In my line of work, I often come across situations where individuals move away, from Canada with their spouses and dependents but choose to rent out their residence to someone unrelated. This scenario often raises a series of tax-related questions:
1. Does keeping a residence in Canada mean they are still considered residents for tax purposes?
2. Is there a requirement to treat the property as if it has been sold i.e., deemed disposition, like other assets owned in Canada?
3. Can they still claim the principal residence exemption when they eventually sell the property as a non-resident of Canada?
This blog aims to cover these three aspects. It is important to note that the situation explained in this blog is unique and it differs from situation to situation. To receive accurate advice on your situation please reach out to professional advisors. You can contact us too at info@ictax.ca
- Tax Residency in Canada and Owning a Primary Residence
To determine whether someone qualifies as a Tax Resident after leaving Canada primarily depends on their connections to the country. Owning or renting, a principal residence in Canada on its own does not make you a tax resident. There are many factors that are taken into consideration before classifying an individual as a tax resident in Canada.
For example, let’s say someone moves away, from Canada but still owns a property that they rent out to a tenant on market terms. In such a case it is unlikely that this alone would establish tax residency. The tax agency will consider factors like the relationship between the homeowner and tenant amongst other things.
2. Deemed Disposition and Principal Residence
Another important aspect to consider is the concept of “deemed disposition” and your principal residence. When you leave Canada the tax authorities automatically assume that you have sold your personal assets such as shares, jewellery, paintings, or collections even if you haven’t sold them. Therefore, it is your responsibility to report any sort of capital gains from the sale of these assets to the CRA on Forms T1243 and schedule 3 of the individual tax returns.
However, when it comes to property such as your residence there is usually no deemed disposition upon departure. It’s worth noting though that if you decide to convert your residence into a rental property this may trigger a change in use rules and potentially lead to a deemed disposition.
3. Claiming the Principal Residence Exemption
The good thing is, that individuals can still claim the principal residence exemption when they sell their property in the future as a non-resident of Canada. Guidance has been provided in Paragraph 73 by the CRA in their document IC72-17R6. As per the document, if someone who doesn’t live in Canada anymore sells their home, they might be eligible, for the principal residence exemption.
It’s important to remember that this exemption is only available, for the years after the person becomes a resident of Canada. The years when the individual was a non-resident will not qualify for the exemption. As such, there will be a partial exemption.
To conclude, please make sure to carefully consider your tax responsibilities when leaving Canada, to avoid future tax issues. If you plan to dispose of the principal residence as a non-resident of Canada then make sure to follow CRA reporting requirements by submitting Form T2062 to avoid penalties and interest. Also, you may have to apply for a section 116 certificate and submit Form T2091. It is suggested to seek professional advice that suits your situation to comply with tax regulations and make the most of any available exemptions.
