When a person moves out of Canada and becomes a non-resident, Canada’s Income Tax Act has a rule that comes into play, known as the “deemed disposition” rule. It’s like an imaginary sale of certain properties you own at their fair market value right before you leave the country. The rule is meant to tax any gains you’ve made on those properties while you were a resident of Canada.
So why does that matter? Well there’s an inverse side to those rules.
When you become a Canadian resident again after being a non-resident, there’s a tax rule that comes into play, which affects the cost basis of certain properties you own. This provision is commonly referred to as the “re-entry cost basis adjustment” and is related to the deemed disposition rule mentioned earlier.
Here’s how it works: When you move back to Canada and regain your residency, you’re deemed to have “acquired” your properties at their fair market value (FMV) on the date you become a Canadian resident again. This means that the cost basis for calculating future capital gains or losses on those properties will be “bumped up” to their FMV at the time of re-entry.
This re-entry cost basis bump can be beneficial if the value of your properties has increased while you were a non-resident. By increasing your cost basis to the FMV upon re-entry, you essentially “reset” the starting point for calculating any future capital gains or losses, which could result in lower taxes if you eventually sell the properties.
Remember though: the re-entry cost basis adjustment applies only to certain properties and that there may be additional tax implications when re-establishing Canadian residency. So watch what you’re plugging in to Turbo Tax.
**Usual Disclaimer: What is written here is not formal tax advice. I’m not your CPA. It’s possible, or dare I say even probable, that the comments and opinions expressed here contain material errors, is out of date, or that important stuff has been left out. Don’t use this info to make tax decisions. Hire a pro to help you.