Leaving Canada: Getting Ahead of the Departure Tax in Lindsay

The situation

Camila had run her own electrical contracting business out of Lindsay for over a decade, incorporated for the last seven years under a company she owned outright. Her spouse, Alejandro, worked as a millwright for an industrial maintenance contractor. When Alejandro was offered a three-year posting overseas managing installations for a manufacturing client, the couple decided to go together. Camila planned to wind down her active client load, keep the corporation intact rather than dissolve it, and pick the business back up when they returned.

They assumed the only paperwork involved was notifying the Canada Revenue Agency of a new mailing address and filing a final return for the year they left. A conversation with their accountant, Bilal, changed that assumption. Bilal flagged that ceasing to be a Canadian resident for tax purposes triggers its own set of rules, separate from anything to do with selling the business itself, and recommended they get tax-specific legal advice before setting a departure date. That is when they came to Treadstone Law.

The tax problem

Under the Income Tax Act, when a person stops being a Canadian resident for tax purposes, they are treated as having sold most of their capital property at fair market value the day before they leave, and immediately bought it back at that same value. This is commonly called the departure tax, and more formally the deemed disposition on emigration. It applies whether or not anything is actually sold. The point is to make sure Canada taxes the gain that built up while the person was a resident here, before that gain leaves the country with them.

For Camila, the property caught by this rule included the shares of her own corporation. She had put in a modest amount of money to incorporate years earlier, so her adjusted cost base, the number used to measure her original investment, was small. The business itself was worth considerably more by the time they were planning to leave, once its equipment, ongoing service contracts, and goodwill were factored in. A professional valuation Bilal helped arrange put the shares at roughly $135,000. A smaller non-registered investment account the couple held jointly had also grown by close to $15,000 since they bought into it. Added together, the gains that would be deemed to arise on departure came to a figure in the range of $50,000 to $150,000, depending on how the corporate valuation was ultimately supported.

Left unplanned, that combined gain would have produced a real tax bill in the departure year, even though Camila had not sold the business and did not intend to. Some categories of property are excluded from the deemed disposition rule, including Canadian real estate, and property used in a business carried on through a permanent establishment in Canada. Shares of a Canadian-controlled private corporation do not qualify for either exclusion once the owner is no longer a Canadian resident, which meant Camila's shares were squarely inside the rule.

What we did

1. Mapped every asset the deemed disposition rule would touch. We went through Camila and Alejandro's holdings item by item against the exclusions in the Income Tax Act, separating out what would be deemed sold on departure from what would not. The corporate shares and the joint investment account were in scope; their home, which they planned to keep and eventually sell once back in Canada, and Alejandro's workplace pension were not.
2. Assessed the corporation's shares against the lifetime capital gains exemption. Gains on qualifying shares of a Canadian-controlled private corporation that meets the active business asset tests can be sheltered, in whole or in large part, by the lifetime capital gains exemption, an exemption every individual can claim once against this specific kind of gain. We reviewed the corporation's balance sheet and activities against the conditions for qualifying small business corporation shares, including how much of its value sat in active business assets rather than passive investments, and confirmed Camila's shares qualified.
3. Coordinated the timing of the departure date with the corporation's financial year. Setting the departure date to align cleanly with a corporate year-end made the share valuation easier to support and kept the deemed disposition calculation tied to a clean set of financial statements rather than a mid-year estimate.
4. Confirmed the tax deferral option for the remaining balance. Where a deemed disposition produces tax owing, a departing taxpayer can elect to defer payment until the property is actually sold, generally by posting acceptable security with the CRA, though no security is required below a threshold the CRA sets for smaller amounts. Because the exemption absorbed most of the share gain, we confirmed what remained fell within the range where no security would need to be posted, so no additional collateral or guarantee was required from the couple.
5. Filed the required departure disclosures. We prepared the list of property owned on departure and the deemed disposition calculations required for Camila's final return as a Canadian resident, making sure the values matched the valuation Bilal had prepared and that the exemption was claimed correctly against the eligible shares.

The outcome

Camila and Alejandro left for the overseas posting with their tax position resolved rather than open. The lifetime capital gains exemption sheltered the substantial majority of the gain on Camila's corporate shares, cutting what would otherwise have been a tax bill running into the tens of thousands of dollars down to a small remainder tied mainly to the joint investment account. That remaining amount was modest enough that no security had to be posted with the CRA, and Camila was able to defer paying it until the underlying investments are actually sold or she resumes Canadian residency, whichever happens first.

Because the corporation was not dissolved and Camila remains its owner, she can step back into the business on the same footing when the family returns to Lindsay. The shares she is deemed to have reacquired on departure carry a new, higher cost base equal to the value used in the deemed disposition, which will reduce any future capital gain if she eventually sells the business or the shares increase in value again after her return. The planning did not make the departure tax disappear. It made sure the rule was applied on terms that reflected what Camila had actually built, rather than on an unplanned, worst-case calculation done after the fact.

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