Introduction – Canadian Taxpayers Must Pay Departure Tax When Leaving Canada
There are two types of individuals who must pay tax in Canada – Canadian residents and non-residents. Subject to various tax treaties and domestic tax rules, Canadian residents pay tax in Canada on their worldwide income while non-residents pay Canadian tax only on their Canadian source income. A Canadian resident taxpayer can become a non-resident and vice versa. Tax residence is based on a series of factors and is not necessarily the same as a person’s residence for immigration purposes. If you have questions about your tax residence, please contact our experienced Canadian tax lawyers.
When an individual who was a Canadian tax resident becomes a non-resident for tax purposes, he or she must pay what is known as “departure tax” with regards to assets the taxpayer owns pursuant to Income Tax Act section 128.1. Certain assets are excluded from departure tax, including real property in Canada (such as houses), and personal property valued at less than $10,000. To calculate the amount of the departure tax, a disposition of the asset is deemed to have occurred, even though even though no real disposition takes place. Since it is a capital gain one half of the difference between the fair market value of the asset at the time the taxpayer becomes non-resident and the adjusted cost base is included in the taxpayer’s taxable income.
For example, Ron owns a Bored Ape NFT worth $40,000. He purchased the Bored Ape NFT in 2021 for $10,000. In 2022, Ron moves himself, his wife and children from Vancouver to London, England and sells their house in Vancouver to purchase a property in London. He becomes a non-resident of Canada for tax purposes. Ron is deemed to have sold the Bored Ape NFT, although he does not actually sell it. He incurs a capital gain equal to ($40,000 – $10,000) x 50%, which is included in his income. The tax he pays on that capital gain is referred to as departure tax.
Cryptocurrency Departure Tax
The rules for departure tax assume departure tax is applied to all assets unless that asset is specifically exempted from departure tax pursuant to the Income Tax Act. The Income Tax Act provides a detailed list of exempted assets and excluded rights or interests. Unfortunately for those invested in cryptocurrencies or non-fungible tokens (NFTs), cryptocurrencies themselves are not generally going to be among the types of property exempted from departure tax subject to certain exceptions discussed later in this article.
With that said, cryptocurrencies may be held in certain types of assets which do qualify for exemption from departure tax. For instance, a taxpayer’s pension plan is exempt from departure tax and the pension plan may hold cryptocurrency.
Holding Cryptocurrency in RRSP and TFSAs to Avoid Departure Tax
Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs) and Tax-Free Savings Accounts (TFSAs) are exempt from departure tax making them a potential strategy to avoid departure tax. An individual who has contribution room available in either their RRSP or TFSA could contribute assets which would otherwise be subject to departure tax to avoid departure tax on those assets. However, this strategy has limited applicability for cryptocurrency. Cryptocurrency itself cannot be contributed to either a RRSP or TFSA as cryptocurrency is not a qualified investment for the purposes of either of these plans. Taxpayers can contribute certain types of cryptocurrency investment instruments though, such as crypto-backed exchange traded fund (ETFs).
Property, such as inventory, owned by businesses operating through a permanent establishment in Canada is exempt from departure tax. A permanent establishment is typically a fixed place of business such as an office, warehouse or mine, except in the cases of businesses which do not have a fixed place of business. If the business has no fixed place of business, the permanent establishment will be where the principal place of business is. If a taxpayer is holding cryptocurrency or NFTs as inventory in an active cryptocurrency mining or trading business which maintains a permanent establishment in Canada, this will be exempt from departure tax.
Pro Tax Tips: Deferring Departure Tax
A taxpayer can elect to defer departure tax. The deferral allows the taxpayer to wait to pay the departure tax when he or she disposes of the property to which the deferral applies. No interest accrues on the departure tax during this time. This deferral is beneficial since departure tax involves an artificial disposition, the taxpayer may not have the funds available at the time of his or her departure to pay the departure tax. If the federal portion of the deferred departure tax exceeds a certain amount, currently more than $16,500 for all taxpayers except former residents of Quebec where the amount is $13,777.50, the taxpayer must provide adequate security.
Contact our experienced Canadian tax lawyers for assistance with tax planning regarding departure tax and cryptocurrencies.
What is departure tax?
Departure Tax is a tax paid by previously Canadian resident taxpayers on the deemed disposal of certain assets when they become non-residents of Canada for tax purposes.
Do you need to pay departure tax on cryptocurrencies?
Generally, yes you need to pay departure tax on cryptocurrencies but there are certain exemptions such as cryptocurrency which is inventory for an active business with a permanent establishment in Canada.