Tax Tip[] Capital Gains

Capital Gains Realized On Emigrating From Canada

“relief from the tax on departure may be available.”

Upon ceasing to be resident in Canada, an individual is deemed to have disposed of their capital property at fair market value, which can create tax liability on accrued capital gains. The individual is then deemed to have reacquired the property at a cost equal to the same fair market value. The purpose of this deemed disposition and reacquisition is to allow Canada to tax any accrued gains up to the date of departure. Such tax is often referred to as a “departure tax,” and can be quite onerous if not planned for appropriately.

Some properties that are subject to the deemed disposition rules are:

  • Shares of most private operating companies (with some exclusions),
  • Shares of public companies, and
  • Non-registered investment portfolios.

Some capital properties that are not subject to a deemed disposition on departure are:

  • Canadian real estate,
  • Canadian resource property or timber resource property,
  • property used in a business carried on in Canada,
  • interests in an RRSP, RRIF, TFSA or similar plans, and
  • certain stock option plans.

The deemed disposition is triggered even though the individual may still own the property after leaving Canada.

To minimize the “departure tax” liability, an emigrating individual may elect to dispose of certain excluded property and trigger accrued losses to offset accrued gains, under paragraph 128.1(4)(d) of the Income Tax Act. Property subject to this election is:

  • Canadian real estate,
  • Canadian resource property or timber resource property, or
  • property used in a business carried on in Canada.

However, accrued losses triggered using this election are limited to the accrued gains triggered from emigration. In order to make this election, the emigrating individual must file Form T2061A along with their departure tax return.

There are provisions to allow an individual to post security to the Canada Revenue Agency for the tax created from the deemed disposition in order to defer the cash flow burden until there is liquidity.

In some situations, relief from the tax on departure may be available where certain capital properties have decreased in value after emigration. For example, suppose an individual sells private operating company shares, after emigrating from Canada, for proceeds less than their fair market value at the date of departure. If the individual emigrated prior to March 5, 2010 the individual can elect to carryback the realized capital loss against capital gains reported on departure.

However, as a result of the 2010 Federal Budget, individuals who emigrate after March 4, 2010 will not be able to use this election on shares of private companies unless such shares derive more than 50% of their fair market value from real property situated in Canada at any particular time during the 60 months before the departure date.

If you are planning on emigrating from Canada, speak to your advisor about the potential tax consequences, including the deemed disposition of property.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Capital Gain Reserves

“Capital Gains are taxable over five or ten years depending on the timing of the proceeds and the asset sold.”

When a capital property is disposed of, a taxpayer can claim a capital gainreserve for the proceeds to the extent that they have not yet been received. The individualis required to calculate as the reserve a “reasonable” portion of the gain.

Generally, the capital gain reserve is calculated as:

  • capital gain x balance receivable at the end of the taxation year;
    selling price

This calculation is subject to another limitation. The reserve cannot exceed the lesser of:

  1. The amount calculated above; and
  2. One-fifth of the total capital gain x 4 minus the number of preceding taxation years
                                                                           ending after the disposition

This means that, in the first year of disposition, not more than four-fifths of the gaincan be taken as a reserve. Each year the calculation must be repeated to determine the amount of the reserve. Consequently, the capital gain will be taxed over a maximum of five years.

Where a transfer of a capital asset is made to a child, grandchild, or great-grandchild who is a resident of Canada, and the asset was:

  1. Family farm property;
  2. A share in the capital stock of a family farm corporation;
  3. An interest in a family farm partnership; or
  4. A share in the capital stock of a small business corporation,

the maximum capital gain reserve is calculated using a ten-year timeframe instead of five years. Consequently, in the first year a reserve of 90% could be claimed. Thetaxpayer has ten years to include the entire capital gain in income.

A taxpayer does not have to claim the maximum available reserve. He or she cannot claim a reserve in a subsequent year greater than the reserve claimed in the prior year. Therefore, if an individual claims a reserve of $5,000 in one year, the reserve in subsequent years can never be greater than that. A reserve cannot be claimed if the acquirer was a corporation, which, immediately after the acquisition of the capital property, was controlled directly or indirectly by the transferor of the property. The reserve is also disallowed for individuals who become non-residents during the year. If a reserve were claimed in the prior year, and the individual leaves Canada, a reserve cannot be taken for the year of departure. The prior year’s reserve will come into income in the year of departure with no reserve for the year of departure.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.