Leaving Canada? The 7 WORST Tax Mistakes to Avoid!

You’re finally ready to say goodbye to Canada—the brutal winters, the high taxes. You’ve booked your one-way ticket and you’re ready to start your new life abroad. But here’s the big question: have you actually escaped Canadian taxes? 

Because if you don’t do it right, the CRA will find you—and just like Liam Neeson in Taken, they have a very particular set of skills. With more Canadians leaving than ever, the CRA is watching closely, and one wrong move could cost you thousands. 

Let’s go over the 7 worst tax mistakes I’ve seen our clients make when leaving Canada—and how to avoid them.

Mistake #1: Not Understanding Your Tax Residency Status

Canada taxes you based on residency, not citizenship. If you don’t clearly establish your residency status when leaving, you could still be considered a Canadian tax resident and owe taxes on your worldwide income.

Think of tax residency like an umbilical cord—if you don’t cut it properly, Canada still considers you attached and will keep feeding you tax obligations.

Here are the four main types of tax residency status when considering moving countries:

1. Factual Resident – Someone who lives in Canada and maintains significant residential ties to the country, even if they are temporarily living abroad.
2. Emigrant – An emigrant is someone who leaves Canada permanently and severs significant residential ties with the country. The CRA considers an individual an emigrant for tax purposes if they leave Canada and establish residency in another country, typically for a full tax year.
3. Non-Resident – Individuals who stay in Canada for less than 183 days in a tax year and do not have significant ties to Canada. Non-residents do not pay Canadian taxes on foreign income but can be taxed on Canadian-sourced income.
4. Deemed Non-Resident – You qualify as a tax resident in another country with a tax treaty, meaning Canada won’t tax you. 

Many people get confused by the difference between non-residents and deemed non-residents. The key difference is how tax residency is determined and whether a tax treaty applies. However, both are taxed the same way in Canada.

Snowbirds Beware!

If you spend too much time in the U.S. (more than 183 days in a calendar year), you could be classified as a U.S. tax resident and be subject to U.S. taxes. Keeping track of your days is crucial!

Pro tip: Track Your Time in the U.S. Using an App – If you’re a snowbird, use an app like “DayCount” or “TaxBird” to avoid crossing the 183-day limit.

Mistake #2: Ignoring Departure Tax (Exit Tax)

When leaving Canada, you may be subject to a departure tax, which treats certain assets as if they were sold at fair market value (FMV) on the day you leave. This can trigger capital gains tax, even if you haven’t actually sold anything.

What is Taxed?

✅ Subject to Departure Tax:

• Stocks, ETFs, and other investments in non-registered accounts.
• Private company shares.
• Foreign real estate.

🚫 Not Subject to Departure Tax:

• Canadian real estate owned personally (taxable only when sold).
• Registered accounts (RRSPs, TFSAs) – but you cannot contribute to them after leaving.

Example of Departure Tax in Action

Scenario: Alex Moves to Portugal

Alex, a Canadian resident, decides to move permanently to Portugal and cut his tax ties with Canada. He owns the following assets:

Departure Tax Calculation

When Alex leaves Canada, the CRA will consider his stocks and private company shares as sold at fair market value (FMV), triggering capital gains tax.

• Total Capital Gains =
  • $80,000 (Stocks)
  • $200,000 (Private Company Shares)
  • Total = $280,000
• Taxable Capital Gain (50% inclusion) = $140,000
• If taxed at 27% average rate, Alex owes about $37,800 in departure tax.

How to Minimize Departure Tax

💡 Strategies to reduce or defer taxes before leaving Canada:

• Sell assets before leaving to avoid deemed disposition.
• Use capital losses to offset taxable capital gains.
• Gift or Transfer Assets to family members
• Defer Departure Tax – If you plan to return to Canada, it is possible to defer departure tax

We help many clients navigate and minimize departure tax, so if you’re facing the complexities of an exit tax, take a look at the services on our website and we can guide you through the process.

Mistake #3: Filing Form NR73 (Residency Determination Form)

Many people assume that filing Form NR73 (Determination of Residency Status) helps confirm their non-resident status with the CRA. However, this form can actually work against you.

When you submit NR73, a CRA official reviews your case and may determine that you are still a Canadian tax resident, even if you believe you have cut ties. This could result in continued taxation on your worldwide income.

What to Do Instead

✅ Skip Form NR73 – It’s not mandatory and could trigger an unfavorable ruling.
✅ File a Departure Tax Return – Report your departure date and pay any applicable exit tax.
✅ Let Your Actions Prove Non-Residency – Sever significant ties to Canada, such as:

• Selling or renting out your home.
• Closing Canadian bank accounts.
• Canceling provincial health insurance.
• Establishing tax residency in another country.

Before we go onto the next mistake, If tax savings are on your mind, check out our guide on 7 powerful income-splitting strategies to legally reduce your tax bill, link is here: https://blueprintfinancial.ca/income-splitting-strategies-download/

Mistake #4: Not Checking Tax Treaties & Tiebreaker Rules

When relocating from Canada, it’s crucial to understand how tax treaties affect your tax residency. Some countries have tax treaties with Canada that include tiebreaker rules to determine residency when both countries claim you as a resident. Overlooking these rules can lead to unexpected tax obligations.​

How Tax Treaties Determine Residency

If your new country has a tax treaty with Canada, the following criteria are typically used to resolve dual residency:​

1. Permanent Home: Where do you have a permanent place of residence? If you have a permanent home in both countries, the next criteria is considered.​
2. Centre of Vital Interests: Where are your personal and economic ties stronger? This includes factors like family location, employment, and social connections.​
3. Habitual Abode: In which country do you habitually reside?​
4. Physical Presence (183-Day Rule) – Some countries automatically consider you a tax resident if you spend more than 183 days there in a tax year.

Example: Moving to the United States

The U.S. employs a substantial presence test to determine tax residency. If you spend 183 days or more in the U.S. during a calendar year, you’re could be considered a U.S. tax resident.

However, under the Canada-U.S. Tax Treaty, tiebreaker rules can resolve dual residency situations. Even if you meet the substantial presence test in the U.S., if your permanent home and centre of vital interests are in Canada, you may be deemed a Canadian resident for tax purposes.

Example: Navigating Tax Residency When Moving to the United States

Scenario: Tiffany’s Relocation

Tiffany, a Canadian citizen, accepts a one-year job assignment in New York starting in January. She owns a condo in Toronto, where her spouse and children continue to live, and she maintains her Canadian bank accounts and investments.

Understanding U.S. Tax Residency

During the year, Tiffany spends more than 183 days in the United States. According to the Substantial Presence Test outlined by the Internal Revenue Service (IRS), she qualifies as a U.S. tax resident for that year. This test considers individuals who are physically present in the U.S. for at least 31 days during the current year and a total of 183 days over the current and preceding two years, using a specific calculation method.

Applying the Canada-U.S. Tax Treaty

Despite meeting the Substantial Presence Test, the Canada-U.S. Tax Treaty provides tiebreaker rules to resolve dual residency situations. These rules assess factors such as:

1. Permanent Home – Tiffany owns a home in Canada but rents an apartment in New York.
2. Centre of Vital Interests – Her family and financial ties remain in Canada.
3. Habitual Abode – Since Tiffany intends to return to Canada after one year, her long-term residency remains Canadian.
4. Citizenship – If there’s still uncertainty, her Canadian citizenship favors Canada as her tax residency.

Outcome

✔ Canada remains Tiffany’s primary tax residency under the treaty.
✔ The U.S. may still tax her U.S. income, but she can avoid being fully taxed as a U.S. resident.

Mistake #5: Maintaining Significant Ties to Canada

The Canada Revenue Agency (CRA) assesses your residential ties to determine if you remain a Canadian tax resident. If you don’t properly sever these ties, you may still be taxed on your worldwide income after leaving.

Primary Residential Ties (Strongest Indicators of Residency):

• Home in Canada – Owning or leasing a residence.
• Spouse or Partner in Canada – If they remain, you may still be considered a resident.
• Dependents in Canada – Children or other dependents living in Canada.

Maintaining any of these ties strongly suggests you are still a Canadian tax resident.

Secondary Residential Ties (May Influence Residency Status):

• Personal Property – Cars, furniture, or recreational equipment in Canada.
• Social Ties – Memberships in Canadian clubs, religious groups, or associations.
• Economic Ties – Active bank accounts, credit cards, investments, or employment in Canada.
• Canadian Documentation – Holding a Canadian driver’s license, passport, or health card.
• Mailing Address – Keeping a Canadian address or PO box.

While no single secondary tie determines residency, multiple ties can keep you classified as a Canadian tax resident.

How to Sever Residential Ties & Confirm Non-Residency

✔ Sell or Rent Out Your Canadian Home – Leasing it to unrelated parties shows you have left Canada.
✔ Move Your Family Abroad – Bringing your spouse and dependents reinforces non-residency.
✔ Close or Convert Canadian Financial Accounts – Terminate accounts or switch to non-resident banking.
✔ Update Government Records – Change your address, cancel health coverage, and surrender your driver’s license.

Mistake #6: Not Planning for Tax on Canadian Income After Leaving

Even after departing Canada, certain Canadian-source incomes could remain taxable. Understanding these tax obligations is crucial to avoid unexpected liabilities.​

Types of Taxable Canadian Income for Non-Residents

1. Canada Pension Plan (CPP) and Old Age Security (OAS) Payments: Generally, these pensions are subject to a 25% withholding tax for non-residents. However, tax treaties between Canada and other countries can reduce this rate. 
2. Rental Income from Canadian Property: Non-residents earning rental income from Canadian properties are typically subject to a 25% withholding tax on the gross rental amount, which seems excessive to me.
3. Registered Retirement Savings Plan (RRSP) Withdrawals: Withdrawals by non-residents are generally subject to a 25% withholding tax.

Strategies to Reduce Withholding Tax

1. File Form NR5 (Reduce Withholding Tax on Certain Income)

• Non-residents can apply for a lower withholding tax rate by filing Form NR5 
• If approved, tax is withheld at a reduced rate based on expected Canadian tax liability.
• The reduction is valid for five years, but you must file a Canadian tax return under Section 217 annually to maintain the lower rate.

2. Elect Under Section 216 for Rental Income

• By electing Section 216, non-residents pay tax on net rental income (gross rental income minus expenses) instead of the standard 25% withholding tax on gross income.
• This often results in a lower tax liability and allows deductions for property-related expenses.
• To qualify, a Section 216 tax return must be filed annually.

Tax Treaty Considerations

• Withholding tax rates vary by country under Canada’s tax treaties. Some countries qualify for reduced rates on pensions, dividends, and rental income.
• Before filing NR5 or Section 216, check if your new country has a tax treaty with Canada that automatically lowers your withholding tax. For example, if you move to the US, you will likely have lower CPP, OAS, and RRSP witholding tax rates than the 25% standard rate.

Overall, managing rental properties and other income sources in Canada as a non-resident can be a big hassle due to the ongoing paperwork, tax obligations, and maintenance.

Mistake #7: Not Establishing Residency in a New Country Properly

Failing to secure legal residency in another country can lead the Canada Revenue Agency (CRA) to still consider you a Canadian tax resident, even if you leave the country. Without official tax residency elsewhere, you may remain liable for Canadian taxes on your worldwide income.

Steps to Properly Establish Residency Elsewhere

✅ Obtain a Visa or Permanent Residency – Ensure you have legal status in your new country.
✅ Set Up Financial Ties – Open bank accounts, rent or buy a home, obtain an ID card, and register for health insurance in your new country.
✅ File Taxes in Your New Country – Paying taxes abroad helps establish you as a non-resident for Canadian tax purposes.

Moving abroad is exciting, but without proper tax planning, you could face unnecessary costs or even double taxation. Tax laws are complicated enough, but when two systems are involved, it can get tricky.

Blueprint Financial specializes in financial and tax planning for Canadians moving abroad. Let us help you navigate this complex process and save you money.

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