Canadian Departure Tax: The Deemed Disposition When You Leave Canada

Canada does not have an exit tax in name, but it has one in effect. When a Canadian resident ceases to be a resident of Canada (emigrates), ITA 128.1(4) triggers a deemed disposition of most property at fair market value (FMV) on the date of departure. If the property has accrued gains, the departing resident owes Canadian capital gains tax on those gains, even though they have not actually sold anything. This is the “departure tax,” and it catches many emigrants by surprise.

What property triggers the departure tax?

The deemed disposition applies to most capital property owned by the departing resident, including:

• Publicly traded shares (Canadian and foreign stocks, ETFs, mutual funds held in non-registered accounts)
• Private company shares (shares of Canadian or foreign private corporations)
• Foreign real estate (a US vacation home, for example)
• Partnership interests
• Stock options (may have special rules depending on the type of option and the employer)
• Cryptocurrency (treated as property for Canadian tax purposes)

The departure tax casts a wide net. Any property with an accrued gain that is not specifically excluded triggers a deemed disposition.

What property is excluded from the departure tax?

Certain property is excluded from the deemed disposition under ITA 128.1(4)(b):

• Canadian real estate (the principal residence and rental/investment properties located in Canada). These are “taxable Canadian property” (TCP), and Canada retains the right to tax gains when the property is actually sold, regardless of the taxpayer’s residence at the time of sale. No departure trigger is needed.
• Property used in a Canadian business through a permanent establishment in Canada. Similar logic: Canada can tax the gain when the property is sold, so no departure trigger is needed.
• Registered plan property (RRSP, RRIF, TFSA, RESP, DPSP). The tax on these accounts is triggered by withdrawal, not departure.
• Employee stock options subject to Canadian tax deferral rules under ITA 7.
• Certain pension rights and life insurance policies.

The most important exclusion for cross-border planning is Canadian real estate. A Canadian who moves to the US and owns a Toronto house does not face departure tax on the house (but will face Canadian tax when the house is eventually sold).

How is the departure tax calculated?

The calculation follows standard capital gains rules:

1. Determine the FMV of each property on the date of departure.
2. Subtract the adjusted cost base (ACB) of each property.
3. The difference is the capital gain (or capital loss).
4. Capital gains are included in income at the 50% inclusion rate (the proposed increase to 66.67% above $250,000 was cancelled in March 2025 and never took effect).
5. Tax is calculated at the taxpayer’s marginal rate for the year of departure.

Can you defer the departure tax?

Yes, through the security election under ITA 220(4.5). The departing taxpayer can elect to post acceptable security (a letter of credit, a bank guarantee, or a pledge of the property itself) with the CRA in lieu of paying the departure tax on departure. The tax is then deferred until the property is actually sold.

To use this election, the taxpayer must:

1. File the departure return (T1 for the year of departure) with the deemed disposition reported.
2. Calculate the tax owing on the deemed gains.
3. Post security acceptable to the CRA (CRA Form T1244, Election Under Subsection 220(4.5), is used to report the election).
4. The CRA accepts the security and defers collection of the departure tax.

When the property is eventually sold, the taxpayer files a Canadian return (as a non-resident, under Section 116 or Part I, depending on the property type) reporting the actual sale. The departure gain is reconciled with the actual gain, and the tax is settled.

Interest does not accrue on the deferred departure tax during the deferral period (unlike most CRA debts). This makes the security election a genuine deferral, not just a payment plan.

What happens on the US side when you emigrate from Canada?

When a Canadian moves to the US and becomes a US tax resident (through a green card, substantial presence, or treaty tiebreaker), the US treats the taxpayer as a US person from the date of US residency. The US does not recognize the Canadian departure tax or the deemed disposition.

The US cost basis for the property is the taxpayer’s original cost (converted to USD at the exchange rate on the date of original purchase), not the Canadian FMV on the date of departure. This creates a potential double taxation problem:

1. Canada taxes the gain accrued up to the date of departure (through the deemed disposition).
2. The US taxes the entire gain from original cost to eventual sale price (because the US does not step up the basis to the Canadian departure FMV).
3. The overlap is the gain that accrued before departure (taxed by Canada) that is also included in the US gain (because the US basis is the original cost, not the departure FMV).

The remedy is the foreign tax credit. When the property is eventually sold, the US taxpayer claims a foreign tax credit on the US return for the Canadian departure tax paid on the portion of the gain that Canada already taxed. This credit should eliminate the double taxation, but the mechanics are complex (the Canadian tax was paid in an earlier year, on a deemed disposition, and the US foreign tax credit has a one-year carryback and ten-year carryforward).

Some practitioners argue that the US basis should be stepped up to the departure FMV under treaty principles (the treaty allocates taxing rights and should prevent double taxation). The IRS has not issued definitive guidance on this point, and the conservative approach is to use the original cost basis with a foreign tax credit.

What about the principal residence exemption?

A Canadian who emigrates and owns a principal residence in Canada does not face departure tax on the residence (Canadian real estate is excluded). But there is a planning opportunity: the taxpayer should designate the residence as their principal residence for all years of Canadian residency on the departure return (or on a subsequent return if the house is sold later). This preserves the full principal residence exemption for the years of Canadian occupancy.

If the taxpayer retains the Canadian residence after moving to the US (renting it out or leaving it vacant), the principal residence exemption can be preserved for up to 4 additional years after departure under ITA 45(2), provided the taxpayer does not designate another property as their principal residence during that period and makes the election on the return for the year of the change of use.

On the US side, the Canadian principal residence is a personal residence. If the taxpayer lived in it for 2 of the 5 years before sale, the US home sale exclusion under IRC 121 ($250,000 single, $500,000 married) applies. But the US and Canadian rules interact: the Canadian exemption covers the years of Canadian residency, and the US exclusion covers the full gain up to the limit. The taxpayer should not have double tax, but the computations for the Canadian return (as a non-resident selling TCP) and the US return (Section 121 and FIRPTA) must be coordinated.

What about the TFSA and RRSP on departure?

RRSP: The RRSP is not subject to departure tax. It remains a Canadian tax-deferred account after departure. The taxpayer can leave the RRSP intact, and withdrawals are subject to Canadian non-resident withholding tax (25%, reduced to 15% by the treaty for periodic RRIF payments). On the US side, the treaty deferral election (now automatic) preserves the tax-deferred treatment.

TFSA: The TFSA is also not subject to departure tax. However, once the taxpayer becomes a non-resident, the TFSA maintains its tax-free status in Canada but the US does not recognize it. A US person’s TFSA income is taxable annually on the US return. Most advisors recommend withdrawing the TFSA balance before or shortly after departure and investing the funds in a US-friendly account.

What forms are filed?

• T1 return for the year of departure: The departure is reported on this return. The deemed dispositions are reported on Schedule 3 (Capital Gains).
• Form T1161 (List of Properties by an Emigrant of Canada): Lists all property owned at the time of departure with FMV and ACB. Required when the total FMV of all property exceeds $25,000.
• Form T1243 (Deemed Disposition of Property by an Emigrant of Canada): Reports the deemed dispositions and calculates the departure tax.
• Form T1244 (Election Under Subsection 220(4.5)): Used to elect the security deferral for departure tax.
• Notification to CRA: The taxpayer should notify the CRA of their change of residence status, which affects future Canadian filing obligations (non-residents file Canadian returns only for Canadian-source income).

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.