Departure tax valuation: when the CRA disputes your value

Which value does departure tax use, and what if the CRA disputes it?

Departure tax uses each property's fair market value immediately before you stopped being resident in Canada. The Income Tax Act, section 128.1(4) deems you to have sold each covered property at that moment for proceeds equal to its fair market value, and to have bought it back at the same amount. Every piece of proof you send must speak to that date, not to today.

The CRA's working definition of fair market value is the highest price obtainable in an open and unrestricted market between informed, prudent parties acting at arm's length, with neither under any compulsion to act (IC89-3). A value you set yourself without support is the easiest one for a reviewer to replace.

A value dispute is not simple when:

• the property is private company shares, a stake in a partnership, or anything else without a market price on your departure date;
• you deferred the tax and posted security, because a higher value changes the amount secured;
• you moved to the US and made the treaty election to reset your US cost, because two countries now hold your value;
• the CRA already sent a proposal letter (30 days to answer) or a notice of reassessment (object by the later of 90 days after the notice and one year after your filing due date), because those clocks are already running.

Gather now: every CRA letter and notice with its date, your departure date and proof of it, Forms T1243 and T1161 as filed, Form T1244 and the security you posted if you deferred the tax, your US return showing any treaty election, how you arrived at each value, and every document dated near your departure (statements, agreements, offers, appraisals). For how departure tax is worked out from these values, see the departure tax calculation example.

Which asset values does the CRA dispute most?

Property with no quoted price on your departure date is most open to dispute, because its value is a judgment rather than a lookup.

How do I prove the value of shares or property when leaving Canada?

Proof holds up when it is dated at or near your departure date, shows how the value was reached, and accounts for every fact that moves the price. For business interests, IC89-3 lists what a CRA valuation officer may ask for, and says the list is not exhaustive:

For other property, the same logic applies: an independent appraisal or valuation report as of your departure date, the closing market price on that day for anything traded, and records of comparable sales. For art, jewellery and collectibles, ask the appraiser to state fair market value at your departure date, not an insurance or replacement value, and to name the comparable sales used. If a value is in another currency, convert it to Canadian dollars at the exchange rate for your departure date and show the rate and its source (section 261(2)).

Two points from the CRA's valuation policy matter here. Share rights and restrictions must be taken into account, but an agreement fixes the value only if it is binding, made in good faith, and cannot simply be changed by a controlling shareholder; a transfer restriction that only needs shareholder or director consent, or a bare right of first refusal, does not fix the value, though it may lower it. And a valuation officer may ask for any arm's-length offers for the company's shares or fixed assets and recent sales of similar shares, so a value that differs from one is easier to defend when the difference is explained, for example because the buyer was not at arm's length.

The CRA asked me to support my value: what do I send, and by when?

Answer the request by the date in the letter, with the evidence for the value as of your departure date. If an auditor has already sent a proposal letter explaining a planned reassessment, the CRA gives you 30 days to agree or disagree, and asks you to explain why you disagree and send documents that support your position (RC4188). If an issue stays unresolved, you can ask to speak with the auditor's team leader. If an independent valuation cannot be ready in time, contact the auditor before the date to say what evidence is coming and when, and confirm any new date in writing; the CRA's audit guide does not promise more time.

Send a covering letter that names each property, the value you filed, the basis for it and the documents attached. If a new valuation supports a figure different from the one you filed, the letter should explain the difference; that is a point to settle with a representative before you send it. For the practical side of answering from abroad, including representatives and online access, see answering a CRA letter while living abroad.

How long can the CRA reassess my departure year?

The CRA can normally reassess an individual's year for three years after the original notice of assessment (section 152(3.1)). After that, it can reassess only in set cases, including:

• a misrepresentation attributable to neglect, carelessness or wilful default, or fraud, in filing the return or giving information; this has no fixed end;
• a waiver you filed within the normal period. The CRA may ask for one while a valuation review is open. A waiver can be limited to the matters it names, such as the value of one property, and you can revoke it; the CRA then has six months from the revocation to reassess (section 152(4.1));
• some other cases in section 152(4), such as a transaction with a non-resident you were not dealing with at arm's length, which allow three more years.

After the normal period, the CRA can change only what relates to the misrepresentation, the matter named in the waiver, or the other listed case (section 152(4.01)).

The full set of rules is in how far back the CRA can reassess.

The CRA reassessed with a higher value: how do I file a notice of objection?

File a notice of objection by the later of one year after your filing due date and 90 days after the date of the notice of reassessment (section 165(1); P148). You can object online through My Account, on Form T400A, or in a signed letter that sets out the facts and reasons.

An objection about value should state the value you say is right, why the CRA's figure is wrong (for example, it ignored a shareholder agreement or relied on an offer that was not at arm's length), and attach the evidence. An independent valuation as of the departure date is the most direct evidence of value.

If you miss the deadline, you can ask for more time, as soon as possible and no later than one year after the objection was due (P148).

Do I have to pay while I object, and what happens to deferred tax and security?

You do not have to pay the disputed amount to object. Interest keeps running on it, except on the part covered by security the CRA has accepted or deemed accepted for deferred departure tax, which is treated as paid while the security stands (section 220(4.5)). The CRA normally postpones collection of amounts in dispute until 90 days after it sends its decision, and says that in most cases interest still applies while the amount is in dispute; paying all or part reduces the interest charged (P148; section 225.1). If you appeal to the Tax Court, the CRA cannot take those collection actions on the disputed amount until the court sends its decision or you drop the appeal (section 225.1(3)); interest still runs on unsecured tax.

If you elected to defer departure tax, a higher value raises the deferred tax. Security is needed when the federal tax on the deemed sales is more than $16,500 ($13,777.50 for former residents of Quebec), so a reassessment can push you over that line or above the amount your security covers. If the CRA decides the security is no longer adequate, it must tell you in writing, and you then have 90 days after the CRA's written notice to provide adequate security (section 220(4.53)). How deferral and security work is in deferring departure tax when you move to the US.

The objection failed: when can I go to the Tax Court?

You can appeal to the Tax Court of Canada within 90 days after the CRA sends its decision confirming or changing the reassessment. If the CRA has not decided within 90 days of your objection, you can appeal without waiting (section 169(1); P148). If you miss that period, you can apply to the Tax Court for more time, giving the reasons for the delay, within one year after the period ended (section 167). In a value dispute, the court weighs the evidence of value, so the quality of the valuation filed at the objection stage matters.

Does a higher Canadian value change my cost in the US?

This is unsettled. Under Article XIII(7) of the Canada–US tax convention, a person taxed on a deemed sale when leaving Canada can elect to be treated in the US as having sold and bought back the property at its fair market value at that time. The IRS's procedure for the election (Rev. Proc. 2010-19) has you make it on your timely filed US return for the first year ending after the move, with Form 8833 and documents proving the value Canada used. Neither the treaty nor that procedure says what happens when Canada later changes the value, and no published CRA guidance addresses it.

Where Canada and the US end up taxing the same gain on different values, the treaty's route is the competent authority: under Article XXVI, you can present your case in writing to the competent authority of the country where you live. There is no deadline to ask, but act early: if the two countries agree on a fix, they can apply it to a year that is otherwise closed only if the other country was told about your case within six years after the end of that year. Keep both countries' records of the value aligned, and get advice before you amend a US return to follow a Canadian reassessment.

Can an understated value bring penalties?

Yes, if the understatement was made knowingly or under circumstances amounting to gross negligence. The penalty under section 163(2) is the greater of $100 and 50% of the tax understated, on top of the tax and interest. A value the CRA later raises is not by itself a false statement: the penalty applies only where the understatement was made knowingly or under circumstances amounting to gross negligence, and in an appeal the CRA must prove those facts (section 163(3)). A missing or late T1161 has its own penalty; see late departure forms.

Example

All figures are in Canadian dollars and illustrative. Each assumes the 50% inclusion rate.

Private company shares raised by a valuation officer

A company owner left Canada and reported her shares at $600,000 from her own estimate. A CRA valuation officer proposes $1,000,000, based on an offer the company received before she left. The extra $400,000 of gain adds $200,000 of taxable capital gain to her departure year. She disagrees within the proposal period; the CRA reassesses anyway. She files a notice of objection within 90 days, attaching an independent valuation as of her departure date that explains why the offer came from a related buyer and was not at arm's length.

A painting supported by an appraisal

An emigrant reported a painting at $30,000 from an insurance schedule. The CRA asks for support. He obtains an appraisal of its value at his departure date of $32,000. If the CRA accepts the appraisal, the extra $2,000 of gain adds $1,000 of taxable capital gain, and the reassessment is small.

A US mover whose Canadian value goes up

A person moving to the US elected under the treaty to treat his shares as bought back at their departure value of $800,000. The CRA later raises that value to $900,000. Whether his US cost follows the higher figure is not settled in the treaty or official guidance. He keeps the Canadian reassessment and valuation with his US records and asks whether to present the case to the competent authority before changing any US return.

Different for you?

• The CRA questions whether you left Canada at all: see the CRA residency questionnaire.
• The shares fell after you left: see shares fell after you left Canada.
• You never filed T1161 or T1243, or filed late: see late departure forms.
• You hold a proposal letter, a waiver request or a reassessment on private shares or values in the hundreds of thousands: the deadline and the valuation evidence both need work now; see individual tax help.
• You owe the reassessed tax and now live abroad: see CRA tax debt while living abroad.
• You moved to the US and the value change affects both returns: see cross-border tax help.
• You are starting from the beginning: see leaving Canada.