Departure Tax — Leaving Canada Permanently

Understanding Deemed Disposition — The Core Concept

When you cease to be a Canadian resident (become a tax resident of another country under Canadian law), the Income Tax Act deems you to have disposed of — and immediately reacquired — most of your property at its fair market value (FMV) on the date you left Canada. This prevents individuals from leaving Canada with large unrealized gains and then selling assets in a lower-tax jurisdiction without ever paying Canadian capital gains tax on the appreciation that occurred while they lived in Canada.

The departure tax is calculated on your final Canadian income tax return — the return for the year you emigrated. You report income from January 1 to your departure date, plus you include the taxable portion of any capital gains triggered by the deemed disposition. The rate depends on your income level and the type of gain.

Important 2024 Change: Effective June 25, 2024, Canada increased the capital gains inclusion rate from 1/2 (50%) to 2/3 (66.67%) for annual capital gains exceeding $250,000 for individuals (the first $250,000 remains at the 50% inclusion rate). For a person emigrating with a large portfolio of appreciated securities, this change substantially increases potential departure tax liability.

What IS and IS NOT Subject to Deemed Disposition

Not all assets trigger the departure tax. Some categories are explicitly excluded under the Income Tax Act, while others are only taxed on actual disposal later:

Forms You Must File When You Emigrate

When emigrating from Canada, you have specific CRA form-filing obligations:

• T1 Tax Return (Final Return): File a regular T1 income tax return for the year of departure, reporting income from January 1 to the date you left Canada. Mark the return as a "final" emigrant return by indicating your departure date on the front page of the return.
• Schedule 3 (Capital Gains): Report all deemed dispositions on Schedule 3 of your T1 return. List each property, its adjusted cost base (ACB), proceeds of disposition (FMV on departure day), and the resulting gain or loss.
• Form T1161 — List of Properties: If the total FMV of all property you owned at the time of emigration exceeds $25,000, you must file Form T1161. This form lists all property you owned on your departure date. The penalty for failing to file T1161 is $25 per day to a maximum of $2,500.
• Form T1244 — Election to Defer Departure Tax: If you do not want to pay the departure tax immediately (e.g., you haven't sold the assets yet and have a cash-flow problem), you can file Form T1244 to elect to defer the departure tax by providing security to the CRA. Acceptable security includes a letter of credit from a Canadian bank, a mortgage on Canadian real estate, or a guarantee bond. The security must equal the amount of tax you are deferring.

Practical Example — Calculating Departure Tax

Consider a Canadian resident leaving Canada on July 1, 2026 with the following assets:

Inclusion Rate Calculation (2026):
First $250,000 of gain → 50% inclusion = $125,000 taxable
Remaining $450,000 → 66.67% inclusion = $300,015 taxable
Total Taxable Income from Departure: $425,015
At an approximate marginal tax rate of 53% (Ontario top rate), the estimated departure tax would be approximately $225,258. This illustrates why advance planning — including selling and re-buying assets to "crystallize" ACBs before departure, or making strategic T1244 deferral elections — is critical.

The Principal Residence Exemption on Departure

The Principal Residence Exemption (PRE) can eliminate some or all capital gains on your home when you emigrate. You can designate your home as your principal residence for every year you owned it and lived in it as a Canadian resident, plus one additional year. The formula for the exemption is:

Exempt portion = (Years designated / Years owned) × Total gain

If you lived in the home for all years of ownership, the entire gain is exempt. However, if you rented the home for some years (triggering a "change in use"), only the years it was your principal residence count. Since non-residents cannot designate years of non-residency, the longer you stay a non-resident while owning the Canadian home before selling it, the smaller the exempt portion of your gain becomes. This is another reason why selling the home before you leave — or immediately upon becoming a non-resident — is often recommended.

What Happens to Your RRSP, OAS, and CPP After Leaving

• RRSP Withdrawals as Non-Resident: When you withdraw from your RRSP after becoming a non-resident, the financial institution withholds 25% NR4 withholding tax (non-resident withholding). Under Canada's tax treaties, this rate is often reduced — to 15% for periodic payments (e.g. monthly RRIF payments) and 25% for lump-sum withdrawals under the Canada-US treaty. You typically do not file a Canadian tax return for RRSP withdrawals unless you elect to do so under Section 217 of the Income Tax Act to be taxed at graduated rates instead.
• OAS and CPP as Non-Resident: Canada continues to pay OAS and CPP to non-residents. These payments are subject to a 25% NR4 withholding tax, reduced by treaty (e.g. 15% under the Canada-US treaty). OAS is additionally subject to the OAS clawback if your worldwide income exceeds the recovery threshold (~$90,997 in 2026).
• Section 217 Election: Non-residents who receive certain types of Canadian income (RRSP payments, pension, OAS, CPP) can elect under Section 217 to be taxed as if they were Canadian residents on those amounts. This is beneficial if the graduated rates produce a lower tax than the flat NR4 withholding rate. You must file a separate Canadian tax return to make this election each year.

Pre-Departure Tax Planning Strategies

A qualified Canadian tax accountant can help implement these strategies before you leave to reduce your departure tax bill:

• Crystallize Gains Strategically: Sell and immediately repurchase securities in your non-registered account before departure to "step up" the ACB to current FMV. This triggers capital gains tax now at current rates but means your FMV = ACB on departure day — so the deemed disposition triggers zero additional gain. This is most beneficial if you expect to move to a higher-tax country.
• RRSP Contribution Catch-Up: In the year of departure, make maximum RRSP contributions to reduce your taxable income. Your RRSP room earned as a Canadian resident is used before you leave.
• Maximize TFSA Withdrawals: Withdraw from your TFSA before leaving Canada. The withdrawn amount re-adds to your contribution room only after you become a Canadian resident again — but the withdrawn cash is yours tax-free now and can be invested in your new country without the non-resident 1% penalty risk.
• Trigger Capital Losses: If you hold any investments that are currently at a loss, realize those losses before departure to offset gains triggered by the deemed disposition.
• Get Valuations Early: For illiquid assets (private company shares, real estate, art, jewelry), obtain qualified appraisals of FMV as close to your departure date as possible. CRA may later challenge your FMV, and having a defensible professional valuation on file protects you.