What is Deemed Disposition?

Deemed disposition” refers to a tax concept where an individual or entity is considered to have disposed of an asset for tax purposes, even though the asset may not have been sold or transferred. This can trigger tax consequences, such as capital gains or losses, depending on the situations. It’s crucial for individuals and businesses to understand these rules to ensure compliance with tax regulations and to make informed financial decisions.

Circumstances where deemed disposition is triggered in Canada.

In Canada, a deemed disposition often arises in the context of changes in the use of property or events such as death, gifts, trusts or emigration. Here we are discussing only the tax filing requirements for the deemed disposition related to emigration.

Change in Tax residency/Emigration

When a Canadian resident becomes a non-resident for tax purposes i.e., he leaves Canada, CRA treats that the individual has disposed of the property and reacquired the same again at FMV (Fair Market Value). This deemed disposition may result in capital gain which is subject to departure tax (to know more about the departure tax please read the article separately). There is a deemed disposition of certain property, such as shares of a private corporation, at their fair market value. This can lead to tax consequences for the individual emigrating. However, there are some exceptions where deemed disposition do not apply when you become non-resident, as following-

i) Canadian real estate or resource property and timber resource property

ii) Canadian business property includes all the inventory and equipment, machinery or other owned property subject to the business has permanent establishment in Canada.

iii) Pension plans, RRSP, RESP, RRIP, TFSA, Employee profit-sharing plans, Salary deferrals, Interest in life insurance policies in Canada, interest in certain personal trusts resident in Canada etc. (full list can be referred to in “excluded right and interest in Canada” in Income Tax Act)

iv) Any property owned before becoming a resident of Canada (or inherited afterwards), If as an individual you were resident for less than equal to 60 months with in last 10 years from the date of leaving Canada.

An emigrant need to report to CRA information for the emigration and the deemed disposition of the property through various forms:

T1243 is filed to report deemed disposition of the properties held in Canada other than the exceptions and foreign properties.

T2061A is filed when any deemed disposition for Canadian real estate or resource property, timber resource property, capital property (including inventor) of a business having a permanent establishment in Canada is to be reported.

Submitting List of Properties to CRA- Form T1161

There is one more reporting for the emigrant to send list of all the properties held by an individual if the FMV of the properties is more than $25000. There are some properties which are not be accounted in for adding up the total value of $25000, which are as follows:

1. Cash and Bank deposits
2. Point number (iii) and (iv) as per the exceptions told above.
3. Any item of personal use property that has a FMV of less than $10000. Personal use items are described in section 54 of the Income Tax Act and includes clothing, household, cars collectibles etc.

Penalty for non-filing of T1161

There is a penalty for non-filing of T1161 which is minimum $100 and $25 per day and goes to a maximum of $2500. Even though an individual may not need to file the tax return but still he needs to submit T1161 if applicable.

Deferring the tax payment

CRA allows you to defer the tax payment of tax due to income from the deemed disposition of property. The tax amount can be paid later when the property is sold or as per the understanding. The information needs to be sent to CRA with in due time and as per the procedures.

Returning Residents after deemed dispositions

If an individual ceases to be resident after Oct 1, 1996 and later becomes resident again for the tax purpose, one can apply for the adjustment to the deemed disposition reported at the time of the emigration. If the individual still holds the property considered to be deemed disposed the request for the adjustment can be made to reduce the gain reported for the return of the emigrant year by an amount as below:

1.  If it is Canadian property, the amount of gain reported for the property
2.  If it is foreign property, the least of the two-

• The amount of the gain reported at the time of the return filing for the emigrant year or
• The FMV of the property when you returned to Canada.

IF you need any help with the matter, Team Aaras is always there for you for case specific solutions.

 Note: The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situations.

–Raman Nagpal

1. B. Com, CA, CMA, DISA