When Leaving Canada for Good, Canadians Must Pay ‘Departure Tax,’ including on Cryptocurrencies
Published: March 16, 2023
In Canada, there are two categories of people who must pay taxes: residents and non-residents. Residents of Canada pay tax in Canada on their worldwide income, whereas non-residents only pay tax on their income with a source in Canada, subject to different tax treaties and domestic tax laws. A resident taxpayer in Canada can switch to becoming a non-resident, and vice versa. Tax residence is determined by a number of variables, and it is not always the same as one's place of residence for immigration reasons. Please get in touch with one of our knowledgeable Canadian tax lawyers if you have any inquiries concerning your tax residence.
According to section 128.1 of the Income Tax Act, when a person who was a Canadian tax resident changes from being a resident to a non-resident for tax purposes, he or she is required to pay what is known as "departure tax" on any assets they hold. Property investment in Canada (such as homes) and personal property with a value of less than $10,000 are among the items exempt from the departure tax. Even though there is no actual disposition of the asset, one is assumed to have taken place for the purposes of calculating the departure tax. The difference between the asset's fair market value at the time the taxpayer becomes a non-resident and the adjusted cost base is a capital gain, thus one-half of that amount is included in the taxpayer's taxable income.
Ron, for instance, is the owner of a Bored Ape NFT that costs $40,000. In 2021, he paid $10,000 to acquire the Bored Ape NFT. In 2023, Ron relocates to London, England, with his family, selling their home in Vancouver to pay for a home in London. For taxation reasons, he no longer qualifies as a resident of Canada. Although Ron doesn't really sell the Bored Ape NFT, he is considered to have done so. He makes a capital gain of ($40,000 - $10,000) x 50%, which equals $15,000, that is his taxable capital gain and is included in his income for the year of departure, 2023. The tax he pays on that capital gain is known as the departure tax.
Departure Tax for Cryptocurrency
If an asset isn't explicitly exempt from departure tax under the Income Tax Act, the departure tax is presumed to be imposed on all of those assets according to the provisions for departure tax. Exempt property and excluded rights or interests are listed in great detail in the Income Tax Act. However, cryptocurrencies or non-fungible tokens (NFTs) themselves are not often likely to be among the sorts of property free from departure tax, subject to specific exclusions discussed later in this article, which is bad news for people who have invested in cryptocurrencies or non-fungible tokens.
Having said that, some assets that do qualify for exemption from departure tax do allow for the holding of cryptocurrencies. The pension plan of a taxpayer, for instance, is free from departure tax and may contain cryptocurrencies.
Storing Cryptocurrency in RRSP and TFSAs to Escape Departure Tax
In order to avoid departure tax, one option is to use Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), and Tax-Free Savings Accounts (TFSAs), which are all free from tax. A person who has adequate contribution capacity in their RRSP or TFSA might contribute assets that would otherwise be subject to departure tax in order to avoid paying departure tax on such assets. This approach does not work as well with cryptocurrencies, though. Per crypto tax laws in Canada, cryptocurrency itself cannot be included in an RRSP or TFSA contribution since it is not considered an eligible investment under the terms of any of these plans. However other forms of cryptocurrency investment products, like crypto-backed exchange-traded funds, allow taxpayer contributions (ETFs).
Businesses That Deal in Cryptocurrencies
Departure tax is not applied to assets, such as inventories, that belong to businesses with a permanent presence in Canada. With the exception of businesses without a set location for their operations, a permanent establishment is often a fixed place of business like an office, warehouse, or mine. If a company doesn't have a set location for its operations, its major office will serve as its permanent establishment. A taxpayer is free from departure tax if he or she have crypto or NFTs on hand as inventory for a company that is actively mining or dealing with cryptocurrencies and has a permanent presence in Canada.
Pro Tax Advice: Delay Departure Tax
Deferring departure tax is a choice that a taxpayer has. When the taxpayer disposes of the property covered by the deferral, he or she might choose to postpone paying the departure tax. During this period, the departure tax bears no interest. As the payment of the departure tax requires an artificial disposition, it is advantageous to postpone it since the taxpayer might not have the money on hand to do so when they go. The taxpayer is required to provide suitable security if the federal component of the deferred departure tax exceeds a specific threshold, presently more than $16,500 for all taxpayers, with the exception of former residents of Quebec, for whom the threshold is $13,777.50.
For guidance with tax planning relating to departure tax and cryptocurrencies, get in touch with our knowledgeable Canadian crypto tax lawyers.
Question: What does departure tax mean?
Answer: When a taxpayer who was previously a resident of Canada becomes a non-resident for tax purposes, he or she must pay the departure tax on the deemed disposition of specific assets.
Question: Are cryptocurrencies subject to a departure tax?
Answer: In general, yes, you must pay a departure tax on cryptocurrencies; however, there are certain exceptions, such as when a cryptocurrency is used as inventory for an operating business with a permanent location in Canada.