Canada's departure tax vs. the US Expatriation Tax http://t.co/8nTXojWjF3
— US Taxation Abroad (@TaxationAbroad) July 31, 2013
Part I – Introduction – Not all “Exit Taxes” are the same:
Those subject to the tax jurisdiction of a country (typically because they reside in that country) are subject to tax for a variety of reasons. These include: earning income, the sale of assets, buying goods and services, etc.) People are becoming more and more mobile. In many instances, they will move from their tax jurisdiction to reside in another tax jurisdiction. For example, a Canadian living in Toronto might decide to (1) cease residing in Canada and (2) start residing in the United States. In a practical sense he will STOP paying taxes (on his world income to Canada) and START paying taxes (on his world income) to the United States. That’s how normal people think about moving from one country to another.
That said, life in the Global World is more complicated. What might seem like a simple move to an individual, may be a more complicated move from the perspective of immigration and taxation.
The concept of the “tax resident”
In a FATCA and CRS world, the concept of “tax residency” is vitally important. In general, your “tax residence” is where you actually live. Your country of “tax residency” is the place where you are taxed on your income because you actually have a physical presence there and actually live there. For most people this is simple. For others (particularly in transition, it is possible to be considered to be a “tax resident” of more than one country. In many of these cases, tax treaties may be utilized to assign “tax residence” to one country or another.
No person should be required to be a “tax resident” of more than one country
With the exception of the United States and Eritrea, all countries assert tax jurisdiction over residents of their countries. (The United States and Eritrea assert tax jurisdiction over both residents and citizens. The consequence is that the governments of the United States and Eritrea follow their citizens to any place they move.)
In a global world it is common for people to move from one country to another. For example one could move from Canada to the Bahamas. By ceasing to become a resident of Canada, one ceases to be subject to Canadian taxes (with the exception of certain kinds of Canadian based income). As a result, Canada (like many countries) imposes a tax when one ceases to reside in Canada and is therefore no longer subject to Canadian tax laws. The theory is that Canada should have the right to impose a tax on the gains in assets that accrued when the person was a tax resident of Canada. To put it simply:
If your gains accrued while you were a tax resident of Canada,and if you then cease to be a tax resident of Canada, you are required to pay tax on the gains that accrued while you were a tax resident of Canada. Is this fair? Is this logical? In Canada capital gains are triggered by the earliest of: sale (actual disposition), death (deemed disposition) or departure (deemed disposition).
Like it or not, that’s the theory and reality. Note that the tax is triggered by “departure” – ceasing to be a resident of Canada. The tax applies to almost all residents with exactly the same rules: regardless of citizenship, regardless of income and regardless of wealth.