Canadian departure tax: obstacle or opportunity?
By David A. Altro, B.A., LL.L, J.D, D.D.N, Fin. Pl., TEP and Matt Altro, B.Comm., CFP®, F. PL.
Canadians move to the US for a variety of reasons. Proximity to family, lifestyle, sunny weather, employment, health issues and lower income tax rates are some of the more popular reasons. If tax is the main driver for a client to hang up their hockey skates in favour of a golf club, they will probably choose to live in a state with little or no state income tax, such as Florida.
The highest marginal rate for a resident of Quebec is 48.2 per cent (Ontario is 46.4 per cent). The highest marginal rate for a Florida resident is only 35 per cent. The tax savings are more pronounced when you take into account that a Quebec resident reaches the highest marginal rate at just CAD132,000 of income, while a Florida resident reaches the highest marginal rate only at income above USD379,000.
But before recommending a one-way ticket to West Palm Beach, it is important to understand the tax impact of becoming a non-resident of Canada. When a Canadian moves to another country and gives up tax residency in Canada this may give rise to a tax commonly referred to as departure tax. To better understand how this departure tax is calculated, a key concept of the Canadian tax system should be reviewed. Canadian residents are taxed on their worldwide income only while they are considered tax residents of Canada. Unlike the US, which taxes based on citizenship, when Canadians depart Canada they are no longer obliged to pay tax to Canada unless they continue to earn Canadian-source income. Canadians who depart Canada need to complete their final personal tax return (also known as an ‘exit return’) by 30 April of the year following their departure. Read the rest of this entry »