Moving Back to Canada: Unwinding Departure Tax and Refunds

Can I undo departure tax when I move back to Canada?

Yes, for property you still own. If you stopped being a Canadian resident after October 1, 1996 and become resident again, you can elect to reduce or reverse the gain from the deemed sale on departure, for property you owned the whole time you were away (Income Tax Act s. 128.1(6); CRA).

The election is optional, and the CRA does not apply it for you. Make it in writing by your filing due date for the year you come back: usually April 30 of the following year, or June 15 if you or your spouse or common-law partner were self-employed (CRA dates). The CRA then reassesses your departure-year return, even if the normal reassessment period has passed (s. 128.1(6)(d)).

What makes a case less simple:

• The property fell in value while you were away (the reduction is capped).
• You deferred the tax with Form T1244 and posted security.
• The property is private-company shares, or a mix of property you kept and property you sold.
• You lived in Quebec, which runs its own income tax, or the country you lived in also taxed the gain.
• Your filing due date for the year you came back has passed. A late election needs the CRA's permission and carries a penalty.

Gather your departure-year Form T1243, proof of the departure tax you paid (or your Form T1244 and security), and each property's value on the day you came back.

Which property qualifies?

Only property you owned without a break from the day you left to the day you returned. Property you sold while abroad cannot be unwound (CRA). The CRA allows the election if you still own "some or all" of the property.

Selling part of a holding matters. Shares you sold are out. Shares bought later were not owned from the day you left, so they likely do not qualify. Neither the Act nor the CRA guidance says how the rule applies to identical shares that were partly sold, kept and rebought, so have the election reviewed before you send it.

Property that was not deemed sold, such as Canadian real estate you did not elect to treat as sold (s. 128.1(4)(d)), has nothing to unwind (s. 128.1(4)(b)). The same holds for property you owned when you first moved to Canada, or inherited after, if you had lived in Canada 60 months or less in the 10 years before you left (s. 128.1(4)(b)(iv)). Only property listed on your T1243 has a gain to unwind.

Taxable Canadian property vs other property: how do the two elections differ?

The law has two elections, one for each kind of property, and they reduce the departure gain differently (s. 128.1(6)(a) and (c)).

Taxable Canadian property mostly means Canadian real estate and certain shares whose value comes mainly from Canadian real estate. Because Canadian real estate is not deemed sold on departure, the first election usually matters only for those shares. If you left before March 5, 2010, when the definition changed, transition rules apply (s. 128.1(6.1); CRA), and a separate loss rule, s. 128.1(6)(b), can change the result; both need a professional review.

The cap on other property is the main trap. If a holding is worth less on the day you return than the gain you reported, only part of the departure gain can be removed.

How do I make the election?

Send the CRA a written request by your filing due date for the year you re-establish residency. Include a list of the properties you own and the fair market value of each property the election covers (CRA). There is no prescribed form named on the CRA page.

1. Confirm your residency date. See returning to Canada after years abroad.
2. List each property deemed sold on your departure-year Form T1243 that you still own.
3. Get the fair market value of each one on the day you returned.
4. For other property, decide property by property how much of the departure gain to remove (the most allowed, or less). An election for taxable Canadian property covers all of it.
5. Send the signed request to your tax centre; the CRA's dispositions page points to its where to mail your documents list, by the due date for the return year.
6. Use the post-election cost on your first return and keep it for the later sale. See your first year as a Canadian tax resident.

Missing the deadline is the costly mistake: the law sets the filing due date for the return year. Both elections are on the list the CRA may accept late or let you amend, at its discretion (Income Tax Act s. 220(3.2); Income Tax Regulations s. 600), so a late request is possible but not assured. You must apply within ten calendar years after the end of the year the election was due, and the penalty is $100 for each complete month late, up to $8,000 (s. 220(3.2) and (3.5)).

What happens to departure tax I deferred with Form T1244 and the security I posted?

The deferred balance shrinks with the reduced gain, and some or all of your security may be returned. Separately, the CRA warns that because you are treated as selling and buying back most of your property when you arrive, you "may now have to pay the deferred tax", and tells you to contact it (CRA). Deferred tax the election does not remove, for example the part above a capped reduction, or all of it if you do not elect, can fall due.

Security is required when federal tax deferred is more than $16,500. How security and deferral work is covered in deferring departure tax.

Do I get a refund of tax I already paid, and is there interest?

Tax you paid on the removed gain comes back through the reassessment of your departure-year return. The law says the reassessment does not change interest for any period before you file your return for the year you came back, and does not change penalties (s. 128.1(6)(d)). So you get no refund interest for the years in between, and any interest or penalty you were charged on the departure-year tax stays.

A refund is figured on the taxable part of the gain, using the inclusion rate and tax rates of your departure year (today 50% of a capital gain is taxable).

What is my cost base after the election, and for property I don't elect on?

It depends on the property and on the election.

Electing the full reduction is not required. When the return-day value is lower than the departure gain, electing the maximum can push your cost toward zero, so the whole value is taxed when you later sell. You are moving tax from the departure year to the future sale, not removing it. You may elect a smaller amount.

What if the property rose further while I was away?

For other property, growth while you were away is not taxed by Canada on your return. The reduction is limited to the departure gain, and your cost becomes the return-day value minus that reduction, so when you later sell, the gain Canada taxes is the departure gain you removed, not the growth while you were away (s. 128.1(6)(c)). The country you lived in may have taxed that growth under its own rules.

What to gather

• Your departure-year return and Form T1243 (deemed disposition list), plus Form T1161 if you filed one.
• Notices of assessment showing the departure tax you paid.
• Form T1244, the CRA's acceptance and your security documents, if you deferred.
• Statements proving you kept each property from departure to return, with any sales or purchases in between.
• The fair market value of each property on the day you returned (broker statements for listed shares; a valuation for private shares).
• Proof of your return date, and any foreign tax paid on the same gain.

Example

Figures are in Canadian dollars and illustrative only, and assume a departure year with a one-half capital gains inclusion rate.

Listed shares that rose

• Year of departure: cost $50,000, value $150,000. Departure gain $100,000; tax paid.
• Four years later: returns still holding the shares, now worth $180,000.
• Election: reduction is the least of $100,000 (gain), $180,000 (return value) and the amount chosen. Choosing $100,000 removes the departure gain; the departure-year tax is refunded without interest for the years between.
• Taxable part removed: half of $100,000 = $50,000. The refund is the tax that $50,000 added to departure-year income.
• New cost: $180,000 minus $100,000 = $80,000. A later sale at $180,000 gives a $100,000 gain; the $30,000 growth abroad is not taxed by Canada.

The same shares worth $30,000 on return

• Reduction is capped at $30,000, the return-day value. $70,000 of departure gain stays taxed; the taxable part removed is $15,000 (half of $30,000).
• New cost: $30,000 minus $30,000 = $0. A later sale for $30,000 is a $30,000 capital gain.
• Without the election: the departure gain stays at $100,000 and the cost is $30,000.

Private-company shares with deferred tax

• Year of departure: cost $100,000, value $900,000 (not taxable Canadian property). Gain $800,000; tax deferred with Form T1244 and security posted.
• Returns owning all the shares, now worth $1,000,000, and elects a reduction of $800,000.
• Departure gain falls to nil, the deferred balance falls with it, and the CRA may return the security. New cost: $200,000.

Different for you?

• You are working out your residency date, benefits or first-year filings: returning to Canada after years abroad and your first year as a Canadian tax resident.
• Your ties to Canada are split and the residency date is unclear: Canadian tax residency.
• The shares fell and you sold them while still abroad: shares that fell after you left Canada.
• You want TFSA room or RRSP rules on return: RRSP and TFSA after leaving Canada.
• You lived in Quebec when you left: this page covers the federal election only, and Quebec runs its own income tax. Get individual tax help with both before the deadline.
• You deferred tax and posted security, own private-company shares, sold part of a holding, the return-day value is below your departure gain, or the deadline is close or has passed: these choices are hard to undo. Get individual tax help with the election before you send it.