What is departure tax in Canada and how much is it?

Why the CRA taxes you on the way out

Departure tax is the everyday name for the deemed disposition rule in section 128.1 of the Income Tax Act. On the day you become a non-resident, you are treated as having sold most of your property for its fair market value and bought it back at that same price a moment later. Nothing changes hands, but any accrued gain is crystallized and reported on your final Canadian return for the year you leave.

The logic is simple: Canada taxes residents on worldwide gains, and once you are gone it loses the right to tax most of them. The exit charge collects the tax on growth that happened while you lived here. The gains are ordinary capital gains, so as at the time of writing one-half of the gain is included in income and taxed at your marginal rate for that year, using the rates of the province you left. There is no flat departure levy.

What is deemed sold, and what is left alone

Most property you own is caught. The common items on a departure file are:

• Non-registered stocks, ETFs, mutual funds and bonds, whether held in Canada or abroad
• Shares of a private corporation, including your own operating or holding company
• Cryptocurrency and other digital assets
• Real estate located outside Canada, including a US vacation home
• Partnership interests and most personal-use property with real value, such as art or collectibles

The Act then carves out property Canada can still tax later or that is already sheltered. The exclusions are Canadian real estate and resource property, property used in a business carried on through a permanent establishment in Canada, RRSPs, RRIFs, TFSAs, RESPs and RDSPs, registered pension and CPP entitlements, unexercised employee stock options, and property a short-term resident owned before arriving. We cover the house separately in does departure tax apply to my principal residence and the newcomer carve-out in the 60-month rule.

How much is it: a worked example

Suppose you leave Ontario holding a non-registered portfolio worth $400,000 that cost you $250,000. The deemed sale produces a $150,000 capital gain, of which one-half, or $75,000, is added to your income for the departure year. At the top combined Ontario rate of roughly 53.5% as at the time of writing, that is about $40,000 of tax; at a lower bracket it is proportionately less. Positions sitting at a loss are deemed sold too, so unrealized losses offset the gains in the same calculation.

Two things move the number more than anything else: your adjusted cost base records and the timing of the departure date. A portfolio with poor cost records tends to be assessed on gains that are too high, and a departure late in a year with other large income lands the gain in a higher bracket than necessary.

The three forms that go with the final return

The T1244 deferral is interest-free, which makes it unusually generous. The CRA asks for security only when the federal tax on the deemed gains passes a threshold that works out to roughly the first $100,000 of capital gains, framed as at the time of writing as $16,500 of federal tax. Above that line, acceptable security is negotiated with the CRA and is often a bank letter of credit or a pledge of the shares themselves.

Planning that lowers or defers the bill

Most of the saving happens in the months before you go, not on the return. Crystallizing losses to shelter gains, triggering some gains deliberately in a low-income year, contributing to an RRSP to absorb the inclusion, and choosing the departure date with the rest of the year's income in view all change the outcome. If you leave and later return, section 128.1 lets you unwind the deemed disposition on property you still own, so a temporary move need not produce a permanent tax cost.

For anyone heading to the United States there is a second-country problem. The IRS does not reset your cost basis when you arrive, so the same growth could be taxed twice. Article XIII of the Canada-US tax treaty lets you elect to treat the property as sold and repurchased for US purposes on the same day Canada taxed it, which aligns the two cost bases. Our departure tax guide and the blog post on planning before you leave Canada go deeper on both sides.

How we handle departure tax files

We start with a valuation date and a clean cost base for every holding, then model the gain under a few departure dates before anything is filed. From there we prepare the final T1 with the departure date, the T1161, the T1243 and, where it helps, the T1244 deferral with the security package, and we coordinate the treaty election on the US side through our cross-border tax services. Fees are fixed and quoted after a discovery call.

Source: CRA — Leaving Canada (emigrants).