Leaving Canada? How to Defer Departure Tax
In our previous article on Canadian departure tax, we discussed how individuals leaving Canada may be subject to tax on unrealized capital gains, even though their assets have not actually been sold.
For example, an individual who owns shares of a private Canadian corporation worth $2 million, with a cost basis of $200,000, could realize a deemed capital gain of $1.8 million upon leaving Canada. This may result in substantial departure tax, despite not having actually sold the shares.
Fortunately, individuals leaving Canada may be able to defer payment of Canadian departure tax by filing Form T1244 with the Canada Revenue Agency ("CRA"). This election can provide significant cash flow relief, particularly for individuals who own private company shares or other assets that have appreciated in value but have not been sold.
However, depending on the amount of departure tax being deferred, the CRA may require security, such as a letter of credit, a mortgage on Canadian real estate or shares of a private corporation. This article explains how to defer Canadian departure tax, when CRA security is required, the types of security the CRA may accept, and the ongoing obligations associated with the deferral.
1. How Can You Defer Departure Tax in Canada?
Under subsection 220(4.5) of the ITA, individuals can elect to defer payment of tax arising from the deemed disposition of property upon departure.
The election is made by filing Form T1244 – 'Election, under Subsection 220(4.5) of the Income Tax Act, to Defer the Payment of Tax on Income Relating to the Deemed Disposition of Property'.
It is important to note that this election must generally be filed by April 30 of the year following the year in which the Taxpayer departed Canada (e.g. for a Taxpayer who departed Canada during 2026, the deadline would be April 30, 2027).
For avoidance of doubt, this election does not eliminate departure tax. It simply postpones payment.
2. Does the CRA Require Security?
Individuals who elect to defer departure tax may be required to provide security to the CRA.
Generally, posting security is not required for the first $16,500 of federal departure tax. For former Quebec residents, the corresponding federal threshold is $13,777.50.
Where the federal departure tax exceeds the applicable threshold, the taxpayer must generally provide acceptable security. Additional security may also be required for applicable provincial or territorial taxes.
Even where no security is required, Form T1244 must still be filed to defer the departure tax.
3. What Types of Security Will the CRA Accept?
The CRA determines whether proposed security is adequate based on its value, reliability and enforceability.
The following are common options.
A. Letter of Credit or Bank Guarantee
A letter of credit issued by a Canadian financial institution is generally one of the more straightforward forms of security for the CRA to accept.
Under this option, the bank essentially guarantees payment of a specified amount if the taxpayer fails to satisfy the secured tax obligation. The CRA generally requires a 1:1 security ratio, meaning a $200,000 of deferred tax liability would generally require a letter of credit for $200,000.
However, banks typically require collateral and charge annual fees. Therefore, this option can become costly if the departure tax remains deferred for an extended period.
The fees may generally range from approximately 1% to 2% annually. For a $500,000 letter of credit, this could represent $5,000 to $10,000 per year. However, these fees should be verified directly with the Canadian banks.
Lastly, it is important to distinguish a letter of credit from an ordinary bank line of credit. The CRA has indicated that a secured line of credit is generally not acceptable as a form of security.
Practical consideration: Letters of credit are relatively straightforward for the CRA to administer but can be expensive to maintain, particularly where departure tax is deferred for many years.
B. Mortgage on Canadian Real Estate
The CRA may accept a mortgage registered against Canadian real estate.
Generally, based on CRA administrative practice, real estate may support security of up to approximately 75% of the property's appraised net equity, although the amount ultimately accepted is subject to CRA approval.
For example, a property worth $1 million with an outstanding mortgage of $400,000 has net equity of $600,000. Applying the 75% threshold, the real estate could potentially support up to $450,000 of security.
Under this option, the CRA could request a professional appraisal, land title search, mortgage statements and other supporting documentation. Although these can lead to legal and appraisal costs to the individual upfront, ongoing expenses are generally relatively modest compared with bank guarantees.
It should also be noted that registering security against the property could complicate future refinancing or sales.
Practical consideration: Canadian real estate can be one of the more cost-effective and easiest forms of security to maintain over the long term.
C. Shares of a Private Canadian Corporation
For business owners, private company shares typically represent their most significant asset. Although the CRA may accept these shares as security, the process can be considerably more complicated.
Based on historical CRA administrative practice, the conditions for accepting private company shares as security may include:
The shares must be the property giving rise to the deferred departure tax.
The shares must generally have a fair market value of at least twice the secured tax liability (2:1 ratio).
The CRA has historically required taxpayers to pledge all of their privately held shares in the relevant corporation.
Corporate financial statements, valuations, minute books and legal documentation may be required.
The CRA may also impose ongoing restrictions, such as requiring approval before declaring dividends and requesting periodic financial statements. As a result, these restrictions can affect the corporation's operations and the shareholder's ability to withdraw funds.
Importantly, private company shares generally can only be used to secure the departure tax attributable to those particular shares. Where departure tax also arises from other properties, other forms of security may be required.
Practical consideration: Private company shares are generally among the most difficult forms of security to establish and maintain because of valuation requirements, legal costs and ongoing CRA monitoring.
D. Other Securities
The CRA may potentially accept other forms of securities such as investment portfolios held through a Canadian brokerage. However, it'll be up to the CRA to accept such securities.
Under this option, the CRA may require a safekeeping agreement with the brokerage, periodic investment statements and additional collateral if the portfolio declines in value. The brokerage may also charge ongoing fees.
Practical consideration: Posting investments as securities may be attractive for individuals with substantial investment portfolios, although market volatility and restrictions on trading or withdrawals can create additional complications.
4. What if the Value of the Security Declines?
Security must remain adequate throughout the deferral period.
For example, assume private company shares worth $2 million are pledged to secure a $500,000 departure tax liability. If the company's value subsequently declines to $400,000, the CRA may determine that the security has become inadequate and require additional or replacement security.
The taxpayer generally has 90 days after receiving written notification to address the deficiency. If the taxpayer fails to provide sufficient replacement or additional security within the prescribed period, interest may begin accruing on the portion of the deferred tax that is no longer adequately secured, together with potential collection consequences.
This is particularly important for private business owners whose companies may experience significant fluctuations in value.
5. What Happens When the Assets Are Eventually Sold?
When the assets are actually sold after departure, there are three important obligations:
Where departure tax was previously deferred, the CRA requires taxpayers to report the subsequent disposition of the relevant property.
Depending on the type of assets disposed of (e.g. taxable Canadian property), other disclosures may be required such as section 116 disclosures.
The deferred tax attributable to the disposed property generally becomes payable by April 30 of the following year. For example, an individual who leaves Canada in 2026 and defers $200,000 of departure tax on private company shares would generally need to pay the $200,000 of deferred tax by April 30, 2030, if the shares are sold in 2029.
Final Thoughts
Deferring departure tax can provide significant cash flow relief for individuals leaving Canada. However, the election may involve more than filing Form T1244.
The availability, cost and ongoing maintenance of security should be carefully considered, particularly for individuals with substantial investments or private company shares.
Furthermore, taxpayers should remain aware of their ongoing obligations, including maintaining adequate security and notifying the CRA when the underlying assets are eventually sold.
Warm regards,
Francis Do, CPA, CA
Have any questions? Please contact Francis Do at Francis@francisdo.com or 416-572-9633.
Disclaimer: This article is not intended to be a tax advice. Always consult and verify with a tax professional.
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