Leaving Canada for the U.S. triggers a set of Canadian tax obligations that most IT contractors have not encountered before. The most significant is the deemed disposition rule, which treats the departure date as a hypothetical sale of most property. That event can produce a tax liability before you have filed a single U.S. return.
This guide covers the main filing obligations and decisions that arise when you leave Canada, with a focus on what to understand and what to organize before working with a CPA.
Residency and departure date
Canadian tax obligations are based on residency, not citizenship. When you leave Canada and establish sufficient residential ties in the United States while severing your significant residential ties to Canada, you may become a Canadian non-resident as of your departure date. The determination depends on the facts of your situation and, in some cases, the Canada-U.S. Tax Convention. A person can physically move to the U.S. and still remain a Canadian tax resident for a period if significant ties remain.
CRA does not use the date of a visa approval, a Social Security Number, or a lease signed in the U.S. The residency determination considers primary ties such as a dwelling place, spouse or dependants, and personal property, as well as secondary ties including social and professional connections. If you sold your Canadian home, moved your family, and closed most Canadian accounts, the departure date is usually straightforward. If you left a spouse in Canada, kept a property, or maintained significant ties, the analysis is more complex and may require applying the treaty tie-breaker rules in the Canada-U.S. Tax Convention.
Form NR73 allows you to request CRA’s view of your residency status. It is optional and is generally used only where the facts are genuinely uncertain. CRA also publishes guidance on determining residency status that describes the ties considered in the analysis.
The departure return
For the year you leave Canada, you file a part-year T1 return that covers the period from January 1 to your departure date. CRA calls this the emigrant return. It is your final return as a Canadian resident.
The return is due April 30 of the following year, or June 15 if you or your spouse carried on a business during the year. Any balance owing is due April 30 regardless of the filing deadline.
The departure return includes:
- all income earned from January 1 to the departure date
- the deemed disposition gain or loss calculated as of the departure date
- certain credits and elections specific to the departure year
If you were incorporated, the corporation does not file a departure return. The corporation remains a Canadian entity with its own T2 obligations. What changes is your personal return and your status as a shareholder.
Deemed disposition
On the departure date, CRA treats you as having disposed of most property at fair market value, then immediately reacquired it at the same amount. Any gain on that hypothetical sale is included in your income for the departure year.
Property subject to deemed disposition includes:
- publicly traded shares and investment accounts
- shares of a private corporation, including your CCPC
- other capital property held personally
Property excluded from deemed disposition includes:
- RRSPs, RRIFs, pension plans, and similar registered accounts
- property used in a Canadian business carried on through a permanent establishment in Canada
- Canadian real or immovable property (real estate in Canada is handled separately)
If the total fair market value of your reportable property exceeded CAD $25,000 at departure, Form T1161 may be required. Excluded property, such as Canadian real estate, RRSPs, RRIFs, and pension plans, is not counted toward the threshold. T1161 lists each reportable property, its cost base, and its fair market value at departure. This is a reporting obligation, not a payment form. Missing it carries a late-filing penalty of $25 per day, up to $2,500.
Deferring departure tax
CRA permits taxpayers to defer payment of departure tax on certain eligible property. The deferral is claimed through the departure tax filing process and may require security to be provided to CRA. Form T1243 is used to report the deemed disposition, while Form T1244 is used where security arrangements are required. These forms are filed with the departure return.
Deferral avoids an immediate cash obligation but does not eliminate the liability. The decision depends on the size of the gain, the type of property, and your anticipated financial position in the years ahead. Whether a departure tax deferral makes sense depends on the facts of the situation and should be reviewed with a CPA.
Principal residence
If you owned a home in Canada that was your principal residence, the principal residence exemption can shelter the gain on the property from departure tax for the years it was your principal residence. Canadian real property is excluded from the deemed disposition rules, so the gain on your home is not triggered at departure. If you eventually sell the property as a non-resident, different rules apply at that point.
If you sell the Canadian property after leaving, a Section 116 clearance certificate must be obtained from CRA before the purchaser is required to release the full proceeds. The purchaser is otherwise required to withhold 25% of the purchase price (or more for certain property types) pending CRA clearance.
The availability of the principal residence exemption after departure depends on the years involved, residency status during each year, and the property’s full ownership history. Specialized analysis is often required when a Canadian home is sold after emigration.
Your Canadian corporation
If you own shares in a Canadian corporation, those shares are subject to deemed disposition at the departure date. The fair market value of the shares on departure determines the gain or loss. Valuing private company shares for this purpose requires a defensible methodology, and the calculation affects your departure year taxes directly.
After departure, you become a non-resident shareholder. Dividends the corporation pays to you are subject to Part XIII non-resident withholding tax, which is generally 25% of the gross dividend. Under the Canada-U.S. Tax Convention, the withholding rate on dividends paid to many U.S.-resident individuals is reduced from 25% to 15%, provided the treaty requirements are satisfied. The reduction is not automatic and requires proper documentation.
The corporation itself remains a Canadian entity and continues to file T2 returns, issue information slips, and operate under Canadian corporate tax rules.
Moving to the United States while retaining ownership of a Canadian corporation also creates significant U.S. tax reporting obligations. In many cases, the Canadian corporation continues operating exactly as before, but the shareholder’s U.S. reporting obligations change dramatically. Depending on the facts, Form 5471 reporting, GILTI, Subpart F, and other U.S. international tax rules may apply. In some situations, a Canadian corporation may also be treated as a passive foreign investment company (PFIC). These issues should be reviewed before departure: restructuring opportunities are often more limited after U.S. residency begins. The Canadian and U.S. sides of this analysis need to be coordinated, which is one of the most important reasons to involve both a Canadian CPA and a U.S. tax adviser before the move.
For background on the Canadian corporate structure itself, see the guide on whether to incorporate as an IT contractor.
Canadian income as a non-resident
After you leave Canada, you may continue to receive income from Canadian sources: clients, rental income, corporate dividends, or RRSP withdrawals. Each type is handled differently under the non-resident rules.
Part XIII withholding commonly applies to dividends and many other passive payments to non-residents. The treatment of interest depends on the nature of the debt and applicable exemptions: many arm’s-length interest payments are exempt from Part XIII withholding under domestic law. Payers are responsible for withholding before remitting payment. Treaty rates may reduce the withholding percentage on applicable amounts, but the reduction must be claimed.
For rental income, the standard withholding is 25% of the gross rental. Filing a Section 216 return allows you to pay tax on net rental income instead, which can reduce the total tax on that income. The election has its own deadlines and conditions.
If you continue billing Canadian clients as a non-resident, the facts determine whether withholding applies and whether a treaty exemption is available. The guide to U.S. client income covers the billing and GST/HST side of the relationship when the client is in the U.S., and the same documentation principles apply in reverse when you are the non-resident.
RRSP accounts
RRSPs are excluded from the deemed disposition rules at departure. The account balance is not triggered as income when you leave Canada. However, withdrawals made as a non-resident are subject to Part XIII withholding. The standard rate is 25%, but under the Canada-U.S. Tax Convention, periodic payments from an RRSP may qualify for a reduced rate.
The interaction between RRSP withdrawals, U.S. tax treatment, and treaty positions is covered in a separate guide.
TFSA accounts
Although a TFSA remains tax-free in Canada, it generally does not receive equivalent treatment under U.S. tax rules. Income and gains earned inside the TFSA may be taxable in the United States, and the account structure may require U.S. reporting. Many Canadians review their TFSA holdings before becoming U.S. residents, since the Canadian tax-free treatment does not transfer to the U.S. side. Some individuals choose to collapse or restructure TFSA holdings before becoming U.S. tax residents, although the appropriate approach depends on the circumstances.
This difference is one reason RRSPs and TFSAs are often treated very differently in cross-border planning.
What to send your CPA
The departure year requires more documentation than a standard return. Useful materials include:
- the departure date and documentation supporting it: lease or home sale completion, change-of-address records, last day in Canada
- a list of all property owned at departure: each asset, its cost base and acquisition date, and a reasonable fair market value estimate
- corporate ownership details, including cost base of shares and recent financial statements to support a share valuation
- confirmation of any registered accounts (RRSP, TFSA) and their balances as of the departure date
- recent filed returns for the two to three years before departure
- information about who will handle the U.S. entry-year return and any documentation already provided to them
The departure year is one of the more complex filings a Canadian faces. The deemed disposition calculation, T1161 reporting, potential T1243 and T1244 elections, corporation adjustments, TFSA review, and the interaction with U.S. entry-year filing all need to be handled in coordination. A CPA who works with cross-border files handles the Canadian side in a way that does not create complications on the U.S. side.