How To Undo "Deemed Disposition" of Assets When Returning to Canada: Insights from a Canadian Tax Lawyer

Rules on Deemed Disposition and Reacquisition

When you leave Canada, you may be subject to the “deemed disposition” tax rules. These rules treat you as though you sold certain assets at their fair market value (FMV) on the date you cease to be a Canadian resident, effectively realizing any accrued capital gains or losses. However, specific types of property—such as Canadian real estate and assets held in registered accounts—are exempt from these rules.

When you move to Canada, a similar concept applies through the deemed disposition and reacquisition rules. You are considered to have disposed of and immediately reacquired certain property at its FMV on the date you become a factual resident of Canada. While this does not trigger immediate Canadian tax, it sets the adjusted cost base (ACB) of your assets for future tax purposes. In essence, your property’s ACB upon re-establishing Canadian residency equals its FMV on that date.

The types of property excluded from the deemed disposition and reacquisition rules mirror those exempt when a Canadian resident emigrates. These provisions ensure that any unrealized gains accumulated while you were a non-resident are not taxable in Canada, and similarly, any unrealized losses from that period cannot be claimed as deductions in Canada.

The Election Process for Unwinding a Deemed Disposition

If you return to Canada, you may be able to make a special tax election to reverse (or “unwind”) the deemed disposition that took place when you left the country. To qualify for this election, you must have ceased Canadian residence after October 1, 1996, and you must still own the property that was subject to the deemed disposition rules at the time of your departure.

The election must be made individually for each property you own:

• For taxable Canadian property (TCP), you may elect to decrease the capital gain previously reported on your departure tax return by any amount you choose, up to the total gain originally declared.
• For non-TCP property, the election adjusts both the deemed proceeds of disposition (POD) at the time you left Canada and the deemed adjusted cost base (ACB) when you resume Canadian residency. The allowable reduction is the lowest of the following:

1. The unrealized capital gain that had accumulated up to your departure from Canada (the amount reported as a deemed disposition);
2. The property’s fair market value (FMV) on the date you return to Canada; or
3. A self-determined amount that does not exceed the lesser of (a) or (b).

This election essentially cancels the deemed disposition that was triggered when you emigrated, which may entitle you to a refund of the Canadian tax you previously paid. However, the refunded tax on unrealized gains is only deferred—tax will again become payable when the property is ultimately sold.

Furthermore, if your marginal tax rate is lower in the year of the actual sale than it was at the time of your departure, you could benefit from paying less tax overall. On the other hand, if your marginal rate is higher upon sale, your eventual tax liability may increase accordingly.

Tax Pro Tips – Key Filing Requirements

The CRA does not offer a standardized form for this special election. Instead, you must file a written request in the form of a letter to the CRA. This election must be submitted on or before the tax filing deadline for the year in which you resume Canadian residence for tax purposes.

Your election letter should include the following details:

• A list of the properties for which the election is being made, along with their fair market values (FMV);
• The taxation year of the deemed disposition and the date you ceased to be a Canadian resident;
• A declaration stating that you are making an election under paragraph 128.1(6)(c) of the Income Tax Act for property owned throughout your non-residence period that was subject to a deemed acquisition at the time of emigration; and
• The updated deemed proceeds of disposition (POD) for the year you left Canada, the revised adjusted cost base (ACB), and the date you resumed Canadian residence.

In some cases, the CRA may allow a late-filed election. If your filing deadline has already passed, it is advisable to consult an experienced Canadian tax lawyer for assistance in preparing and submitting a late election request.

Frequently Asked Questions (FAQs)

What are the eligibility requirements for returning Canadian tax residents to reverse the deemed disposition?

To be eligible for this election, a returning Canadian resident must:

• Have ceased to be a Canadian resident after October 1, 1996; and
• Still own the property that was subject to the deemed disposition rules at the time of emigration.

Is there a prescribed form available for making the election to reverse the deemed disposition?

There is no official CRA form for this election. Instead, taxpayers must submit a written request (letter) to the CRA. The election must be filed no later than the tax return due date for the year in which Canadian residency is re-established.

Disclaimer: This article is intended for general informational purposes only and reflects the law as of the date of posting. It has not been updated and may no longer be current. The content does not constitute legal advice and should not be relied upon as such. Each tax situation is unique and may differ from the examples discussed. You should consult a Canadian tax lawyer for advice tailored to your circumstances.

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