Canada Exit Tax: What You Owe When You Leave

Canada's exit tax — technically called the departure tax — is triggered the moment you cease to be a Canadian tax resident. It doesn't wait for you to sell anything. The CRA deems you to have disposed of most of your worldwide assets at fair market value on the day you leave, and you owe capital gains tax on any resulting gain right then.

For people leaving to lower-tax jurisdictions with appreciated portfolios, the bill can be substantial. The mechanics are less complex than the US version but the scope is similarly broad.

How Canadian Residency Ends

The question of when you stop being a Canadian resident is more nuanced than most people expect. Leaving Canada doesn't automatically end your tax residency. The CRA looks at residential ties:

Significant ties that maintain residency: a home available for your use in Canada, a spouse or common-law partner remaining in Canada, dependants remaining in Canada.

Secondary ties: Canadian bank accounts, credit cards, driver's licence, provincial health insurance, personal property, social ties.

You can leave Canada and remain a Canadian resident for tax purposes if significant ties remain. The date residency ends is the date you sever sufficient ties to support a non-residency claim — which often requires planning before departure, not just buying a plane ticket.

The Deemed Disposition Rule

On the date you become a non-resident, the CRA deems you to have sold your non-exempt worldwide assets at their fair market value. Any accrued capital gains trigger tax on that date.

Exempt from deemed disposition:

• Canadian real property (taxed when actually sold, under non-resident rules)
• RRSPs, RRIFs, and TFSAs
• Pension rights earned in Canada
• Rights to stock options that were previously taxed as employment income
• Your principal residence (subject to principal residence exemption rules)

The exemptions are significant. If most of your wealth is in Canadian property and registered accounts, the departure tax may be modest. The bite is felt most by people with appreciated stock portfolios, private company shares, or non-registered investment accounts.

Capital Gains Rate

Canada taxes capital gains by including a percentage of the gain in income, which is then taxed at your marginal rate.

The inclusion rate is 50% — meaning half of the capital gain gets added to income and taxed at whatever your marginal rate is (up to ~53% federally + provincially in high-income brackets, making the effective capital gains rate up to ~26.5%).

The 66.67% inclusion rate that was proposed and caused significant alarm was cancelled on March 21, 2025, when Prime Minister Carney's government formally abandoned it. The 50% inclusion rate remains in effect.

The Lifetime Capital Gains Exemption (LCGE) is $1.25 million for qualifying small business corporation (QSBC) shares. If you're departing with shares in a qualifying private company, the LCGE can shelter a substantial portion of the deemed gain.

Form T1161 and the Departure Return

Departing Canadians file a departure return — a regular T1 return for the period of the year they were resident, with special calculations for the deemed disposition.

Form T1161 must be filed listing all property subject to the deemed disposition with a fair market value of $25,000 or more. Failure to file T1161 results in a $2,500 penalty.

The departure return is due by April 30 of the following year (or June 15 if self-employed), the same as a regular return.

Deferring the Tax: Form T1244

If the federal tax from the deemed disposition exceeds $16,500, you can elect to defer payment via Form T1244. The election requires posting security — typically a letter of credit, mortgage, or other acceptable collateral — and the deferred amount accrues interest.

The deferral option exists specifically because the deemed disposition creates a tax liability without actual cash proceeds. You haven't sold anything; you've just left. The CRA acknowledges this creates a cash flow problem and allows deferral with security.

Installment payment arrangements are also negotiable with the CRA for large departure tax bills, though interest still applies.

The US-Canada Tax Treaty and Double Taxation

For Americans leaving Canada (or Canadians leaving for the US), the interaction between Canada's departure tax and the US exit tax creates a potential double-taxation problem.

Article XIII(7) of the US-Canada Income Tax Treaty is the key provision. It allows the departing person to elect to be treated as if they sold and immediately repurchased covered assets at FMV on the date of departure. This basis step-up is recognized by both countries, meaning the same unrealized gain doesn't get taxed twice.

This is the gold standard treaty provision for departure tax — most other countries' treaties don't have it. The US-Australia treaty doesn't contain an equivalent provision, which is why US-Australia cross-border departures require more careful planning.

For US-Canada cross-border tax situations — Americans who lived in Canada and are now leaving, or Canadians moving to the US — the treaty also governs how each country treats income during the transition period, which social security benefits are taxable where, and how pension income is allocated.

The Australia-US treaty does allow Australia to credit taxes paid to the US against Australian tax liability and vice versa, but it lacks the specific deemed-sale election of the US-Canada treaty. This means a different planning sequence is needed for that corridor.

Practical Steps Before Departing Canada

1. Establish your departure date carefully. The date you cease residency is the date the deemed disposition occurs. If you're leaving at year-end, a December vs. January departure can shift the tax into a different tax year, affecting cash flow and potentially which year's marginal rates apply.

2. Consider selling appreciated assets before departure. If you plan to sell a non-exempt asset soon anyway, selling before departure means the gain is taxed in the normal way (not as a departure event), which may simplify reporting.

3. Maximize registered account contributions. RRSP and TFSA room can be used up before departure, since these accounts are exempt from the deemed disposition.

4. Document FMV for all assets. The deemed disposition requires establishing fair market value for everything on departure day. For private company shares or real estate, this may require formal valuations.

5. Get proper advice before severing ties. Because residency ends when you sever ties — not when you arrive somewhere else — the sequencing matters. The CRA has contested departure dates where people claim earlier departure dates than supported by the evidence of their ties.

The Exit Tax Playbook covers the US-Canada corridor in depth, including how to sequence renunciation and departure to avoid the exit taxes from both sides hitting the same assets.