How to unwind ‘deemed disposition’ for returning Canadian tax residents – guidance from a Canadian tax lawyer

Deemed disposition and reacquisition rules

When you move from Canada, you may be subject to the ‘deemed disposition’ tax rules. These rules treat you as having sold certain property you own at its fair market value (FMV) on the date you cease to be a Canadian resident, causing you to realize any accrued capital gains or losses. Certain types of property are exempt from these deemed disposition rules, such as real properties located in Canada and properties held under a registered account.

When you move to Canada, the deemed disposition and reacquisition rules may apply. Under these rules, you are deemed to have disposed of and immediately reacquired certain property you own at its FMV on the date you become a factual resident of Canada. This does not trigger Canadian tax, but instead establishes the adjusted cost base (ACB) of your property for Canadian tax purposes. In other words, the ACB of your property upon re-establishing residence is its FMV on that date.

The types of property excluded from the deemed disposition and reacquisition rules are the same as those exempt when a Canadian resident emigrates. These rules ensure that unrealized gains that accrued while you were a non-resident are not taxable in Canada, and likewise, unrealized losses from that period cannot be deducted in Canada.

Election to Unwind the Deemed Disposition

If you return to Canada, you may be eligible to make a special tax election to unwind the deemed disposition that occurred when you left the country. To qualify, you must have ceased Canadian residence after October 1, 1996, and must still own the property that was subject to the deemed disposition rules at the time that you emigrated.

The election is made on a property-by-property basis:

• For taxable Canadian property (TCP), you can choose to reduce the capital gain reported on your Canadian tax return for the year you emigrated by an amount you specify, up to the amount of the original reported gain.
• For property other than TCP, the election reduces both the deemed proceeds of disposition (POD) on the date you ceased residence and the deemed adjusted cost base (ACB) on the date you re-establish residence. The reduction amount is the least of:
  • a) The unrealized capital gain accrued up to the date you left Canada (i.e., the gain reported on the deemed disposition);
  • b) The fair market value (FMV) of the property on the date you return to Canada; and
  • c) An amount you specify, which cannot exceed the lesser of (a) and (b).

This election effectively reverses the deemed disposition triggered upon emigration, potentially resulting in a refund of Canadian tax previously paid. The refunded tax on unrealized gains is deferred until the property is actually sold.

Additionally, if your marginal tax rate is lower in the year the property is sold than it was when you emigrated, you may owe less tax upon sale. Conversely, if your marginal rate is higher, you may owe more tax when the property is eventually disposed of.

Pro tax tips – filing Requirements

The CRA does not provide a prescribed form for making this special election. Instead, you must submit a written request (a letter) to the CRA. The election must be filed on or before the tax filing due date for the year in which you re-establish Canadian residence for tax purposes.

Your letter must include the following information:

• A list of the properties and their fair market values (FMV) for which you are making the election;
• The taxation year in which the deemed disposition occurred and the date you ceased Canadian residence;
• A statement declaring that you are making an election under paragraph 128.1(6)(c) of the Income Tax Act in respect of property you owned throughout your period of non-residence that was subject to a deemed acquisition at the time of emigration; and
• The revised deemed proceeds of disposition (POD) for the year of departure, the revised adjusted cost base (ACB), and the date you re-established Canadian residence.

The CRA may accept a late-filed election in certain cases. If your filing due date has already passed, you should consult an experienced Canadian tax lawyer for guidance on submitting a late election.

FAQ:

What are the conditions for a returning Canadian tax resident to elect to unwind the deemed disposition?

To qualify, the returning Canadian resident must

• have ceased Canadian residence after October 1, 1996, and
• must still own the property that was subject to the deemed disposition rules at the time you emigrated.

Is there a prescribed form to make the election to unwind the deemed disposition?

There is no prescribed form; taxpayers can send a written request (a letter) to the CRA for the election. This must be filed on or before the tax filing due date for the year in which you re-establish Canadian residence for tax purposes.

Disclaimer: This article only provides broad information and is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.

About the Author

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David J. Rotfleisch

David J. Rotfleisch, a leading Canadian tax lawyer, is not only a certified specialist in taxation but also a chartered professional accountant. Most recently, David is a pioneer in Canadian crypto taxation.

As of April 2020, he was one of 12 Ontario Certified Specialists In Taxation™.

Learn more about David J. Rotfleisch