Understanding the “Departure Tax” Between Canada & the U.S. Before Moving Home

The rules around departure tax when moving between Canada and the U.S. can surprise many expats returning home. In particular, the “deemed disposition” rule under Canadian tax law can trigger significant capital-gains tax unless managed proactively. In this article, we’ll walk you through what triggers the departure tax, how to use the Canada–United States Income Tax Treaty to reduce exposure, how to manage unrealized gains through cross-border investment planning, and when you should definitely consult a Canada–U.S. tax advisor.

---

1. What triggers the departure tax (Canada → U.S.)

When you leave Canada to become a resident of another country (such as the U.S.), you may become an “emigrant” for Canadian tax purposes. Under Canadian tax law, you are deemed to have sold (and immediately reacquired) many of your assets at fair market value (FMV) on the day you depart. This is often dubbed the “departure tax.”

1.1 Emigrant status and tax residency

The CRA defines an emigrant as someone who leaves Canada to live in another country and severs their residential ties with Canada. If you keep significant ties (home, spouse/dependents, bank accounts, health insurance, etc.), you may continue to be considered a Canadian resident—and your worldwide income may still be taxable in Canada.

1.2 Deemed disposition (the “departure tax”)

Once you are considered to have emigrated (or become a deemed non-resident under treaty rules), you are treated as if you disposed of many of your assets at FMV immediately before departure and reacquired them at that same value. This triggers a capital gain even though no sale occurred.

1.3 Which assets are subject (and which are exempt)

Registered plans like RRSPs or RRIFs are generally not subject to the deemed disposition rule. However, most non-registered assets—such as shares, mutual funds, secondary properties, jewelry, and collectibles—are.

1.4 The timing matters

Your departure date determines the FMV for deemed disposition and when you transition from resident to non-resident for tax purposes. The CRA typically considers the later of your physical departure, the departure of your dependents, or the start of residency in your new country.

1.5 Why this matters when moving to the U.S.

If you become a U.S. resident under IRS rules but fail to terminate Canadian residency, you may face double taxation. The deemed disposition rule can also surprise movers who assume only future gains are taxable.

1.6 Example

Imagine you own shares purchased years ago at a low cost base. Upon moving to the U.S., you are deemed to have sold them at current market value, triggering a Canadian capital gain—while future U.S. taxes still apply upon actual sale.

---

2. Using the Canada–U.S. Tax Treaty to reduce exposure

The Canada–U.S. Tax Treaty helps coordinate taxation between both countries and minimize double taxation.

2.1 Purpose of the treaty

• Avoids double taxation.
• Defines which country has the primary right to tax different income types.
• Provides tie-breaker rules for dual residency situations.

2.2 Residency tie-breaker rules

If you qualify as a tax resident in both countries, the treaty considers:

• Permanent home location
• Centre of vital interests
• Habitual abode
• Citizenship

2.3 Capital gains and departure/entry situations

The treaty doesn’t eliminate Canada’s deemed disposition rule, but it can help align timing and provide credits to avoid being taxed twice.

2.4 Foreign tax credits

Taxes paid in one country may be credited in the other, preventing double taxation on the same income or gains.

2.5 Reduced withholding rates

The treaty provides lower withholding rates on dividends, interest, and royalties between the two countries.

2.6 The “saving clause”

U.S. citizens and green-card holders are always subject to U.S. tax on worldwide income, even if they live in Canada. The treaty provides relief but doesn’t exempt them.

2.7 Practical planning

• Determine departure date and sever ties.
• Estimate deemed disposition gains.
• Coordinate U.S. cost basis and credit claims.
• Consult advisors early for cross-border structuring.

---

3. Managing unrealized gains through cross-border investment management

3.1 Assess unrealized gains

Determine the FMV of your investments before leaving Canada. The difference between cost and FMV determines your capital gain exposure.

3.2 Deferring or reducing the impact

• Sell or rebalance before departure.
• Use the principal residence exemption where applicable.
• Restructure or reduce appreciated holdings.
• Plan currency exposure.

3.3 After departure: U.S. basis and reporting

Your U.S. cost basis is typically the FMV at departure. You’ll also need to comply with foreign asset reporting (FBAR, FATCA, etc.).

3.4 Common account types and traps

• TFSA: Not tax-sheltered in the U.S.
• RRSP/RRIF: Generally treaty-protected, but require disclosure.
• Mutual funds: May trigger U.S. PFIC rules.

3.5 Timing your exit

Plan asset sales 6–12 months ahead. Track dates and valuations carefully.

3.6 Example strategy

Sell appreciated positions while still a Canadian resident to manage gains, then move with a cleaner tax slate.

---

4. When to consult a Canada–U.S. tax advisor

4.1 When you should seek advice

• Significant unrealized gains
• Cross-border business or complex assets
• Mixed residency ties
• Retirement accounts in both countries
• U.S. citizenship or green-card issues

4.2 What advisors help with

• Determining departure date
• Calculating deemed disposition
• Coordinating tax returns and credits
• Managing RRSP/TFSA treatment and reporting
• Handling currency, estate, and pension planning

4.3 Why timing matters

Planning before departure enables restructuring and avoids double taxation. Once you’ve left, your options narrow.

4.4 Choosing a cross-border advisor

Seek experience with both Canadian and U.S. tax systems and a clear understanding of the treaty.

4.5 Timeline

• 6–12 months before move: Plan and value assets.
• 3 months before move: Finalize restructuring.
• After move: Set U.S. basis, begin compliance.
• Ongoing: Annual cross-border reporting and treaty monitoring.

---

5. Putting it all together: A roadmap for your move

1. Inventory & valuation: List assets, calculate cost basis and FMV.
2. Determine departure date & sever ties: End Canadian residency clearly.
3. Restructure portfolio: Reduce gains and address account types.
4. Departure tax & reporting: File final Canadian return and Form T1161 if required.
5. Establish U.S. residency: Set cost basis and file first-year U.S. return.
6. Ongoing compliance: Track cross-border obligations and treaty use.

---

6. Common pitfalls

• Failing to sever Canadian ties
• Ignoring the deemed disposition rule
• Not documenting FMV for U.S. basis
• Misunderstanding TFSA or RRSP treatment
• Missing U.S. reporting obligations
• Misapplying treaty provisions
• Waiting too long to plan
• Using domestic-only tax advisors

---

7. Wrapping it up

If you’re moving from Canada to the U.S., you need to understand the departure tax (deemed disposition). The most critical step is establishing your departure date and severing Canadian ties. The Canada–U.S. Tax Treaty provides relief through tie-breaker rules and foreign tax credits but must be used proactively.

Good planning means:

• Assessing unrealized gains early
• Restructuring before you leave
• Documenting FMV and residency
• Coordinating with a qualified cross-border advisor

Your move isn’t just geographic—it’s a transition in tax residency, reporting, and long-term financial structure.