Canadian Tax Planning Before Relocation

Two systems, one move — and a narrow window

A move from Canada to the United States is not a single tax event. It is the collision of two complete tax systems on or around one date. The moment you cease to be a resident of Canada, the Income Tax Act treats you as having sold almost everything you own at fair market value — the Section 128.1 deemed disposition, commonly called the departure tax. In the same window, you become a US tax resident taxed on worldwide income, exposed to FBAR and FATCA reporting and to the US anti-deferral regimes (PFIC, Subpart F, GILTI) that turn ordinary Canadian holdings into tax problems. The two systems do not coordinate themselves, and the treaty resolves some overlaps while creating traps of its own.

The reason planning matters is timing. Almost every effective step — selling a Canadian mutual fund, closing a TFSA, restructuring a private corporation, crystallizing or sheltering a gain — is far easier and cheaper to do while you are still a Canadian resident and before the US rules attach. Once US residency begins, the same transactions are taxed under both systems at once, and several options simply disappear. The cross-border practice at Barrett Tax Law is led by Simone Barrett, who is admitted in Ontario and in Florida, so the Canadian and US sides of a relocation are analyzed together rather than handed back and forth between advisors who each see only half the picture. This page explains the mechanics on both sides, where the treaty changes the answer, and the traps that catch people who move first and plan later. It is general information, not legal advice.

The Canadian side: departure tax under Section 128.1

When you emigrate, subsection 128.1(4) of the Income Tax Act deems you to have disposed of most of your property at fair market value and immediately reacquired it at that value. The accrued gain to the date of departure is taxed on your final Canadian return for the year. As of 2026 the federal capital gains inclusion rate remains one-half — the proposed increase to two-thirds, originally tied to a June 2024 effective date and then deferred, was cancelled in 2025, so departure-tax gains are still included at 50%. Even so, the deemed disposition can still produce a large tax bill in a year when you have not sold anything and have no cash to pay it.

Not everything is caught. Canadian real property, Canadian resource property, and certain business property of a Canadian permanent establishment are excluded because Canada keeps the right to tax those later (which is why the Section 116 clearance system exists). RRSPs, RRIFs, registered pensions, TFSAs and similar registered plans are also outside the deemed disposition — but, as set out below, that does not mean they are safe once you are a US resident. The deemed disposition mainly bites on non-registered portfolios, private company shares, and other appreciated capital property.

Two mechanics soften the cash-flow hit. First, you can elect under section 220(4.5), using Form T1244, to defer payment of the departure tax until you actually dispose of the property — the tax is calculated now but paid later, when there is real liquidity. Where the federal tax on the deemed-disposition income exceeds roughly CAD $16,500 (a lower figure for former Quebec residents), the CRA requires adequate security for the deferred amount; security is generally accepted up to the tax on the first $50,000 of such income without a separate posting. Second, if you later resume Canadian residency still owning the same property, subsection 128.1(2) lets you elect to unwind the original deemed disposition, effectively reversing the departure tax on a return. Our Departure Tax Planning page works through the deemed-disposition mechanics and the deferral election in detail.

The US side: worldwide tax, anti-deferral regimes, and a first-year return

From the US perspective, the question is when residency begins. A green-card holder is a US tax resident from the first day of US presence as a lawful permanent resident. Someone on a work visa generally becomes resident under the substantial-presence test: you meet it if you are present at least 31 days in the current year and 183 weighted days over a three-year window, counting all current-year days, one-third of last year's, and one-sixth of the year before. Cross the line and you are taxed on worldwide income, must report non-US financial accounts on an FBAR (FinCEN Form 114) and frequently on Form 8938, and become exposed to the anti-deferral rules that make ordinary Canadian investments toxic for a US person. Where someone has Canadian-resident ties but spends time in the US below the 183-day current-year count — the snowbird profile — the Form 8840 closer-connection statement can preserve non-resident status; that path is covered on our Snowbird Tax Planning page.

The first US return as a new resident is usually a dual-status return: non-resident for the part of the year before the residency start date, resident afterward. The cut-over date drives the entire year's US tax, and getting it right often requires applying the treaty's Article IV tie-breaker rules (permanent home, centre of vital interests, habitual abode) to pin down the day residency actually shifted. There can be a short gap where neither country claims you, or a brief overlap of dual residence the tie-breaker has to resolve. These positions are not mechanical, and small differences in the residency date can change the US bill materially.

The big traps — and why they are easier to fix before you go

• Canadian mutual funds and ETFs (PFICs). Once US residency begins, most Canadian pooled funds are passive foreign investment companies under IRC section 1297. Without a Qualified Electing Fund election (which the fund must support with US-style reporting — almost no Canadian funds do) or a mark-to-market election, the punitive excess-distribution regime applies, taxing gains at the highest ordinary rates with an interest charge stacked back over the entire holding period, plus annual Form 8621 filings per fund. The clean fix is to sell out of Canadian mutual funds and ETFs before the US residency date — while only the Canadian rules apply — and rebuild the portfolio in US-domiciled funds, individual securities, or other non-PFIC holdings afterward.
• TFSAs and RESPs. Both are tax-sheltered in Canada and fully taxable in the United States, because the treaty does not extend its retirement-account relief to them. Worse, the IRS frequently treats them as foreign trusts, triggering Forms 3520 and 3520-A with steep penalties for late or missed filings. For most movers the practical answer is to collapse or restructure a TFSA and to rethink an RESP before US residency, when the only cost is the Canadian one.
• RRSPs and RRIFs. Here the treaty helps. Article XVIII of the Canada-US treaty, implemented for US purposes by Rev. Proc. 2014-55, gives US-resident owners automatic deferral of the inside build-up of an RRSP or RRIF — no Form 8891 and no annual election since 2014. Growth accumulates tax-deferred for US purposes; distributions are US-taxable when received, with a foreign tax credit generally available for the Canadian non-resident withholding so the same dollar is not taxed twice. RRSPs are usually kept, not collapsed — but the account still appears on FBAR and Form 8938, and the deferral protects only the plan itself, not investments held outside it.
• Closely-held Canadian corporations. A Canadian-controlled private corporation owned by a soon-to-be US resident can become a controlled foreign corporation once the shareholder moves, dragging the new US shareholder into Subpart F and GILTI inclusions on the company's income and a maze of Form 5471 reporting. Pre-emigration restructuring — a section 85 rollover, a pre-move dividend or surplus distribution, an asset sale within the company, or a reorganization of the share structure — can defuse the worst of it while the company is still purely under Canadian rules. This needs Canadian and US analysis together; our Cross-Border Tax overview describes how these corporate moves fit into the larger plan.
• Departure-tax cash flow. The deemed disposition lands a tax bill in the year of the move, often without a sale to fund it. The Form T1244 deferral election (with security where required) keeps that cash available for the move itself rather than handing it to the CRA before any asset is actually sold.

Canadian real estate, Section 116 and the rate you may not expect

Canadian real property is excluded from the departure-tax deemed disposition because Canada taxes it on a later actual sale, when you are a non-resident. That later sale runs through Section 116: the buyer must withhold and remit a percentage of the gross proceeds unless the CRA issues a clearance certificate (Form T2062) fixing the tax on the actual gain. The long-standing withholding rate is 25% of gross, but a higher 35% rate — introduced alongside the now-cancelled capital-gains inclusion-rate change — has had a contested and shifting effective date, so the rate that will apply to a future sale should be confirmed at the time. Either way, withholding on the gross price routinely far exceeds the real tax on the gain, and the clearance certificate is what frees up the difference. Selling Canadian real estate as a non-resident is its own project — see our Section 116 Clearance page and, for the mirror-image US situation, our FIRPTA page covering the 15% US withholding (reduced for lower-priced residences a buyer will occupy) when a Canadian sells US real property. The principal-residence exemption, change-of-use rules, and whether to sell before or after the residency date all interact here, and the answer is fact-specific.

US estate and gift tax — the part most movers underestimate

Becoming a US resident, and especially building toward US citizenship, changes your estate-tax exposure completely. A US citizen or domiciliary is subject to US estate tax on their worldwide estate. As of 2026 the US federal estate and gift tax exclusion is USD $15 million per person, raised and — importantly — made permanent with annual inflation indexing by the One Big Beautiful Bill Act in 2025; the long-feared 2026 sunset back toward roughly $5 million did not happen. That sounds generous, but the US estate tax rate climbs to 40% and a couple's combined Canadian-dollar net worth — home, registered plans, business, life insurance proceeds — reaches eight figures more often than people assume. Canada has no estate tax but taxes the deemed disposition of capital property at death, so a cross-border family can face the Canadian deemed-disposition tax and US estate tax on overlapping assets, with the treaty's Article XXIX-B providing limited relief through a pro-rated unified credit and a foreign-tax-credit mechanism. Planning the estate side before and during a move — wills, the treatment of a non-citizen spouse (who does not get the unlimited US marital deduction, though a qualified domestic trust can help), and the ownership of US-situs assets — belongs in the same plan as the income-tax steps. Our US Estate Tax for Canadians page and cross-border estate planning page go deeper on these mechanics.

Ongoing US reporting and getting current if you are already behind

US residency brings a permanent reporting load that catches Canadians off guard, because the obligations attach to accounts that are completely ordinary in Canada. An FBAR is due if your non-US financial accounts together exceed USD $10,000 at any point in the year; Form 8938 (FATCA) adds a parallel filing above higher, residency-based thresholds; PFIC funds add Form 8621; foreign corporations add Form 5471; and TFSAs or RESPs may add Forms 3520/3520-A. Meanwhile, on the Canadian side, anyone who keeps specified foreign property costing more than CAD $100,000 must file Form T1135 — relevant if you retain Canadian-resident status for part of the transition or own US assets while still Canadian. The reporting is unforgiving, and the penalties are information-return penalties that apply even when no tax is owed. Where US filings have already been missed — a common situation for people who moved before getting advice, or who held a green card for years without filing — the IRS Streamlined Filing Compliance Procedures remain available in 2026 for non-willful cases, offering a defined catch-up path (three years of returns, six years of FBARs, and a non-willfulness certification) without the harshest penalties. The IRS has signalled it may close this program, so the window should not be assumed to stay open. Our FATCA and FBAR Compliance page and the blog guide on the Streamlined Filing Procedures for Canadian US persons explain how the cleanup works.

A realistic timeline

Pre-emigration planning works backward from the residency date, and the useful work happens early. Roughly 90 days or more before the move is the practical floor for anything involving a corporation, a real-estate sale, or a clearance certificate, because CRA processing (Section 116, for example) and corporate reorganizations take weeks and cannot be rushed at the closing table. In the months before departure, the priorities are usually: modelling the departure-tax exposure and the year-of-move US position together; selling down PFICs and rebuilding the portfolio in US-friendly holdings; closing or restructuring TFSAs and RESPs; deciding what to do with RRSPs (almost always keep, with the treaty deferral in mind); restructuring or distributing from a private corporation; and confirming the wills and estate plan still work across both systems. In the year of the move, the work shifts to the final Canadian departure-year T1, the Form T1244 deferral election if needed, and the first-year dual-status US return with its supporting treaty positions. Compressing all of this into the weeks around the move is where avoidable tax gets created.

How Barrett Tax Law approaches pre-relocation planning

We treat a relocation as one coordinated file with a Canadian half and a US half that have to agree. An engagement typically starts well before the planned move with a model of the Section 128.1 departure tax and the year-of-move US tax under realistic residency-date assumptions, so you can see the combined number before committing to dates. From there we identify and help execute the pre-move steps that actually move the needle — the PFIC sell-down, the TFSA and RESP decisions, any corporate restructuring, and the departure-tax deferral election — and then prepare the final Canadian return alongside the first-year US return so the treaty positions line up rather than contradict each other. Because the cross-border practice is led by a lawyer admitted in Ontario and in Florida, the Canadian and US analysis is done under one roof and protected by solicitor-client privilege. If a move is on your horizon, a free initial consultation is the place to map your own facts onto these rules; you can also start with our Cross-Border Tax overview or the practical cross-border move tax checklist and year-one planning guide.

This page is general information, not legal advice. Cross-border tax outcomes depend on the specific facts and on the rules of both countries, the figures and rates noted here can change — the US estate-tax exclusion and the Canadian non-resident withholding rate in particular are subject to legislative change — and you should obtain advice on your own situation before acting.