Departure Tax for Small Trusts

There is a little-noticed difference between the way that security for the departure tax works for individuals and the way that it works for trusts. When an individual ceases to be a resident of Canada and has a deemed disposition of certain property, the departure tax is payable by April 30 of the year following the individual's departure. Emigrating taxpayers may elect on the tax return for the year of departure to defer the payment of the tax until they actually dispose of the underlying asset, provided that they post security for the tax that is being deferred. Security is automatically considered to be posted for essentially the first $16,500 ($50,000 × 33%) of federal tax (subsection 220(4.51)). However, as the CRA has confirmed (2015-0608051E5, October 18, 2016), this deemed-security rule does not apply to trusts that cease to have a Canadian residence and have a corresponding departure tax. Thus, such trusts must post security regardless of how small the accrued gain on the deemed disposition is, or else face penalties and interest charges. It can be difficult to post security if the trust holds only non-liquid assets.

Trusts cease to have a Canadian residence whenever their central management and control moves out of Canada (Fundy Settlement v. Canada, 2012 SCC 14), which often happens when the trustees themselves leave Canada. However, trusts may also cease to have a Canadian residence when there is no longer a resident contributor or a resident beneficiary (subsection 94(5)); this provision is easy to overlook, because it is often impractical for a trustee to track where these taxpayers reside.

Jenny Yu
Grant Thornton LLP, Mississauga

Canadian Tax Focus
Volume 7, Number 1, February 2017
©2017, Canadian Tax Foundation