Recently, a little-known tax made headlines when a professor wrote on Facebook that the CRA planned to tax him for moving out of Canada. The professor – Gad Saad – wrote that after speaking with his accountant, he learned it would cost him an “exit tax” to leave Quebec and Canada.
The post was a provocative one, to put it mildly. “Could I be taxed just for taking a vacation?,” a person might ask after reading it.
Truthfully, the CRA is not taxing Canadians for taking short trips abroad – at least not yet. As for moving abroad, that’s a slightly different story. The reason Saad is being forced to pay a tax is that he is moving to the United States, permanently, in order to accept a professorship at the University of Mississippi. It is quite standard to be taxed in such a scenario – and stocks are among the things that can be taxed!
In this article, I will explore the CRA’s sneaky “exit tax” and what you can do to protect yourself from it
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My reaction to the departure tax story
After reading Gad Saad’s post on my Facebook feed, I immediately felt apprehensive. I have spent enough time outside Canada at times that I could have been considered a non-resident. Was I supposed to pay the CRA some sort of tax before departing on these extended trips?
As it turns out, no, primarily because all of my securities are in RRSPs and TFSAs, while my other assets are electronics, likely worth less than $10,000. Securities held in registered accounts and electronics worth less than $10,000 are both exempt from the departure tax. On the other hand, securities held outside of registered accounts and electronics worth more than $10,000 (along with similar personal items like jewelry) are subject to the tax. Honestly, I find this aspect of the departure tax – going after small personal items – really galling. Is the CRA going to come after someone’s comic book collection next?
Note that the previous sentence was rhetorical when written, but later research confirmed that a valuable enough comic book collection is, in fact, subject to the departure tax.
Now, I want to dispel one possible concern that you (if you’re planning on moving out of Canada) might have about the exit tax: having to pay it right away. This isn’t the case. You can elect to defer paying the departure tax, but this does involve some paperwork. Rather than defer paying the tax, I’d prefer to position myself to not be liable to pay it at all. In the next section, I’ll explore how that can be done.
How to avoid paying the departure tax
If you live in Canada and your main assets are securities, you can avoid the departure tax by placing the assets in registered accounts (that means RRSPs and TFSAs). Such securities (provided they’re Canadian) can’t be taxed while they are inside the account(s). Canadian securities held in TFSAs specifically cannot be taxed, period – not even on withdrawal!
Take the iShares S&P/TSX 60 Index Fund (TSX:XIU) units that I hold in my TFSA. I have gone on many a foreign voyage while holding these in my account. I have never once been harassed for the departure tax. As a result, the units have grown 108% in value, dividends not included, over my holding period. Had I held these outside of a TFSA, I might have worried about paying the departure tax. With my securities, including XIU, housed comfortably in a TFSA, I sleep more easily at night than I would otherwise.
