Tax Considerations for Entrepreneurs Considering Leaving Canada

WEDNESDAY, JANUARY 31, 2024

Some entrepreneurs are exploring the idea of leaving Canada – chief among the reasons: higher tax rates in Canada than in many other jurisdictions.  At RMR, we remind our entrepreneur clients of the favourable rules for taxation of business income and government assistance for qualified research and development – but the question persists for some.

The departure from Canada gives the Canada Revenue Agency one final opportunity to tax the departing individual and the cost can be very significant for successful entrepreneurs who have funds trapped in holding companies and in active businesses. Navigating those rules requires support from a tax team experienced in emigration.

For those seriously considering departure an introduction to a qualified lawyer is the first step. A careful analysis of the facts and whether you are moving to a country with which Canada has a tax treaty is the starting point.

If you are departing Canada the following tax implications must be considered:

1.     Departure Tax

An emigrant from Canada is deemed to have disposed of all of there property at fair market value (FMV). This triggers a departure tax on all gains accrued prior to leaving.

There are a few exceptions to this rule, including your residence, any pensions plans, and RESPs.

For entrepreneurs often the most significant issue is that their private company shares are subject to deemed disposition, hence, the departure tax. They are to be disposed of at FMV on the date of emigration.

The tax arising from this disposition may be possible to defer if the departure tax cause financial burden since the tax payment is due without the actual realization of gain. However, this deferral is only possible by posting security with the CRA. Acceptable forms include a Bank letter of credit, Canadian real property, or shares of a private corporation (including your CCPC shares). In these cases, the agreement frequently requires all shares be part of the security regardless of the amount of the tax liability, and subject to reporting requirements.  That can be problematic in situations where there are multiple shareholders.

A departing individual may qualify for some relief if their company qualifies for the small business capital gains exemption which allows for almost $1 million in gains per shareholder on to pass tax free.

2.     Loss of Canadian Controlled Private Company status

For small business owners, their companies Canadian Controlled Private Corporation (CCPC) loses its status upon emigration. This can increase the rate of tax and reduce tax credits. 

3.     Filing a Departure Tax Return

You are required to file a tax return by April 30 of the year following your departure in order to:

-       Record the date of your departure and change your residence status
-       Report any property you own at the time of your departure
-       Prepare appropriate tax election forms
-       Report and pay the departure tax described above.

4.     Listing your Property at the Time of Departure

Any property with a fair market value above $25,000 must be reported to the CRA, failing which you are liable for a $2,500 penalty.

Please reach out if you have any questions.