As COVID-19 travel restrictions are lifted, individuals who are usually resident in another country but sheltered in place in Canada during the pandemic may decide to return to their countries of residence. Those individuals who are planning to leave Canada should remember to ensure their Canadian tax obligations are satisfied prior to their departure.
A person might be deemed resident in Canada throughout the taxation year for purposes of the Income Tax Act (the “Act”) if the person sojourned in Canada for 183 days or more. The Canada Revenue Agency (“CRA”) has issued an administrative position in light of the extraordinary circumstances of the pandemic that it will not consider the days during which an individual is present in Canada, and is unable to return to their country of residence solely as a result of travel restrictions, to count toward the 183 day limit for deemed residency. This administrative position will apply where the individual is usually resident in another country and intends to return, and does in fact return, to their country of residence as soon as they are able. The CRA’s position appears to be restricted to those who stay in Canada due to travel restrictions, though, and may not extend to those who chose not to travel due to general safety concerns.
For those individuals who are deemed resident in Canada or those who are ordinarily resident in Canada (and who are not otherwise deemed to be not resident in Canada by virtue of the treaty tie-breaker rules, referred to below), a deemed taxation year-end will occur when the individual ceases to be resident in Canada. Moreover, an income tax return should be filed with the CRA, if income tax is payable, if the individual has a taxable capital gain or disposes of capital property.
Subject to certain exceptions, when the individual ceases to be resident in Canada, they will be deemed to have disposed of each property owned by the individual immediately before they cease to be a resident of Canada for proceeds of disposition equal to fair market value. Colloquially known as a “departure tax”, this may result in Canadian income tax payable by the emigrant on gains that have accrued while the individual is resident in Canada. It should also be noted that the ITA contains a deemed disposition and acquisition upon immigration to Canada, such that the individual will be deemed to dispose of each property owned by the individual, subject to certain exceptions, immediately before they become a resident of Canada such that their cost of the property for purposes of the Act will be equal to its fair market value at the time they became a resident. As such, in determining the “departure tax”, it is relevant to consider adjustments in the tax cost of properties that were owned prior to an individual becoming resident of Canada and deemed to have been disposed of for fair market value upon becoming resident of Canada.
The deemed disposition will not apply to real or immovable property situated in Canada, a Canadian resource property or a timber resource property. There is also an exception to the deemed disposition available if the taxpayer, who is an individual, was not, during the preceding 120 months, resident in Canada for more than 60 months, provided the property was owned by the taxpayer at the time they last became a resident in Canada or was acquired by inheritance or bequest after they became resident in Canada. Thus, short-term deemed residents who have not acquired any property while in Canada may escape the deemed disposition upon emigration, depending on their particular circumstances.
In addition to the various exceptions in the Act and the impact of CRA administrative positions, consideration should be given to the implications of any income tax treaty between Canada and the emigrant’s normal country of residence, which may override the provisions of the Act regarding tax residency.
Individuals planning on leaving Canada should carefully consider their tax residency prior to departure to ensure their Canadian tax obligations have been satisfied.