Tax Alert: Tax Issues for Individuals Departing from Canada

Individuals departing from Canada should consider the following tax rules that may apply upon and subsequent to their exit from Canada:

1. The proposed capital gain tax regime,
2. The alternative minimum tax regime, and
3. The vacant tax regime

Canada’s Income Tax Act (section 128.1) deems certain types of properties to have been disposed at their fair market value (FMV) and to have been immediately reacquired for the same amount on the departure, except for the following:

1. Canadian real or immovable property (e.g. home, principal residence).
2. Canadian business property (including inventory) if business is carried on through a permanent establishment in Canada.
3. Certain properties like RRSP, TFSA, CPP, QPP, interest in life insurance policies, etc.
4. Property owned when the individual became a resident of Canada or inherited afterward if the individual was a resident of Canada for 60 months or less during the 10-year period before emigration.

Individuals may, for income tax purposes, elect to dispose of the above-mentioned properties upon departure, resulting in notional capital gains, and therefore, potential income tax.

The individual taxpayers should consider the following rules when thinking of emigrating from Canada.

1. The proposed capital gains tax – The notional capital gain will be subject to the new inclusion rate regime from June 25, 2024. For individual taxpayers, the capital gain inclusion has been increased from ½ of capital gains to 2/3 of capital gains that excess CAD 250,000.
   
   Where the notional capital gains exceed CAD 250,000, the individual would be subject to a higher capital gains tax on departure from Canada post June 25, 2024. Therefore, individuals emigrating from Canada should decide if they would like to pre-pone or post-pone their decision of emigrating from Canada and whether to dispose all of some of their assets (other factors that can impact this decision include loss carryovers, compliances involved with disposition of real properties (e.g., home) as a non-resident, etc.).
2. The alternative minimum tax (AMT) – The AMT is a minimum tax on taxpayers who claim certain tax deductions, exemptions, or credits to reduce the tax that they owe to very low levels.
   
   The notional capital gains on the deemed disposition on exit from Canada could be subject to AMT which may or may not be recoverable. That is, it could be a permanent tax for some individuals emigrating from Canada.
   
   Starting in 2024, the AMT rate will be raised from 15% to 20.5% and the basic exemption will increase from CAD 40,000 to approximately CAD 173,000. Therefore, in some cases, individuals emigrating from Canada could be subject to AMT (if it is higher than the regular tax on capital gains) and must pay the difference.
3. Vacant tax/Underused housing tax/Deemed disposition of principal residence – Apart from the above issues, individuals emigrating from Canada should consider the vacant tax (particularly for houses in Toronto) which is in addition to the underused housing tax (an annual federal 1% tax on the ownership of vacant or underused houses in Canada). In addition, if the individual decides to rent his/her principal residence, the Act would deem it to be a disposition of real property, resulting in notional capital gains (Section 45 of the Act). Accordingly, individuals would have to consider the capital gain rules discussed above.

Moving from one country to another is never easy. With so many tax issues to consider at the time of moving, we recommend taxpayers to reach out to a professional tax advisor for assistance to avoid any potential pitfall or tax audit.