Moving Back to Canada: Unwinding the Deemed Disposition (ITA 128.1(6)/(7))

When you leave Canada, ITA 128.1(4) deems you to have disposed of most of your property at fair market value, triggering capital gains tax on unrealized gains (the “departure tax”). If you later move back to Canada, you can potentially reverse this tax. ITA 128.1(6) provides an election to unwind the deemed disposition, and ITA 128.1(7) provides a similar mechanism for property that was taxable Canadian property.

This is the companion to our guide on leaving Canada. That article covers the departure tax. This one covers what happens when you come back.

How the departure tax works (recap)

When you became a non-resident of Canada, ITA 128.1(4) deemed you to have disposed of most property at FMV. You paid Canadian capital gains tax on the unrealized gains. Common assets affected:

• Non-registered investment portfolios (stocks, ETFs, mutual funds)
• Shares in private corporations (not used in an active business in Canada)
• Interests in partnerships
• Rental properties (taxable Canadian property, slightly different rules)

Excluded from the deemed disposition: Canadian real property (taxed on actual disposition), pension rights (RRSP, RRIF, RPP), and personal-use property under $10,000.

If you posted security under ITA 220(4.5) instead of paying the departure tax immediately, the tax is deferred until the property is actually sold or you elect on return.

ITA 128.1(6): the return election

When you become a Canadian resident again, ITA 128.1(6) gives you two options for property that was subject to the departure deemed disposition:

Option 1: Do nothing. Your cost base in Canada remains the FMV at departure (the deemed disposition price). Any gain from that FMV forward is taxed as a Canadian gain when you eventually sell. This is the default if you do not make the election.

Option 2: Elect under 128.1(6). You are deemed to have disposed of the property immediately before becoming resident again at its current FMV, and to have reacquired it at the same FMV. The result depends on what happened to the property’s value during your absence:

If the value dropped since departure:

• At departure: FMV was $100, ACB was $40. Departure gain: $60. Tax paid on $60.
• On return: FMV is $70. The election deems a disposition at $70 with a cost base of $100 (the departure FMV). This creates a loss of $30.
• CRA allows you to apply this loss against the original departure gain by reassessing the departure year (ITA 128.1(6)(c)). The departure gain is reduced from $60 to $30. The departure tax is partially refunded.
• Your new Canadian cost base is $70 (current FMV).

If the value increased since departure:

• At departure: FMV was $100, ACB was $40. Departure gain: $60. Tax paid on $60.
• On return: FMV is $150. The election deems a disposition at $150 with a cost base of $100 (the departure FMV). This creates a gain of $50 during the non-resident period.
• However, this gain accrued while you were a non-resident. Canada does not tax non-residents on most non-Canadian-situs property gains. The gain of $50 is not a Canadian taxable event.
• Your new Canadian cost base is $150 (current FMV). This is the beneficial outcome: you get a stepped-up cost base in Canada, so when you eventually sell, only the gain from $150 forward is taxed.

ITA 128.1(7): taxable Canadian property

Taxable Canadian property (primarily Canadian real estate and shares of certain Canadian private corporations) is treated differently. Non-residents ARE taxable on gains from taxable Canadian property (ITA 2(3)(c)). The departure deemed disposition may or may not have applied to taxable Canadian property (real property is excluded from the departure deemed disposition because Canada retains the right to tax it on actual sale).

ITA 128.1(7) applies to property that was taxable Canadian property that the returning resident owned continuously since departure. The election under 128.1(7) allows the returning resident to elect a deemed disposition and reacquisition at FMV, which may be beneficial if the property has declined in value.

US side: the basis question

On the US side, the cost basis of the property is not affected by the Canadian departure tax or the return election. The US basis is the original purchase price (or the FMV at the time the taxpayer became a US resident, if the immigration step-up under IRC 1014 or treaty provisions applied).

The mismatch: if the property appreciated during the time in the US, the US already has a basis for that property (likely the FMV at immigration to the US). When the taxpayer moves back to Canada, the US basis remains unchanged. But the Canadian cost base is reset to the FMV on return (under the 128.1(6) election). If the taxpayer later sells the property while a Canadian resident, Canada taxes the gain from the return FMV, while the US taxes the gain from the original US basis (which may be lower or higher). The FTC coordinates the two taxes, but the gain amounts may not match.

When to make the election

The election under ITA 128.1(6) is beneficial in two main scenarios:

1. Property declined in value since departure. The election creates a loss that offsets the departure gain, generating a refund of departure tax.

2. Property appreciated since departure. The election resets the Canadian cost base to the higher current FMV, reducing future Canadian capital gains tax.

In both cases, the election is beneficial. The only scenario where the election might not help is if the property value is exactly the same as at departure (no change, so the election has no effect).

The deadline: the election must be made in the T1 return for the year of return to Canada. If you return in October 2026, the election is made on the 2026 T1 (due April 30, 2027). Missing this deadline forfeits the election, though a late election may be accepted under CRA’s administrative policies if the request is reasonable.

The security release

If you posted security under ITA 220(4.5) to defer the departure tax (instead of paying it at departure), returning to Canada and making the 128.1(6) election resolves the security. CRA will release the security once the return is processed and the departure tax is reassessed.

If the property declined in value, the reassessment reduces the departure tax, and any tax refund is paid. If the property increased in value, the departure tax remains as assessed, the security is released, and the new Canadian cost base reflects the higher FMV.

Common mistakes

Not making the election at all. If you return to Canada and do not make the 128.1(6) election, your Canadian cost base stays at the departure FMV. If the property appreciated during your absence, you miss the opportunity to step up the cost base. If it declined, you miss the opportunity to recover departure tax.

Forgetting to claim the departure tax refund. The election under 128.1(6) creates the loss or adjustment, but CRA does not automatically reassess the departure year. You (or your preparer) must request the reassessment of the departure year to apply the loss and generate the refund. This is a separate step from filing the return-year T1.

Not coordinating with the US return. The Canadian election does not affect the US basis. If you are still filing US returns (as a US citizen or green card holder), the gains and FTC calculations must account for the different cost bases in each country.

What should I do next?

If you are moving back to Canada (or recently moved back), gather the departure tax assessment, the current FMV of the affected properties, and discuss the 128.1(6) election with your cross-border CPA. The election is made on the T1 for the year of return.

• I’m leaving Canada for the US: a tax checklist, the departure side of this equation
• I’m moving back to Canada from the US, the broader re-entry guide
• Part XIII withholding: what gets withheld when you leave Canada?, the withholding that may have applied during your non-resident years

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