A vehicle crosses the new Gordie Howe International Bridge in Windsor, Ont. The departure tax Canadians pay when they move out of the country is often misunderstood.Dax Melmer/The Canadian Press
There’s no such thing as an exit tax in Canada – at least, not in the way most people think of it.
The term “exit tax” makes it sound like a toll booth at the border; a penalty you pay for leaving. And because of that, many believe the government is somehow holding their money hostage unless they decide to stay. But that’s not how it works.
The exit tax – or “departure tax,” as it’s officially called – is just a deemed disposition. When someone becomes a non-resident of Canada, the Canada Revenue Agency (CRA) treats them as if they sold certain assets at fair market value on the day they became a non-resident and then immediately bought them back at the same price. No sale needs to happen and no money needs to change hands. The accrued taxable capital gain on those assets is taxed as if they were sold, whether or not they actually were.
Essentially, it’s a capital gains tax that would have been owed eventually even if the person stayed in Canada, just pulled forward to their departure date. And as there are several exemptions, it misses most emigrants entirely.
Exempt assets
Most of Canadians’ wealth is held in real estate and in registered accounts, such as RRSPs, RRIFs and pension plans. All of these are exempt from the departure tax. As of 2023, Statistics Canada’s Survey of Financial Security reported that assets held by Canadian families totalled $19.2-trillion and more than 70 per cent of those assets were completely exempt from the departure tax.
Canadian real estate and registered accounts are exempt because Canada can tax them later. A Canadian rental property gets taxed when it’s eventually sold; it’s not going anywhere. Foreign real estate is different because it sits beyond Canada’s reach once the person is gone, so a person’s departure is the CRA’s last real chance to collect on it.
Once you’re living in another country, the CRA has limited ability to pursue or extradite you to settle an old bill, so you settle up at the door. The point is to tax the appreciation that happened while you were a resident and benefiting from living in Canada.
Non-registered investments and business shares
The deemed disposition rule applies to non-registered investment portfolios, meaning any unrealized capital gains are captured (although only 50 per cent of the capital gain is taxable while the other 50 per cent remains tax-free).
For small business owners, shares of a Canadian private corporation are deemed disposed of at fair market value on departure. But if they qualify as small business corporation shares – or qualified farm or fishing property – the lifetime capital gains exemption can shelter part or all of that gain, even upon departure. So, a business owner isn’t necessarily writing a large cheque – at least not yet.
Business owners can also defer the actual payment of the tax by posting security – for example, government bonds, a bank letter of credit or Canadian real estate equity – with the CRA. The deferral is available when the departure tax liability exceeds $16,500 and it lasts until the asset is sold. Generally, no interest is charged on the deferred amount.
The trade-off is that the departing person’s tax bill is locked in at the departure-date value. If the asset later drops in value, they can end up owing taxes that exceed the asset’s current value. Deferral changes the timing but not the amount.
Canada’s approach is not unusual. Australia’s rules are almost identical and countries such as Austria, Norway and Belgium all have their own versions of a departure tax.
Many point out that the U.S. doesn’t levy a departure tax, but U.S taxes follow citizenship – an American who leaves the U.S must still file taxes with the Internal Revenue Service (IRS) every year. If they renounce their citizenship or give up their green card, then their version of the departure tax – the “expatriation tax” – comes due.
Although the U.S. has its own exemptions, tests, and limits, the function is largely the same – emigrants settle their tax bill because once they’ve renounced their citizenship, they no longer have to file taxes in the U.S., making it easier to escape the IRS’s reach.
So, Canada doesn’t have a punitive additional layer of taxes levied on those daring to leave. It’s possible to think taxes are too high and still see why this particular one isn’t as unfair as many make it out to be. Without it, someone could build up years of gains in Canada, move to a zero-tax jurisdiction, then sell their assets and pay no taxes anywhere. The exemptions prove the intent: Canada waives the tax on exactly the assets it can still tax later.
Those who don’t hold a large, non-registered portfolio, foreign real estate or private company shares may owe little or nothing in departure tax. And those who do owe may still be able to defer it.
For most people leaving Canada, the “exit tax” is far less punishing than the name suggests. It’s a deemed disposition, not a wall. Understand it and most of the fear goes away.
Mark McGrath is the founder of Phynance, a fee-for-service financial planning firm focused on physicians based in Squamish, B.C.