Lifetime Capital Gains Exemption Before Leaving Canada

Can I use the capital gains exemption on departure tax?

It can. When you leave Canada, you are deemed to sell most of your property at fair market value immediately before you stop being resident (s. 128.1(4)(b)). The lifetime capital gains exemption (LCGE) can shelter that deemed gain on your shares if you still have exemption room and two conditions hold:

1. You count as resident in Canada throughout the departure year (see the next section).
2. Your shares are qualified small business corporation shares at the moment of the deemed sale (s. 110.6(2.1)).

The exemption covers up to $1.275 million of gain over your lifetime, less any amount you used before. Any gain above what is left is taxed as an ordinary capital gain in the departure year. At the 50% inclusion rate, the deduction on line 25400 is half of the sheltered gain.

What makes a case not simple:

• Anything that fixes a failing test (moving surplus cash out, crystallizing at an earlier date) has to be done before your departure date. After you leave, a later sale cannot use the exemption.
• The company holds surplus cash or investments, so it may fail the asset tests on departure day.
• You arrived in Canada recently, so you may not meet the residence rule, and shares you owned on arrival may not be deemed sold at all.
• A large exemption claim can trigger minimum tax that is hard to recover once you are gone.

Gather: the share register and your cost, the company's balance sheet as of the departure date and for the past 24 months, a valuation, your arrival and departure dates with proof (prior-year return filed as a resident, lease or sale of your home, move date), and every past T657 you filed.

Am I resident "throughout the year" in the year I leave?

You are treated as resident all year if you were resident at any time in the departure year and resident throughout the year before (or throughout the year after, if you come back) (s. 110.6(5)). The CRA's line 25400 page states the same rule.

Your departure date decides which year is the departure year. See the date you become a non-resident and Canadian tax residency.

Do my shares qualify on the departure date?

The shares must pass every test at the time of the deemed sale, which is just before you stop being resident (s. 110.6(1), "qualified small business corporation share"):

Idle cash, a portfolio, or a rental property inside the company counts against the tests. Removing such assets before departure is called purification; it is covered in selling your business. Newly issued shares and recent reorganizations can fail the holding test, so check them early.

Why can't I use the exemption after I become a non-resident?

The deduction is only for an individual resident in Canada throughout the year of the sale (s. 110.6(2.1)). If you sell the shares in a later year while living abroad, you were not resident at any time in that year, so the deemed-residence rule cannot help.

That is why the departure deemed sale matters: it may be your last chance to use the exemption on gains up to that day. After departure, your cost for Canadian tax is reset to the departure value (s. 128.1(4)(c)). If you move to the US, the US treatment of that cost is a separate question: see moving from Canada to the US.

If you were resident in Canada for 60 months or less in the 10 years before you leave, property you owned when you last arrived, or inherited after, is not deemed sold (s. 128.1(4)(b)(iv)). Those shares have no departure gain to shelter. Shares of a company you started after arriving are still deemed sold. See departure tax on private company shares.

What is crystallizing, and do I need to do it before I leave?

Crystallizing means deliberately triggering a gain while the shares qualify, for example by selling the shares to your own holding company at a price set by a joint election with that company on Form T2057 (s. 85(1)), so the exemption is used and your cost goes up. The election is due by the earlier of the two parties' filing deadlines for the year of the sale; a late one within three years costs a penalty (s. 85(6)-(7)). The departure deemed sale already works like a crystallization if the shares qualify that day and you meet the residence rule. A separate step before departure may be worth considering when:

• The company may fail the asset tests on departure day, but passed them at an earlier date in a year when you met the residence rule.
• You want to spread the gain over two tax years to manage minimum tax.

Crystallizing has its own anti-avoidance rules. Selling to a corporation you control is caught by s. 84.1: cash, a note or paid-up capital above your shares' paid-up capital and original cost is a deemed dividend the exemption cannot shelter, and the cost the exemption creates does not count for that rule later. A gain that is part of certain dividend or undervalue-transfer series loses the deduction (s. 110.6(7)). Plan it with a professional before you sign anything. Founders of investor-backed companies, see the exemption on a startup exit.

Will a large exemption claim trigger alternative minimum tax?

It may. For minimum tax, 30% of a gain sheltered by the exemption is still counted (s. 127.52). If your adjusted income for minimum tax exceeds the $181,440 exemption, the excess is taxed at 20.5% federally before credits, and you pay the higher of regular tax and minimum tax.

Minimum tax paid can be carried forward 7 years, but only recovered against regular tax that exceeds minimum tax in those years. As a non-resident with little Canadian income, you may have little or no tax to recover it against. Run the minimum tax calculation before choosing the timing.

What can reduce my exemption?

The amount you can claim is limited by what you have already used and by two other running totals in s. 110.6:

I live in Quebec: is the exemption different?

Quebec has its own capital gains deduction on form TP-726.7-V, with a limit of $637,500 of taxable capital gains, which matches the federal limit once the inclusion rate is applied (Revenu Québec). Quebec allows it if you ceased to reside in Canada in the year and were resident in Canada throughout the year before.

Enclose TP-726.7-V with the Quebec return, plus copies of your T657 and federal return. The deadline is the later of 30 days after the federal claim and the return-filing deadline for that year. Missing documents cost $25 a day, up to $2,500. Quebec computes its own cumulative net investment loss on TP-726.6-V.

Which forms do I file?

All go with your departure-year return. The full departure filing list, including T1161 and the deferral election, is in leaving Canada.

Example

Figures are in Canadian dollars and illustrative only.

Shares qualify on departure day

Maya owns all the shares of a software company. Her cost is C$100. She was resident all of last year and leaves in August. On her departure date the shares are worth C$900,000, and the company passes all three tests.

• Deemed gain on T1243: C$899,900.
• Taxable capital gain: C$449,950.
• Capital gains deduction on T657, if she never claimed before and has no cumulative net investment loss: C$449,950.
• Minimum tax check: 30% of C$899,900 is C$269,970. Less the C$181,440 minimum tax exemption, C$88,530 remains; at 20.5% that is about C$18,150 of federal minimum tax before credits. With no other income her regular federal tax is nil, so most of it would be payable. Provincial tax is separate.

Too much cash on departure day

Same company, but it holds C$2 million of idle cash next to a business worth C$1 million. Active assets are about a third of the value, so the shares fail the departure-day test. Removing the cash before departure fixes that test only: if the cash was half the value or more at any point in the past 24 months, the shares still fail the holding-period test. An earlier crystallization helps only if the shares passed both tests at that earlier date.

Arrived 19 months before leaving

Jun arrived in Canada in March of Year 1 and leaves in October of Year 2.

• Year 1 (if Jun crystallized that year): not resident throughout Year 1 or Year 2, so the rule fails.
• Year 2: not resident throughout Year 1, so the deemed-residence rule fails, unless Jun comes back and is resident throughout Year 3.

If Jun does not return, the exemption is not available in either year. Shares Jun owned on arrival are not deemed sold at all under the 60-month rule above; shares of a company Jun started in Canada are, with no exemption.

Different for you?

• Your company holds cash, investments or real estate, or you need a valuation: the asset tests are read from the company's balance sheet on your departure date and for the 24 months before. See departure tax on private company shares and selling your business, and have the company's books brought up to date with corporate tax help before you set the date.
• Investors own part of the company: see the exemption on a startup exit.
• You cannot pay the departure tax now: see deferring departure tax.
• You are moving to the US and selling in the same year: see moving from Canada to the US.
• You hold the shares through a family trust: see family trust beneficiaries moving abroad.
• Your spouse or children also own shares: each person has a separate lifetime limit, and each person's shares are deemed sold only if that person leaves Canada. Plan the whole register together with individual tax help.
• The exemption claim, crystallizing or minimum tax timing is close: these choices are hard to undo after you leave. Plan the departure-year return with individual tax help before your departure date.