THE BASICS OF CANADIAN DEPARTURE TAX

When an individual, who was resident in Canada for tax purposes, ceases to be resident in Canada, there is generally a deemed disposition of assets owned by that individual at their fair market value. Any resulting deemed gain must be reported on the final tax return filed as a resident. This is commonly called “departure tax” which is calculated and payable when the individual filing his/hers last income tax return.

Scope and exemptions

The deemed disposition at fair market value immediately prior to emigration generally applies to all property owned by the individual at that time. However, there are many important exceptions, including:

  • Direct interests in Canadian real property
  • Interests in Canadian “Registered Retirement Savings Plans” and “Tax Free Savings Accounts”
  • Rights under various types of employee benefit or pension plans, as well as rights under stock option plans
  • In the case of an individual who was resident in Canada for not more than 60 months in the 120 months prior to departure, property that was owned by that individual at the time when he or she last became a Canadian resident, or that was acquired by gift or bequest after that time,
  • Interests in a personal trust resident in Canada that was not acquired for consideration, and
  • Interests in a non-resident testamentary trust that was not acquired for consideration

Filing obligations

Where applicable, the deemed dispositions must be reported in the tax return for the last year in which the individual was resident.

That tax return should also include two special schedules: T1161 (which is a listing of assets owned on emigration) and T1243 (which reflect the deemed disposition).

Election to defer payment of tax

It is possible to elect to defer the payment of any tax resulting from the deemed disposition until the time that there is an actual disposition of the relevant property.

The election is made by filing form T1244 with final tax return as a resident and subsequently providing adequate security to the Canada Revenue Agency. No interest is charged on the deferred tax.

Special consideration for Canadians moving to the US

In cases where a Canadian expat has realized a deem gain when moving to the US, it is possible for that individual to make an election, under Article XIII(7) of the Canada-US Tax Convention, that will avoid potential double taxation of the deem gain.

By making that election, the individual will have a deemed cost base, for US tax purposes, equal to the fair market value of the relevant property at the time of emigration from Canada. Thus, the gain that was taxed in Canada on departure will not be taxed in the US when there is an actual sale.

Finally the new compilation standard CSRS 4200 will be out in February 2020. The AASB (Accounting and Assurance Standard Board) approved a new standard on compilation engagements in October 2019, to be issued in February 2020. The new standard takes effect for compiled financial information for periods ending on or after December 14, 2021, with early application permitted. Its impact could be significant, practitioners will have to start work in 2020 to ensure successful implementation.

The AASB recognized that Section 9200, Compilation Engagements, was outdated. The new standard, Canadian Standard on Related Services (CSRS) 4200, Compilation Engagements, will replace Section 9200 and Assurance and Related Service Guideline (AuG) 5, Compilation Engagements – Financial Statement Disclosures. It provides a suite of requirements and guidance for accepting, conducting, and reporting on compilation engagements.

The following are the major improvement designed to respond to stakeholder input and public interest issues per the AASB:

  • A scope clarifies what services are compilation engagements. The new standard clarifies that a bookkeeping service may result in system-generated financial information. Such information is excluded from the scope of the standard if no communication is included or attached to it.

 

  • Specific engagement acceptance considerations that apply when the compiled financial information is intended to be used by a third party. Practitioners may not accept or continue the engagement when the basis of accounting to be applied in the preparation of the financial information is not general purpose financial reporting framework unless the third party can meet one of the following conditions:

(a) The third party is in a position to request and obtain further information from the entity; or

(b) The third party has agreed with management the basis of accounting to be applied in the preparation of the financial information.

 

  • Establish minimum work effort and documentation requirements: refer paragraph 27 to 33 for in the draft for detail.
  • The new compilation engagement report that is more informative and insightful than the current Notice to Reader. It requires that compiled financial information must include a note describing the basis of accounting that was applied.

You can read the draft standard which can be downloaded at here to learn more detail. The AASB will be publishing the standard, guidance and examples in 2020, so stay tuned.