Canada's Deemed Disposition on Departure: Section 128.1 ITA
Section 128.1 of the Canadian Income Tax Act (ITA) provides that when an individual ceases to be a Canadian tax resident, they are deemed to have disposed of all property at fair market value (FMV) at the time of departure. This creates a deemed capital gain (or loss) on the accrued appreciation. Key exclusions from the deemed disposition: (1) Canadian real estate and timber resource property: not subject to deemed disposition — Canada retains taxing rights when these are actually sold (as non-resident property under Part XIII/XXIII of the ITA). (2) Canadian business assets: property used in a business carried on through a Canadian permanent establishment. (3) Pension plans and retirement accounts: CPP, OAS, RRSP, RRIF, DPSP, pension plans — exempt from deemed disposition. (4) Stock options: complex rules — certain options may be taxable on departure. (5) Cultural property donated to qualifying institutions: exempt. What IS subject to deemed disposition: worldwide portfolio investments (shares, bonds, mutual funds, ETFs), foreign real estate, private company shares (Canadian and foreign), rental properties outside Canada, cryptocurrency, life insurance policies (the CSV portion), and most personal-use property above $1,000 with gains. Capital gains inclusion rate: Canada increased the capital gains inclusion rate to 2/3 (66.67%) for gains exceeding C$250,000/year for individuals from June 25, 2024 — verify the current rate as this has been subject to political uncertainty. Federal capital gains tax: the inclusion rate × the individual's marginal federal rate (up to 33%).
Departure Return (T1), T1161, and Clearance Certificate
CRA Departure Return: file a T1 income tax return for the period January 1 to your departure date. Mark the return as a 'departure return' — enter your date of departure. Include all income earned as a Canadian resident plus the deemed disposition gains. Filing deadline: April 30 of the year following the departure year (or June 15 if self-employed — but any tax owing is still due April 30). T1161 (List of Properties): all Canadian residents who own property with FMV exceeding C$25,000 at the time of departure must file T1161 with their departure return. T1161 lists all non-excluded property — each asset with its description, acquisition cost, FMV at departure, and the resulting deemed gain/loss. T1244 (Election to Defer Payment of Departure Tax on Certain Properties): you can elect under Section 220(4.5) ITA to post security with CRA instead of paying the departure tax immediately — allowing you to defer payment on the deemed gain until the property is actually sold. Security can be: a bank letter of credit, mortgage over Canadian real estate, or government bonds. This is valuable when the deemed gain produces a large tax bill but no immediate cash (e.g., private company shares that are illiquid). CRA Certificate of Compliance (s.116 clearance): if selling Canadian taxable Canadian property after departure, obtain a clearance certificate. Form T2062: application filed with CRA before or within 10 days of completion of the sale.
RRSP, TFSA, CPP, and OAS on Departure
RRSP (Registered Retirement Savings Plan): exempt from the deemed disposition — the RRSP remains intact on departure. As a non-resident: contributions are no longer possible (you lose Canadian earned income). Withdrawals from RRSP as non-resident: subject to Part XIII non-resident withholding tax at 25% (or reduced under DTA — USA: 15% on periodic payments, 25% on lump sums; UK: 15%; Australia: 15%). RRSP is generally treated as a pension under most DTAs. RRSP conversion to RRIF: can occur while non-resident. TFSA (Tax-Free Savings Account): exempt from deemed disposition. However, as a non-resident, TFSA contribution room does not accrue. TFSA withdrawals as non-resident: tax-free in Canada (no Part XIII withholding on TFSA). TFSA investment returns while a non-resident: still tax-free within the account. However, some countries (notably the USA) do not recognise TFSA as a tax-exempt account — US residents pay US tax on TFSA investment income annually (mark-to-market or PFIC rules may apply). CPP (Canada Pension Plan): fully portable internationally. Payable from age 60 (reduced) or 65 (standard). Non-resident withholding on CPP payments: 25% (reduced under DTA — USA: 15%; most developed countries: 15%). Apply for CPP at Service Canada (canada.ca/service-canada) from anywhere in the world. OAS (Old Age Security): payable from age 65. Non-resident withholding at 25% (or reduced under DTA). OAS recovery tax (the 'clawback') — applies to high-income Canadians; once non-resident this is replaced by the 25%/DTA withholding rate. Life certificate required for OAS payments (annual proof of life).
Provincial Tax and Part XIII Non-Resident Withholding
Provincial income tax: Canadian income tax has two components — federal and provincial/territorial. Provincial tax applies to residents for the period of provincial residency (based on the province of residency on December 31 of the departure year, or the province of residency on the departure date if you ceased provincial residency mid-year). If you moved provinces during the year: this adds complexity — file using the province of residence at December 31. The province with the highest rates is impactful: Quebec (combined marginal rate ~53%), Ontario (~53.5%), BC (~53.5%), Alberta (~48%). Provincial tax on the deemed disposition gains is a significant component of the total departure tax bill. Part XIII non-resident withholding: once a non-resident, Canadian-source income is subject to Part XIII withholding tax at 25% (or DTA-reduced rate). Applies to: dividends from Canadian corporations (15% DTA rate for USA, UK, Australia), interest, rents, royalties, annuities, pension income. Section 216 election for rental income: non-residents can file a Section 216 return for Canadian rental income — pay net income tax on actual net rental income (rather than the 25% gross withholding). This usually results in less tax. File by June 30 of the year following the rental year. NR6 form: non-resident rental income — tenant/agent withholds on net rent basis if NR6 is filed and approved.
Canadian Property, Departure Planning, and the 5-Year Rule
Canadian real estate held on departure: NOT subject to deemed disposition — stays in Canada's tax net and will be taxed when actually sold (Part XIII withholding on gain). Non-residents selling Canadian real estate: the buyer must withhold 25% of the gross sale price and remit to CRA (under Section 116 ITA). File Form T2062 for a CRA clearance certificate before sale — CRA approves the withholding amount based on the actual expected gain, which is usually much less than 25% of gross. The 5-year rule (departure from Canada to a low-tax country): unlike Germany or France, Canada does not have a specific general 5-year anti-avoidance rule on departure. However, CRA has general anti-avoidance provisions (GAAR) — Canadian residents who manipulate their residency status to avoid Canadian tax may face reassessment. Residency determination: Canada uses a factual residency test (where is your home, family, social ties, financial accounts?). Moving to a DTA country: if Canada has a DTA with your new country, the DTA tie-breaker rules determine where you are resident if there is a dual-residency situation. Form NR73 (Determination of Residency Status): optional form submitted to CRA for a formal determination of whether you are a Canadian resident or non-resident from a specific date — provides certainty. See also provincial guides for Ontario, British Columbia, Alberta, Quebec, and other provinces for province-specific departure tax rates and credits.