2.18 What are the main deemed disposition issues when you cease to be a resident of Canada?

ITA-128.1(1)(b). When a taxpayer ceases to be a resident in Canada, some of the taxpayer’s assets are deemed to have been disposed of at their fair value. Deemed disposition means CRA will treat the assets as if they were sold at fair market value when a taxpayer ceases to be resident of Canada even though he or she may not have actually sold any of the assets. This process ensures that the taxpayer is subject to tax on any gains accrued during their period of residency in Canada.

For instance:

Normally any accrued gains on property at the time of departure are taxed in the year of departure but the payment of tax may be delayed by the taxpayer through an election and by posting a tax bond to offset the tax liability.

ITA-128.1(4)(b). Exemption from deemed disposal

There are certain properties – generally, those that would be subject to Canadian tax in the hand of non-residents – that are exempt from the deemed disposition. This includes things like real property in Canada and capital property used in a business carried on through permanent establishment in Canada. You will find more information on possible exemptions in ITA 128.1(4)(b)

There are also exemptions for individuals who owned property when they became resident of Canada, if they resided in Canada for 60 months or less during the 10-year period preceding their departure. Under this rule they will be exempted from all deemed disposition of assets that they brought with them and took away. Also exempted are properties inherited after the individual became resident in Canada. ITA 128.1(4)(b)

ITA-2(3), Taxpayer will continue to be liable for tax on the disposition of exempted property as a non-resident.

But- As there is always a but

128.1(4)(d). The taxpayer can elect to apply the deemed disposal rules on certain properties that are specifically exempt from the departure tax rules under section ITA 128.1(4)(b). A taxpayer might elect to do this to trigger accrued losses to offset accrued gains (or vice versa).

Capital losses triggered on an elected deemed disposal property may only be offset against the capital gains resulting from the application of departure tax rules 128.1(4)(d). In this situation, losses, except listed personal property losses, are restricted to the taxable capital gains actually triggered by deemed disposal.

References and Resources:

• Income Tax Act, RSC 1985, c1, (5th Supp.) ss 128.1(1)(b), 128.1(4)(d)
• Chartered Professional Accountants. (2022). The Chartered Professional Accountant Competency Map. Part 1: The CPA Competency Map: 6.5.2