume a majority shareholder of a CCPC departs
from Canada in 2007. The individual receives dividends from the company in 2008. In 2009 the individual returns to Canada. The individual uses the election in subsection 128.1(6) to minimize the tax
consequences of the earlier emigration from Canada.
The impact of the rules is to ensure that the dividend
that the individual received while nonresident will be
realized as a capital gain and section 119 will give the
individual credit for any withholding tax paid on the
dividend. There is some flexibility in electing the
amount of the deemed proceeds on emigration, affecting the reacquisition cost.
The new election is on a property-by-property basis
for nontaxable Canadian property. The election adjusts
both the proceeds of disposition that are deemed to
arise as a consequence of the deemed disposition on
the individual’s earlier emigration and the deemed acquisition cost. Each of these amounts is adjusted by
subtracting the lesser of (i) the amount that would
otherwise be the individual’s gain on the property as a
result of the deemed disposition, (ii) the FMV of the
property immediately before the individual becomes
resident in Canada, and (iii) any other amounts specified by the individual. The returning individual may
therefore defer Canadian tax on any gain that accrued
before emigration, while still protecting from Canadian
tax gains that accrued during periods of nonresidence.
For example, assume that an individual emigrates
from Canada in 2007, owning shares of a U.S. corporation that would be subject to departure tax. In 2009
the individual returns to Canada, at which point the
shares have appreciated in value. An election may be
made under paragraph 128.1(6)(c) to control the tax
consequences of ceasing to be a Canadian resident. It
would enable the individual to take advantage of a
capital loss in 2007 from another source, by triggering
a capital gain on emigration equal to the capital loss.
Assume Noah emigrates in 2007, owning shares of
a U.S. company that has an FMV of $25,000 and an
ACB of $15,000, and in 2009 he returns to Canada. At
that time, the shares have an FMV of $80,000. Assume
that in 2007, he had other capital losses of $7,000. If
Noah elects $3,000, the proceeds on departure in 2007
will be deemed to be $22,000 ($25,000 FMV - least of
gains $10,000 ($25,000 - $15,000), FMV in 2008 of
$80,000, and elected amount of $3,000). His deemed
gain on departure will be $7,000 (deemed proceeds of
$22,000 - ACB $15,000), and he may claim his available capital loss of $7,000. The result is that he will
avoid any tax on his departure and his new ACB will
be $77,000. If he then sells his shares for $80,000, he
would realize a capital gain of $3,000.
SPECIAL REPORTS
Paragraph 128.1(4)(d.1) applies to reduce the individual’s proceeds of disposition for those shares by the
amount, if any, that would have been added to the
shares’ ACB under paragraph 53(1)(j) of the ITA had
subsection 7(1.1) applied to the disposition. This ensures that the measurement of the individual’s gain on
the share takes into account the amount that will eventually be taxed under the employee stock option rules.
Subsection 7(1.6) deems the shares, for the purposes
of the income inclusion under section 7 and the deduction of one-half of the benefit under paragraph
110(1)(d.1), not to have been disposed of because of
the emigration. As a result, emigration from Canada
will not accelerate the income inclusion under the employee stock option provision. However, the share will
still be disposed of for purposes of the ITA and the
emigrant will realize any gain that accrued on the
share since it was last acquired. For example, if an individual had received an option to acquire a share at C
$100 and exercised that option when the share was
worth C $200, the individual would have a deferred
income inclusion of C $50. If the individual emigrates
from Canada when the shares are worth C $600, the
rules are designed to ensure that the difference between
the C $600 and the C $200 are subject to the deemed
disposition rules at the time of departure. The individual would have a C $200 taxable capital gain (50
percent of $400). The income inclusion of C $50 under
section 7 will be delayed until the shares are actually
disposed of.
XIII. Inventory
As indicated above, property of a business carried
on by the taxpayer at the time of emigration, through
a permanent establishment in Canada, is exempt from
the departure tax. Subsection 10(12) triggers a deemed
disposition if a nonresident taxpayer removes a property from the inventory of a business or part of a business carried on in Canada and adds that property to
the inventory of a business or part of a business carried on by the taxpayer in another country. Subsection
10(13) deems a nonresident taxpayer who adds a property (otherwise than by acquiring the property) to the
inventory of a business or part of a business that is
carried on by the taxpayer in Canada to have acquired
property at that particular time at FMV.
Subsection 10(14) provides that a property included
in the inventory of a business includes professional
work in progress that would be so included if the elec-
TAX NOTES INTERNATIONAL
tion were not made under section 34 to exclude work
in progress. Any work in progress that would ordinarily be included in inventory will thus be subject to
the deemed disposition or deemed acquisition set out
in the preceding paragraph.
Paragraph 45(1)(d) will treat a nonresident who
ceases to use a property to earn income in Canada and
begins to use it instead to earn income outside of
Canada as having disposed of the property.
XIV. Fiscal Period
Paragraph 128.1(4)(a.1) provides that the fiscal period of any business carried on by an individual emigrant (other than a trust) otherwise than through a permanent establishment in Canada is deemed to have
ended immediately before the emigration time and a
new fiscal period of the business is deemed to have
begun at the emigration time. This ensures the appropriate measurement of the individual’s predeparture
income or loss from the business. The emigrant may
choose a new fiscal period of the business.
XV. Security for Departure Tax
Departure tax could pose a severe hardship on an
individual who does not realize third-party proceeds in
connection with the assets subject to departure tax.
Subsection 220(4.5) permits an individual to elect, on
giving security acceptable to the Minister of National
Revenue, to defer payment of an amount of tax that is
owing as a result of the deemed disposition of a particular property (other than an EBP right). If such an
election is made, interest and penalties do not start to
accrue on the amount secured until the amount becomes unsecured. The election is made in a prescribed
manner to defer the amount of the tax owing. The
election is made under subsection 220(4.5) of the ITA,
on providing adequate security, and by filing the prescribed Form T1244. The prescribed form must be filed
on or before the individual’s balance-due day. However,
an extension of time for making the election is possible
under subsection 220(4.54) of the ITA. The CRA will
review the amount of security annually and determine
whether it continues to be adequate. The security arrangements must be made on or before the individual’s
balance-due date for the year of departure (April 30 of
the calendar year following departure).
If the taxpayer makes an election, the CRA is required to accept adequate security for the year following the year of emigration, and reassess the adequacy
of the security yearly. The Minister of National Revenue may, but is not required to, accept some or all of
the shares as security. The amount that the Minister
must accept as security will reduce from year to year as
the former emigrant disposes of property and pays part
of the tax that was subject to the security. The CRA
will want to ensure that the corporation not enter into
any transaction or make any payments that will reduce
APRIL 14, 2008 • 167
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
CCPC issued under an employee stock option plan,
section 7 of the ITA provides for an income inclusion
for shares issued to an employee under such a plan.
The employment benefit is included in the employee’s
income in the year that the stock option is exercised.
However, subsection 7(1.1) defers the income inclusion
for shares of a CCPC to the year in which the employee disposes of or exchanges the shares.
SPECIAL REPORTS
Departure tax may pose a
hardship on individuals
who don’t realize
third-party proceeds in
connection with the assets
subject to departure tax.
Under the election, the security is for the tax from
the deemed disposition rule when the taxpayer is
deemed to have disposed of the property but has not,
in fact, disposed of it before the year of emigration. If
the CRA then determines that the security accepted is
not adequate, the CRA is required to notify the taxpayer. The security provided will only secure the
amount for which it is adequate at that time. The balance of the amount will be unsecured and interest will
accrue on the balance. However, the individual may
provide additional security within 90 days of the notification and, if accepted, this will be deemed continuous
security, and no interest should accrue.
The CRA has developed internal guidelines dealing
with posting security. Most tax services offices across
Canada have a regional migration team. That team is
responsible for accepting security for departure tax. For
example, the Toronto East Tax Services Office has provided tax practitioners with an outline of its procedures for posting security. That outline discusses
three types of security the CRA considers to be acceptable: pledge of shares (private or public corporations),
letter of credit, and bank letter of guarantee. Also, the
CRA has developed pro forma security agreements for
posting shares as security (one for shares of a privately
held corporation and one for publicly traded shares).
The language in those agreements has been developed
by the Department of Justice to cover most situations.
Minor changes to those agreements may be accepted
by the CRA; however, any major changes will have to
be negotiated with the CRA and may not be accepted.
In our experience, the provision of security can take
more than a year for the CRA to approve as it goes
through the Department of Justice.
For obvious reasons, the pro forma security agreement for shares of a privately held corporation is more
elaborate than the one dealing with shares of a publicly held corporation. Essentially, the security agree-
168 • APRIL 14, 2008
ment transfers, mortgages, pledges, and assigns the
shares of the privately held corporation to the CRA.
The taxpayer is required to deliver the shares to the
CRA, and those shares will remain in the CRA’s possession. Any sale, mortgage, lien, or pledge of the
shares is not permitted, unless authorized by the CRA.
The CRA also is given the full power of attorney to
take all necessary actions regarding the shares. The
CRA collects any dividends paid on the shares and
remits them to the taxpayer, unless there is a default
under the security agreement. In that case, the CRA is
entitled to withhold the dividends as payment of the
tax liability. Also, the pledge of the shares would not
hinder the voting power and the control exercised by
the taxpayer over those shares. On the sale or redemption of all or a portion of the shares, the departure tax
will become due and payable, and the CRA is entitled,
in priority, to the proceeds of the sale as payment of
the departure tax. To ensure the value of the shares,
the corporation must obtain written consent from the
CRA before the issuance of new shares. The corporation also is required to provide in a timely manner a
copy of its financial statements to the CRA.
A securities broker may hold the shares of a publicly held corporation that are posted as security with
the CRA. The taxpayer must advise the CRA of any
shareholder meeting or information regarding dividends. The broker has the obligation of advising the
CRA of any sale or redemption of the shares.
The migration rules generally create complexity for
individuals migrating. Individuals are required to keep
detailed records of the cost base of each of their properties, deal with valuation issues, and post security. Although the process of posting security by pledging the
shares seems cumbersome, it is nevertheless a tool that
all migrating individuals should consider before migrating, because it prevents individuals from having to pay
the departure tax or to sell the shares to meet their tax
obligations.
As a relieving measure, the CRA does not require
an individual to provide security on the first C $50,000
of income resulting from the deemed disposition rule
(that is, for approximately C $20,000 in tax owing).
Subsection 220(4.7) is also a relieving provision that
permits the CRA, in case of undue hardship, to accept
security different from, or of lesser value than, that
which it would otherwise require. In the September 10,
1999, ‘‘Taxpayer Migration and Trusts: Technical
Backgrounder,’’ the Department of Finance recognized
situations of hardship and commented:
Some emigrating individuals may have serious
difficulty providing acceptable security.
For example, an individual emigrant whose only
significant property is shares of an unlisted Canadian company may be prohibited from pledging
those shares as security because of prior restrictions under a shareholder agreement. Even if the
TAX NOTES INTERNATIONAL
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
the value of its security. No interest will accrue on the
taxes otherwise payable (paragraph 220(4.5)(b)). The
tax is canceled if the emigrant returns to Canada (subsection 128.1(6)). Subsection 152(10) of the ITA provides that the posted security is deemed not to be taxes
assessed for purposes of the administration of the provincial tax.
SPECIAL REPORTS
TAX NOTES INTERNATIONAL
amount becomes unsecured. This provision allows the
trust to transfer taxable Canadian property to a nonresident beneficiary without having to pay the tax arising as a result of the deemed disposition under subsection 107(5) of the ITA. A nonresident beneficiary will
be required to obtain a section 116 certificate on the
actual sale of the property. However, the trust will have
guaranteed the tax based on the accrued gain at the
transfer of the property to the beneficiary. This relief
may be beneficial for a Canadian trust having nonresident beneficiaries and owning taxable Canadian properties such as shares of Canadian private corporations.
If the deemed realization on the 21st anniversary of
the trust occurs, the trust will owe the tax without any
relief being available. If, instead, the property is transferred to the nonresident beneficiary and security is
provided, no interest will be charged in connection
with the taxes owing.
XVI. Foreign Tax Credit
Foreign tax credits may be claimed for nonresident
individuals who were formerly resident in Canada and
for nonresident beneficiaries of trusts that are resident
in Canada. Relief is required because an individual
who is a former resident of Canada may be subject to
tax in another country on a gain that accrued while
the individual was resident in Canada and that has already been subject to Canadian tax on emigration.
Similarly, a nonresident beneficiary of a Canadian trust
who receives trust property on a distribution may be
taxed abroad on a gain that accrued while the property
was held by the trust and that has been taxed in
Canada. Many countries impose tax based on historical cost and will not increase the tax cost of the assets
to FMV when the individual becomes resident in that
country. The United States and some other countries
have agreed to step up the basis (tax cost) of assets
subject to Canadian departure tax. Also, that country
may not provide a foreign tax credit for the tax arising
as a result of the deemed capital gain in Canada arising on departure. Canada will attempt to remedy this
problem in future treaty negotiations.
The objective of the provision is to provide relief
from the double taxation of predeparture gains when
an individual emigrates from Canada to a country with
which Canada has an income tax treaty. Subsection
126(2.21) provides limited credits against an individual’s Canadian tax that arises in the year of the individual’s departure from Canada for postdeparture foreign taxes. These foreign taxes can comprise both
business income and nonbusiness income taxes. Relief
is available only in connection with foreign taxes that
are paid for dispositions before 2007, and only for
taxes paid to countries with which Canada has a tax
treaty.
An exception is provided for taxes imposed by a
foreign country on gains on real property situated in
that country. In keeping with the general international
APRIL 14, 2008 • 169
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
shares can be pledged, their value may already be
taken up by a bank as security for a business
loan, thus making them inadequate security for
the tax arising at the time of emigration.
In response to . . . cases such as the one described
above . . . cases of undue hardship, the Minister
of National Revenue would be able to accept a
lesser value of security than, or security of a different kind from, that which the Minister would
normally consider adequate. In an extreme case,
this would give the Minister authority to accept
very modest security.
The backgrounder noted that to qualify for special
treatment, the taxpayer must meet the following conditions:
• the individual emigrant must be unable without
undue hardship, to pay the tax or to provide fully
acceptable security; and
• the individual emigrant must be unable to reasonably arrange to have another person, such as a
corporation controlled by the emigrant, pay the
tax or provide security.
If the Minister of National Revenue accepts the security, the Minister will not take any action to collect
the tax so secured and for the purpose of computing
interest owing by the taxpayer, the amounts secured
will be treated as an amount paid on account of the
tax liability. In other words, no interest will be charged
on the departure tax until the property is sold.
There is a de minimis rule, and an individual may
not be required to furnish acceptable security to the
Minister of National Revenue for the first C $25,000 of
departure tax. The individual will be deemed to have
furnished acceptable security for the lesser of C
$25,000 and the greatest amount of tax for which the
Minister is required to accept security. The deemed
security is treated as having been furnished by the individual before the individual’s balance-due date for the
year in which the individual ceased to be a resident of
Canada.
An individual who departs Canada owning assets in
excess of C $25,000 must file a list of assets with the
CRA. If the Minister of National Revenue later determines that the amount of security previously furnished
is inadequate, the Minister is required to notify the individual in writing and provide the individual with the
opportunity to furnish security to the Minister within
90 days of being so notified. The Minister has the discretion to extend the time available to the individual to
make an election or to furnish security when the Minister considers it just and equitable to do so.
A trust may elect, on giving a security acceptable to
the Minister of National Revenue, to defer payment of
an amount of tax it owes as a result of the distribution
of taxable Canadian property to a nonresident beneficiary. If such an election is made, interest and penalties
do not start to accrue on the amount secured until the
SPECIAL REPORTS
XVII. Principal Residence
For Canadian tax purposes, the sale or deemed disposition of a taxpayer’s principal residence generally
will not result in liability for tax if the property has
been his principal residence over the years commencing
at the later of the purchase or 1972. When there has
been interrupted use of the property as a principal residence, the exempt portion of the gain is prorated accordingly.18
A departing taxpayer may find it desirable to retain
his principal residence property even after becoming a
nonresident of Canada, although, as noted earlier in
the article, the retention of his Canadian residence
could negate his claim that he is a nonresident of
Canada unless he becomes resident in a treaty country
or the property is rented for a prolonged period.19
However, the taxpayer may be leaving Canada at a
time of depressed real estate sales and may have no
choice but to retain his property until the market revives. Even in the absence of the principal residence
exclusion, the property would be taxable Canadian
property assuming the residence is situated in Canada;
accordingly, there would be no liability for departure
tax. On the disposition of the property by the nonresident, his gain would be prorated to exempt that por-
tion of the gain that related to the years when the
property was his principal residence.
If the residence were rented by the nonresident, resulting in a change of use of the property for tax purposes, the taxpayer would be deemed to have disposed
of the residence for proceeds equal to the FMV of the
property and to have reacquired it immediately thereafter at a cost equal to FMV. In the absence of an election, tax on any accrued gains would be payable at
that time.20
The departing resident may elect to have a property
continue to qualify as a principal residence despite its
change of use.21
This election is made by including with the Canadian tax return filed for the year of departure a letter
that indicates that the election is being made. The election will enable the nonresident to designate the Canadian residence to be his principal residence for up to
four years while the election is in force.22
If the nonresident disposed of the property within
the four-year period, no Canadian tax would be exigible for the period during which he was resident in
Canada plus one year if the home is designated as his
principal residence for the period of ownership before
departure. The election may not be worthwhile if it is
anticipated that most of the gain will have accrued
while the taxpayer was a Canadian resident. The formula would result in taxation of a pro rata portion of
the gain based on the number of years the person was
a nonresident over the number of years that the person
resided in the home and was resident in Canada, plus
one.
A taxpayer planning to become a nonresident and
intending to dispose of his principal residence in any
event should complete the sale while still a Canadian
resident to realize the tax-exempt gains. If the residence were sold after becoming a nonresident, the capital gain in the United States may be computed in relation to the historical cost of the property and tax
would be payable unless totally or partially deferred by
reason of the purchase of a replacement residence.23
The U.S. replacement residence rule may not be
available if the property was a rental property. One
method of stepping up the cost for United States purposes may be to transfer the principal residence to a
spouse or other family member before departure. If the
property is a principal residence, no Canadian income
20
Subsection 45(1).
Subsection 45(2).
22
Section 54, ‘‘principal residence,’’ para. (d).
23
Subsection 40(2)(b).
21
18
Para. 40(2)(b).
IT-221R3 para. 6.
19
170 • APRIL 14, 2008
TAX NOTES INTERNATIONAL
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
principle that the country in which real property is located has the first right to tax gains on that real property, Canada will also provide credit for those taxes.
Similarly, credit for those taxes will be available regardless of whether Canada has a tax treaty with the particular country.
Assume that an individual departs Canada and
moves to a treaty country. At his departure, he owns a
home outside of Canada that has a cost of $60,000
and an FMV of $100,000. He sells the house for
$120,000, and the new country of residence taxes the
gain of $60,000. A foreign tax credit may be claimed
in Canada of two-thirds of the foreign tax ($40,000 out
of $60,000 gain accrued before departure) up to the
amount of Canadian tax.
The credit to be provided is computed on a
property-by-property basis as the lesser of the foreign
taxes paid for the disposition of the property that relates to the portion of the gain or profit that arose before the individual’s emigration from Canada and the
individual’s tax under Part I of the ITA for the year of
emigration that is attributable to the deemed disposition of the particular property. The tax paid to the government of a political subdivision of a country is included for this purpose as if the tax were paid to the
government of that country.
SPECIAL REPORTS
XVIII. Taxable Canadian Property
The term ‘‘taxable Canadian property’’ is relevant
for purposes of the departure tax elections noted
24
See, e.g., section 1034 of the Internal Revenue Code.
Subsection 73(1) would apply to automatically roll over the
residence to a spouse unless an election was made to transfer the
property at FMV. Subsection 40(4) of the act would deem the
spouse to have owned a residence for the years owned by the
transferor. If a residence is transferred to a child, section 69
would apply to deem the sale to take place at FMV. If a gain
arises as a result of the transfer of a residence to a spouse or
child, the transferor could take advantage of the principal residence exemption so that no tax would be payable in Canada. As
indicated above, the objective would be to step up the cost base
of the property for U.S. tax purposes.
26
Section 54, ‘‘principal residence,’’ para. (a).
27
Para. 212(1)(d), C. 1. Burland Properties Ltd. v. MNR, 68 DTC
5220 (S.C.C.).
28
Subsection 216(1).
25
TAX NOTES INTERNATIONAL
above, and a nonresident of Canada is subject to Canadian tax on the disposition of taxable Canadian property. Taxable Canadian property is defined to include:
(a) real property in Canada;
(b) property used by the taxpayer in carrying on a
business in Canada, other than:
(i) property used in carrying on an insurance
business; and
(ii) when the taxpayer is a nonresident, ships
and aircraft used principally in international
traffic and related personal property, if the
country in which the taxpayer is resident does
not tax the gains of persons resident in
Canada from dispositions of that property;
(c) if the taxpayer is an insurer, its designated
insurance property for the year;
(d) unlisted shares of Canadian resident corporations (other than mutual fund corporations);
(e) unlisted shares of nonresident corporations if,
at any time during the 60-month period, the
value of the company’s Canadian real and resource properties making up more than half of
the FMV of the shares was derived directly or
indirectly from those properties (it should be
noted that a protocol to the Canada-U.S. tax convention exempts U.S. residents from this provision);
(f) listed shares that would be described in paragraph (d) or (e) if they were unlisted, or shares of
a mutual fund corporation, if, at any time during
the 60-month period, the taxpayer and non-arm’slength persons owned 25 percent or more of the
issued shares of any class of the capital stock of
the corporation;
(g) some partnership interests if, at any time in
the 60-month period, most of the partnership’s
value is attributable to Canadian property;
(h) capital interests in trusts (other than mutual
funds trusts) that are resident in Canada;
(i) units of unit trusts (other than mutual funds
trusts) that are resident in Canada;
(j) units of mutual fund trusts if, at any time during the 60-month period, not less than 25 percent
of the units of the trusts belongs to the taxpayer
and non-arm’s-length persons;
(k) interests in a nonresident trust if, at any particular time during the 60-month period, the trust
met a test comparable to the one described regarding a nonresident corporation in (e); and
(l) property deemed by any provision of the ITA
to be taxable Canadian property.
The definition of taxable Canadian property includes any interest in or option regarding the property,
whether or not the property actually exists. There is
APRIL 14, 2008 • 171
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
tax should arise on the transfer and the cost for tax
purposes in the United States should be increased.24
Since a residence outside Canada would be subject
to departure tax, it may be advisable for one spouse to
designate that property as principal residence and
thereby avoid the departure tax.25
A family unit comprising a husband, wife, and minor children may designate only one residence as a
principal residence in any one year.26
Interpretation Bulletin IT-120R3, paragraph 41 confirms that the principal residence exemption is limited
by reference to the number of years ending after acquisition and during which the taxpayer was resident in
Canada. If the home were rented after departure, the
nonresident may be subject to Canadian withholding
tax on gross rental income,27 or may elect to file a
Canadian tax return and be taxed on a net income basis.28
If elections have been made to qualify the residence
as a principal residence and to file on a net basis, the
nonresident could deduct expenses such as municipal
taxes, repairs, and fuel but not capital cost allowance
(depreciation) in computing net income for Canadian
tax purposes. If the individual has moved to the
United States, the net rental income will be taxable in
the United States, with a foreign tax credit being available for any Canadian tax. The rental of the Canadian
residence may result in the property losing its principal
residence status with the result that the full amount of
the gain may be taxable in the United States on a later
sale without the benefit of the replacement property
rules. Any loss on a principal residence would be a
nondeductible personal loss. If mortgage payments are
made to a Canadian lender, the United States may
technically impose withholding tax on the interest component.
SPECIAL REPORTS
XIX. Foreign Exploration and Development
Expenses
A taxpayer who becomes resident in Canada cannot
deduct foreign exploration and development expenses
that were incurred before becoming resident in
Canada. Only expenses incurred while the taxpayer
was resident in Canada are taken into account. There
is a deemed acquisition of the taxpayer’s foreign resource properties at FMV when the taxpayer becomes
resident in Canada.
The full amount of the taxpayer’s undeducted foreign exploration and development expenses balance
may be deducted in the event that the taxpayer ceases
to be resident in Canada. This is consistent with the
existing income tax rules that allow emigrating taxpayers to claim a terminal loss on depreciable property
as a consequence of the deemed disposition on departure.
XX. Taxable Income Earned in Canada
Subparagraph 115(1)(a)(i) includes in computing the
income of a nonresident from the duties of offices and
employment in Canada, income from offices, and employment performed by the nonresident person outside
Canada, if the person was resident in Canada when
the duties were performed. This ensures that if an individual who is a former resident of Canada receives, as
a nonresident, income relating to work the individual
performed outside Canada when the individual was
resident in Canada, the income is subject to Canadian
tax.
XXI. Overseas Employment Tax Credit
Section 122.3 of the ITA provides a tax credit that
effectively eliminates 80 percent of the Canadian tax
arising on the first C $100,000 of salary or wages
earned by a Canadian resident who is employed outside Canada by a specified employer for at least six
months in connection with resource, construction, installation, agricultural, or engineering contracts or for
the purpose of obtaining those contracts.
172 • APRIL 14, 2008
XXII. Home Buyers’ Plan
Section 146.01(5) is a special rule that applies when
an individual ceases to be resident in Canada after having withdrawn an eligible amount under the home buyers’ plan. It provides for an income inclusion equal to
the total of all eligible amounts previously withdrawn
minus the total of all previous income inclusions and
all home buyers’ plan repayments made not more than
60 days after the date on which the individual ceases to
reside in Canada and before the individual files a return of income for the year in which he became nonresident.
XXIII. Predeparture Planning
An individual may wish to reorganize a Canadian
private company before departure, to freeze the value
of common shares (convert to preference shares), and
then pay either departure tax or post a security. Tax
treaties may give Canada a right to tax a sale of shares
owned by a former resident when he left Canada. After
the reorganization, new common shares may be issued
for nominal consideration to a Canadian family trust
for Canadian family members (preserve CCPC status
to continue to benefit from the small-business deduction or dividend refunds) or to a company in a treaty
country. The CRA has threatened to use the general
antiavoidance rule to disallow the treaty protection on
a later sale of the shares by the nonresident corporation.
XXIV. Moving to the U.S.
An individual should have the existing RRSP dispose of assets and reacquire the assets. An individual
should then elect, under the Canada-U.S. treaty, on the
first U.S. return to defer U.S. tax on income in the
RRSP. An individual should consider transferring the
old RRSP to a new RRSP to get a step-up on the basis
of the assets for U.S. tax purposes.
An individual should convert Canadian holding
companies to a Nova Scotia unlimited liability company, an Alberta unlimited liability company, or a British Columbia unlimited liability company before departure to step up the basis of the assets for U.S. tax
purposes and to avoid U.S. controlled foreign corporation and passive foreign investment company reporting.
No Canadian tax is triggered on the conversion. The
individual will be able to claim a foreign tax credit on
his U.S. tax return for Canadian corporate tax and Canadian withholding tax on dividends. The fifth protocol to the Canada-U.S. treaty proposes to increase the
rate of withholding tax on dividends or interest paid by
an unlimited liability company to 25 percent commencing three years after the treaty is ratified. If the company is not converted to an unlimited liability company, the individual will be taxable in the United
States on the undistributed passive income of the Canadian company under the U.S. subpart F rules. If the
TAX NOTES INTERNATIONAL
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
also an extended definition for purposes of determining the tax liability of a nonresident on a sale of taxable Canadian property, the departure tax, and the
taxation of a nonresident, as well as for the purpose of
applying paragraphs 85(1)(i) and 97(2)(c) to a disposition by a nonresident person. The extended definition
includes Canadian resource properties, timber resource
properties, income interests in trusts resident in
Canada, rights to a share of the income or loss under
an agreement referred to in paragraph 96(1.1)(a) for a
retired partner, and life insurance policies in Canada.
Some shares of nonresident-owned investment corporations are excluded from the definition of taxable Canadian property.
SPECIAL REPORTS
XXV. Retention of Canadian Domicile
The term ‘‘resident’’ means, for estate tax purposes,
one who has domicile within the United States at the
time of death. According to the regulations:
A person acquires a domicile in a place by living
there, for even a brief period of time, with no
definite present intention of moving therefrom.
Residence without the requisite intention to remain indefinitely will not suffice to constitute
domicile, nor will intention to change domicile
affect such a change unless accompanied by actual removal.
The concept of domicile for U.S. estate tax purposes
is somewhat broader than the concept of residency for
U.S. income tax purposes. The two elements necessary
to establish domicile are physical presence within the
country and the intent to remain there indefinitely.
While the establishment of physical presence has rarely
presented problems, the determination of the individual’s intent has been litigated. The courts have used a
number of different factors in arriving at decisions on
the question of intent. Some of the factors that have
been considered by the courts are:
• The length of the individual’s stay in the United
States and the frequency of travel away from the
United States.
• The value, nature, and permanency of the individual’s housing abroad and in the United States.
(Houses in resort areas are less likely to be determinative than houses in nonresort areas. Factors
would include ownership vs. rental, seasonal residence vs. permanent residence, and location in a
resort or elsewhere.)
• The location of any expensive personal possessions, particularly if the possessions are sentimental in nature.
TAX NOTES INTERNATIONAL
• The location of the individual’s business interests.
• The location of family and close friends.
• The location of organizations in which the individual has maintained membership, including
churches, clubs, and civic associations.
• Oral or written declarations of intent made by the
individual, including wills, trusts, visa applications
and reentry permits, driver registration, and voter
intention.
• The reasons the individual left the country.
• The location of accident, health, liability, automobile, home, and fire insurance policies.
• Jurisdiction where income tax returns are filed.
• Citizenship.
In the 1983 decision of Estate of Paquette v. Commissioner, T.C. Memo 1983-571, the deceased was found to
be a nonresident of the United States at the time of
death even though the deceased owned a home in
Florida and had wintered there for 25 years. The decedent filed all of his income tax returns in Canada;
maintained a valid Canadian driver’s license and a
valid Canadian passport; voted in Canada; purchased,
registered, and insured his automobile in Canada; and
maintained the bulk of his assets in Canada. Also, his
accountant and investment manager both resided in
Canada.
Holding a green card requires the holder to have the
intent to reside permanently in the United States and
may result in a determination by the IRS that the individual is domiciled in the United States.
The determination whether
a person has a domicile in
the United States is a
question of facts.
An individual who has a temporary visa may still be
considered to be domiciled in the United States if the
individual has the intent to remain indefinitely. In
Estate of Robert A. Jack v. United States, No. 01-410T
(Fed. Cl. Nov. 27, 2002), the court dealt with crossmotions for partial summary judgment to determine
whether a Canadian citizen employed in the United
States on the date of his death, who was admitted to
the United States under TC and TN nonimmigrant
temporary professional classifications, was legally capable of forming an intent to be domiciled in the
United States for federal estate tax purposes. The court
did not address the intent of Jack, but concluded that a
temporary visa did not preclude a determination of
U.S. residency.
APRIL 14, 2008 • 173
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
company is not a CFC because there are other Canadian shareholders, the individual can be taxed in the
United States on undistributed gains of the Canadian
company if the Canadian company is a PFIC.
Consider converting an existing U.S. C corporation
to an S corporation to be subject only to personal taxation. The U.S. tax triggered on the conversion should
be compared with the future U.S. tax savings achieved
by being subject only to U.S. personal tax (rather than
both corporate and personal taxation).
Think about making gifts to family members before
being subject to U.S. gift or estate tax, and consider
getting a U.S. visa rather than a green card or citizenship to avoid U.S. estate tax on non-U.S. assets and to
avoid U.S. expatriation rules in the future.
Take steps to retain domicile in Canada for U.S.
estate and gift tax purposes. This may include the retention of Canadian investments and a Canadian burial
plot.
SPECIAL REPORTS
XXVI. Corporate Emigration
A Canadian corporation that was incorporated in
Canada will not cease to be resident in Canada by virtue of the departure of the controlling shareholder or
the sole director.
174 • APRIL 14, 2008
However, if a Canadian corporation is continued
outside of Canada, it will cease to be resident in
Canada. It will be subject to a deemed year-end and a
deemed disposition of its property. Also, the corporation will be subject to tax at the rate of 25 percent on
the difference between the FMV of its assets minus the
aggregate of the paid-up capital and the liabilities.
XXVII. Interests in Trusts
As indicated above, an interest in a trust will generally not be subject to Canadian departure tax. A trust
is considered for Canadian tax purposes to be resident
where the trustees reside. If a person who is the sole
trustee of a Canadian trust moves to the United States,
the trust will be treated as emigrating and will be subject to Canadian departure tax. If the trustees are
changed to Canadian residents, departure tax is
avoided but assets may not later be transferred to a
U.S. resident beneficiary on a tax-deferred basis (only
to a Canadian resident beneficiary). This will be problematic once the trust has its 21st anniversary, because
the trust will be subject to a deemed disposition of its
assets unless it has rolled the assets out to a Canadian
resident beneficiary before that time. Canadian withholding tax will apply to income distributions at the
tax rate of 15 percent. If the trust earns business income or capital gains, it will be subject to a 36 percent
Canadian tax under Part XII.2 on distributions to a
nonresident. A section 116 clearance certificate will be
required on dispositions of the capital interest in the
trust. For U.S. tax purposes, the beneficiary will have
U.S. reporting obligations and will be considered to
own shares owned by the trust if it is a foreign nongrantor trust. The U.S. beneficiary may be taxable in
the United States on accumulation distributions regarding the Canadian trust.
◆
TAX NOTES INTERNATIONAL
(C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
It is surprising that the issue arose given that Jack
moved to the United States in October 1992 to accept
the position of equine medical director at a university.
He initially had a one-year TC temporary professional
visa, which he extended. In 1994 he obtained a TN
temporary professional visa, which was extended to
1996. He died in the United States in August 1996. He
maintained bank accounts in Canada and affiliations
with Canadian professional associations, remained a
licensed Canadian veterinarian, and maintained his
Canadian driver’s license, voting registration, and
Canadian mailing address. Given the foregoing and his
relatively short stay in the United States (four years), it
is of concern that the IRS pursued this case. The Court
of Federal Claims’ decision was not a determination
that Jack was domiciled in the United States, but
merely a holding that the government should be allowed to prove its case.
As these decisions show, the determination whether
a person has a domicile in the United States is a question of facts. One must bear in mind that to acquire
domicile for U.S. estate tax purposes, the intent of the
individual to remain indefinitely in the United States is
necessary. However, it is possible for a Canadian to be
a resident in the United States for income tax purposes
(intending to return to Canada) while remaining a nonresident for estate tax purposes. But an individual
could easily establish domicile in the United States after a short stay if the individual has no current intention of returning to Canada. Note that losing domicile
once it is established is not an easy task.