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Leaving the Great White North

Hockey.  Maple Syrup.  The Mounties.  High taxes.

Just a few things that Canada is known for.  Given what we do here at Robin Glen, no surprise we will be talking about the last item in that list today.

Over the past few years, there has been a trend of successful and affluent individuals choosing to emigrate from Canada.  In essence, these individuals are giving up their Canadian tax residency and choosing to live a stateless life.

Canadian Flag

This trend is accelerating as in May of this year, the Canadian government announced they would be raising the capital gains tax rate to 66% from 50%.  That rate applies to all capital gains recorded by corporations and trusts and applies to or individuals on capital gains in excess of 250,000 Canadian dollars (US $182,000).

Just because your tax burden goes away, that doesn’t mean the need for life insurance disappears.  There are still wealth transfer considerations that may be at play.  Plus, there still may be additional taxation from your home country.  For example, in Canada, unused property in the country is still subject to taxation even if it is no longer your primary residence.

In this blog, we will take a look at what happens, from a tax perspective, when you choose to leave Canada as well as what the life insurance picture looks like once you have bid adieu to the Great White North.

The (Tax) Cost of Leaving Home

Leaving Canada and transitioning into a non-resident status will carry certain tax implications.  First, there is the departure tax which involves the deemed disposal of all your assets at their fair market value and subsequent reacquisition of these assets at the same value. This process can lead to capital gains on these assets.

Certain assets are exempted from the calculation, including:

  • Canadian real or immovable property, such as land and buildings.

  • Canadian business property, including inventory, provided the business operates through a permanent establishment in Canada.

  • Pension plans.

  • Registered Retirement Savings Plans.

  • Registered Education Savings Plans.

While shares in a corporation you own may fall under the deemed disposition rules, there are options to manage the tax implications.  One option is to apply for a tax payment deferral by providing security, like shares of the company, to the Canada Revenue Agency (CRA). This deferral allows you to postpone the tax payment until you actually sell the property.

You also might be eligible to claim the lifetime capital gains exemption on the deemed disposition of your shares.  This exemption permits a deduction on the gain from your corporate shares, up to a maximum of $971,190 (as of 2023, indexed annually).  To qualify, the shares must belong to a Qualified Small Business Corporation.  Deciding to claim the lifetime capital gains exemption can be advantageous if you plan to sell the shares to a third party later or if the combined withholding tax and taxes in your new country are lower than those in Canada.

It's important to note that the deemed disposition can result in double taxation.  The first level of tax is when paying the departure tax, and the second occurs when you extract the value through dividends, even if security is pledged or a lifetime capital gains exemption is claimed.  

Life Insurance in Canada

Canadian tax residents are required to purchase Canadian tax-compliant life insurance policies.  This means either life insurance from domestic insurers in Canada like Sun Life, Great West and Manulife, or policies from other jurisdictions that meet the Revenue Canada’s definition of being tax compliant.

In addition to being compliant, policyholders who purchase policies from non-Canadian carriers must also obtain an actuarial assessment and related letter attesting to that compliance.  Missing even a single year could lead to Revenue Canada determining the policy is non-compliant and subjecting inside build-up to taxation.  And remember - Revenue Canada will look through a U.S. trust structure to the Canadian tax resident involved and Canadian tax-compliance of the policy is required.

Bring Out the Crystal Ball

In addition to the tax consequences, leaving Canada also opens up a new world of possibilities when it comes to life insurance.  Once someone has given up their Canadian tax residence status, they are free to purchase policies elsewhere.   

In order to determine what type of policy should be purchased and from which jurisdiction, you need to do a little bit of life planning and determine where your life, and the life of your kids and grandchildren, will take you all.  

For example, we often see former Canadian tax residents who will expatriate from Canada and then rotate living between different jurisdictions.  Given the growing expatriate population of Canadians in the Cayman Islands, a common rotation is Grand Cayman, the United States and Canada.  These international citizens are careful not to spend too much time in Canada or the United States to avoid triggering residency connections.

These clients then purchase policies from a host of jurisdictions, including Bermuda, Cayman, Barbados and ,sometimes (depending upon financial ties), from the United States.  Many of these policies can be purchased U.S. tax-compliant and that can be helpful if someone eventually settles in the U.S., perhaps to be around adult children and grandchildren.

In addition, many of these policies purchased ‘offshore’, can be Canadian tax compliant.  Since some Canadians who emigrate may decide to permanently return to Canada someday, it is advised these folks get written, annual confirmation of Canadian tax-compliance.  The portability of many ‘offshore’ policies make them a good fit for a wide range of stateless nomads.

Goodbye Canada

For those who are considering exiting from Canada, there are many considerations that need to be considered.  While we touched on certain tax liabilities such a move may create as well as how life insurance can fit into an exit plan, there are also issues around healthcare, property, and investments (among other topics) that need to be considered and planned for.

At Robin Glen, we use our expertise in income and estate tax, private capital, and insurance analysis and design to create unique solutions that deliver impactful results for our clients and advisor partners.

As your life and the world changes, we are there every step of the way to ensure your planning evolves to always support you, your family, and your business.


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