Departure Tax — Leaving Canada

For Canadians relocating to the United States, the single largest tax event of the move often happens before they have set foot across the border. Canada's departure tax — the deemed disposition under Section 128.1 of the Income Tax Act — treats most of your worldwide property as sold the day you cease Canadian residency, and taxes the accrued gain in your year of departure even though nothing has actually been sold. Because the United States does not automatically recognize that same valuation date, the move sits squarely at the intersection of two tax systems. Planned early, the deemed gain can be deferred, secured, restructured, or coordinated with the US side so the same appreciation is not taxed twice. Planned late — or not at all — it becomes a cash bill in a year when most of your liquidity is tied up in the move itself.

The cross-border practice at Barrett Tax Law is led by Simone Barrett, who is admitted in both Ontario and Florida, so departure planning here is handled with an eye on both the Canadian deemed-disposition rules and the US treatment a former resident will face after arrival. This page explains how departure tax works, how the two countries treat the same assets, where the Canada-US tax treaty bridges the gap, and the traps that most often surface in real files.

What departure tax actually is

Under subsection 128.1(4) of the Income Tax Act, an individual who ceases to be a Canadian tax resident is deemed to have disposed of most kinds of property at fair market value the moment before they emigrate, and to have re-acquired it at that same value immediately after. The accrued gains on that deemed sale become taxable in the year of departure. As of 2026 the capital-gains inclusion rate is 50% — the higher two-thirds inclusion rate proposed in the 2024 federal budget was cancelled by the federal government in March 2025 and never took effect — so half of the deemed gain is added to income and taxed at your marginal rate for the departure year.

The deemed disposition catches most categories of capital property: publicly-traded shares, private-company shares, partnership interests, mutual funds, art, jewellery, cryptocurrency, and most foreign real estate. It does not apply to a defined list of excluded property, the most important of which are:

• Taxable Canadian property (TCP) — chiefly Canadian real estate, Canadian resource property, and shares of certain private corporations whose value is derived principally from Canadian real estate. These stay within Canada's tax net and are taxed when they are actually sold, not on departure.
• Registered and pension accounts — RRSPs, RRIFs, TFSAs, RESPs, RDSPs and Canadian pension entitlements are excluded from the deemed disposition.
• Certain employment-related items — stock options on Canadian employment and similar rights are treated under their own rules rather than the deemed disposition.

Even though TCP and registered plans escape the deemed disposition, they do not escape reporting. Where the total fair market value of the property you owned on departure exceeds CAD $25,000, you must file Form T1161, List of Properties by an Emigrant of Canada, with your departure-year return — and that list includes many items that are not themselves subject to departure tax. Missing the T1161 carries its own penalties separate from any tax owing.

The Canada-side mechanics: return, valuation and reporting

The departure-year return is a part-year resident return. You report worldwide income up to your date of departure, then the deemed dispositions on top. Three documents typically travel together with that return:

• Form T1161 — the inventory of property owned on departure, required above the CAD $25,000 threshold.
• Form T1243, Deemed Disposition of Property by an Emigrant of Canada — the schedule that actually computes the deemed gains and losses.
• Form T1244 — the election to defer payment of the departure tax (discussed below), filed where deferral is wanted.

Valuation is where many departure files live or die. The deemed proceeds are fair market value on the date residency ceases, and for private-company shares, real estate, partnership interests and unusual assets that figure is a matter of evidence, not assumption. A defensible valuation — ideally a contemporaneous appraisal rather than a number reconstructed years later under audit — is the difference between a clean filing and a reassessment. It is also the number that, under the treaty, can become your US cost basis, so getting it right matters on both sides of the border.

Deferring payment with security

If the departure-tax bill is large relative to your liquid assets, you can elect under subsection 220(4.5) of the Income Tax Act to defer payment of the departure-tax liability rather than pay it in the departure year. The election is made on Form T1244, filed with the departure-year return by the normal filing deadline. The deferred amount becomes payable only when the deemed-disposed property is actually sold (or on certain earlier events such as death or gift).

The deferral has two practical features worth understanding:

• A no-interest, no-security band. The Canada Revenue Agency does not require security for a modest amount of deferred departure tax. Where the federal departure tax that is deferred exceeds roughly CAD $16,500 (a lower threshold applies for Quebec residents), the CRA requires acceptable security to be posted.
• Acceptable security. Security typically takes the form of a bank letter of credit, a charge registered against real estate, or pledged marketable securities. When adequate security is in place and the T1244 election is valid, interest does not accrue on the deferred amount — so the deferral genuinely buys time rather than simply postponing a growing balance.

Deferral is most useful for taxpayers who are asset-rich but cash-poor at the moment of departure — a common profile for owners of private corporations and concentrated equity positions — and it keeps the Canadian liability tied to the eventual sale.

The US side: why the same gain can be taxed twice

The United States does not have a departure tax that mirrors Canada's deemed disposition for arriving residents. For someone moving to the US, the problem runs the other way: when you later sell an asset, the US generally measures your gain from your original cost, not from the value Canada used on departure. Without planning, that means Canada taxes the gain that accrued up to your departure date, and the US taxes the entire gain — including the portion that accrued before you ever became a US person — when you eventually sell. The same appreciation is reached by both countries.

Two mechanisms address this, and they work very differently:

• The treaty basis-step-up election (Article XIII(7) of the Canada-US tax treaty). A person subject to Canadian departure tax can elect to be treated, for US purposes, as having sold and repurchased the deemed-disposed property at its fair market value immediately before departure. In effect, this steps up the US cost basis to the Canadian departure value, so the US later taxes only the gain that accrues after arrival. This is the cleaner long-term fix, but it must be made correctly and is generally claimed on a US return with treaty disclosure on Form 8833.
• Foreign tax credits. Where the same property is sold while you are a US person and both countries tax the gain, a foreign tax credit can relieve the double tax — but credits depend on matching the income to the right year and category, and Canada's tax was triggered on departure while the US tax is triggered on sale, so the timing rarely lines up cleanly. Coordinating which return claims what, and in which year, is part of the planning, not an afterthought.

One important caveat: the Article XIII(7) election does not help with US real property. Electing a deemed sale of a US real-property interest triggers actual US tax on that gain in the year of the election, so US real estate is treated separately and deliberately.

RRSPs, TFSAs and registered accounts after the move

Registered accounts survive a move to the US, but they are not treated equally. Under Article XVIII of the treaty, an RRSP or RRIF continues to grow tax-deferred for US purposes, and since Revenue Procedure 2014-55 that deferral is automatic — you no longer need to file Form 8833 each year simply to defer the internal growth. The account is still reportable to the US on FBAR and, where thresholds are met, on Form 8938.

The TFSA is the trap. The treaty gives it no protection, so for a US person the income earned inside a TFSA is taxable in the US year by year, and the account often falls into onerous foreign-trust or foreign-financial-asset reporting. For many people moving to the US, collapsing a TFSA before the move — or at least before becoming a US person — is cleaner than carrying it across the border. Because the TFSA is excluded from the departure deemed disposition anyway, the decision is driven by the US side, which is exactly why it needs to be made before arrival. The same TFSA and FBAR/FATCA reporting issues are covered in more depth on our FATCA and FBAR compliance page.

The planning window — and why it closes on departure day

The planning window for departure tax closes the day you cease residency. Most of the moves that reduce or restructure the deemed gain only work if they are executed before the residency change:

• Crystallizing losses against gains. Selling property that carries an accrued loss before departure can offset deemed gains on other property, but the deemed disposition will not net certain losses against gains automatically, so the sequencing matters.
• Pre-departure corporate reorganizations. For owners of private corporations, a Section 85 rollover, an estate freeze, or a pre-departure distribution of retained earnings can change what is deemed disposed and at what value — and these are far harder, or impossible, to achieve once you are a non-resident.
• Trust and family structuring. Fragmenting ownership through a family trust before the move can change who bears the deemed gain, though Canada's anti-avoidance and trust-residence rules (and the US treatment of foreign trusts) make this an area to approach carefully rather than aggressively.
• Timing the date itself. Because the gain is fixed to the departure date's fair market value, the chosen date — and a clean, well-documented date — can materially change the number.

Departure is a question of fact, not merely intention. The CRA weighs primary residential ties (a home available to you in Canada, a spouse or common-law partner, and dependants who remain) and secondary ties (a driver's licence, provincial health coverage, club memberships, bank and brokerage accounts), together with the relevant treaty. For a move to the United States, the most defensible position usually pairs a clean cessation of residency under Canadian domestic law with the Article IV tie-breaker in the Canada-US treaty, so that there is a single, supportable date on which residency changed. A blurry departure date undermines both the Canadian filing and the US basis position that depends on it.

If you come back: the returning-resident rule

Subsection 128.1(6) lets a returning resident unwind the departure tax on property that was still owned when residency resumes. The election effectively treats the original deemed disposition as if it never happened, restoring the original cost base and reversing the departure-year inclusion. The mechanic only works for property the taxpayer continuously owned across the entire non-resident period — which is one of several reasons round-trip migrants, secondees, and anyone with a realistic chance of returning to Canada should think hard before selling pre-departure-assessed holdings while abroad. Selling the asset locks in the departure-tax treatment and forfeits the unwind.

Common traps

• Forgetting the T1161 because nothing was sold. The reporting obligation is triggered by ownership and value on departure, not by an actual sale, and it captures excluded property too. It is one of the most common omissions on emigration returns.
• Treating the deferral election as automatic. Deferral under subsection 220(4.5) requires a valid Form T1244, and above the security threshold it requires acceptable security to be posted — it does not happen by default.
• Missing the Article XIII(7) step-up. Failing to fix the US cost basis to the Canadian departure value can leave the entire historic gain exposed to US tax on a later sale, long after the move.
• Carrying a TFSA into the US unexamined. The absence of treaty protection turns a tax-free Canadian account into a taxable, heavily-reported US one.
• Stale or absent valuations. Private-company shares, real estate and unusual assets need contemporaneous fair-market-value support; reconstructing the number under audit years later is far weaker.
• Ignoring the US estate-tax dimension. A move to the US can change your exposure to US estate and gift tax. As of 2026 the US estate and gift tax exclusion is USD $15 million per person under the 2025 legislation that made the higher exemption permanent and indexed it to inflation — but that figure is a creature of US law and can be changed by future Congresses, so it should not be treated as fixed. We address this on our US estate tax for Canadians page.

How Barrett Tax Law approaches departure tax

Most departure-tax engagements involve at least three workstreams. The first is cataloguing every asset and classifying it as deemed-disposed or excluded, then building the T1161 inventory and the T1243 computation. The second is modelling the liability under different planning scenarios — crystallizing losses, timing the departure date, deferring under Form T1244 with appropriate security, and, where the destination is the United States, layering in the Article XIII(7) basis step-up and a view of how foreign tax credits will play out on the eventual sale so the same gain is not taxed twice. The third is preparing the departure-year part-year resident return and the elections that go with it, and coordinating the US-side filings that follow arrival. Because Simone Barrett is admitted in both Ontario and Florida, the Canadian deemed-disposition planning and the US treatment a former resident will face after the move are considered together rather than in isolation.

If you are planning a move from Canada to the United States — or already living abroad and unsure whether your departure was reported correctly — Barrett Tax Law offers a free initial consultation to review your facts and outline the options. You can read more about the broader practice on our cross-border tax hub, and about related mechanics in our guides to FIRPTA withholding for Canadian sellers and Section 116 clearance certificates. For plain-language overviews, see Leaving Canada: departure tax explained and our cross-border move tax checklist.

This page is general information, not legal or tax advice. Cross-border departure planning depends on your specific facts and on the interaction of both Canadian and US rules, which change over time; figures stated here are current as of 2026 and should be confirmed for your year of departure. Speak with a qualified advisor about your own situation before acting.