When, at any time, a Canadian resident ceases to be a resident, there is generally a deemed disposition and reacquisition of all property at the fair market value at that time. This is provided in paragraph 128.1(4)(b) of the Income Tax Act (“ITA”).
The resulting tax on deemed capital gains is commonly called “departure tax”.
There are some important exceptions to this rule, including, most notably:
- Direct interests in Canadian real estate
- Interests in deferred income plans, such as RRSPs and RPPs
- Employee stock options, and
- Property owned by a person who was not resident in Canada for more than 60 months that was not acquired while resident (other than by bequest or inheritance).
But, what happens if a former resident of Canada returns? Is there a way to reverse any deemed gain, and resulting tax?
The answer is that, usually, the deemed gain may be retroactively reversed if an appropriate election is filed.
This ability will generally only apply to property that is still owned when the taxpayer returns to Canada.
In the case of “taxable Canadian property” (“TCP”), a returning expat may elect under paragraph 128.1(6)(a) of the ITA to retroactively eliminate the deemed disposition and reacquisition.
Hence, the deemed gain on departure will be eliminated, and the original cost base will be restored.
In the case of properties other than TCP, an election can be filed under paragraph 128.1(6)(c). However, in such situation, the deemed disposition is not eliminated-instead, the deemed proceeds are reduced by the least of the following three amounts:
- The deemed gain that would otherwise result
- The fair market value at the time of return to Canada, and
- Such amount that the taxpayer designates (hence the taxpayer may choose to have some gain taxed on departure)
This, in turn, will mean that the taxpayer’s deemed cost base (which would generally be the fair market value at the time of return) will be reduced by whichever of the three amounts that apply.
In the case of both provisions, a written election should filed with the CRA on or before the filing-due date for the year in which the individual returns to Canada (although it is possible to apply to the CRA to late file under the “fairness package”)
An election under subsection 128.1(6) of the ITA may be made regardless of the number of years during which the taxpayer was not resident in Canada. By virtue of paragraph 128.1(6)(d) of the ITA, the CRA may issue any required reassessments of tax, even if they would normally be beyond the normal time limitations.