Exit Taxes: As Formidable as They Seem?

Recently, a viral post on X was making the rounds claiming that the Canadian government was in talks to impose a $25,000 ‘Departure Penalty Tax’ and double the existing exit tax on people leaving the country.

Naturally, this got everyone up in arms, myself included. At this point, there does not appear to be any real evidence that this is actually going to happen. But I think why so many people freaked out about this is because we could 100% see it actually happening.

Western governments do not want you to leave. They need you to pay your taxes into their feudal system like a good little serf. As more and more people decide to vote with their feet and leave the country, our leaders are getting nervous about losing their cash cow.

But, are exit taxes as scary as they seem? Or is their bark worse than their bite? Let’s discuss.

What is an Exit Tax?

It’s important to note that your government really doesn’t care where you live, as long as you pay your taxes. But try to escape their tax net and that’s where they start to get concerned.

Exit taxes can also be referred to as expatriation or emigration taxes, and they are levied once a person ceases to be a tax resident of their country.

I touched on this in last week’s article about countries with territorial tax systems. Essentially, Canadians have to go from tax residents to tax non-residents to escape the tax net and Americans, well, you pretty much have to renounce your citizenship altogether.

Exit taxes often take the form of capital gains taxes based on the “deemed disposition” of all of your assets. So, basically, it’s a tax on unrealized capital gains. This is so the country can claim its “fair share” (I hate that term – thanks, Trudeau!!!) of whatever wealth you made while you lived there.

What, you thought they’d let you leave without exacting their pound of flesh?

Countries so good, you have to pay to leave!

It’s been weirdly difficult to find a complete list of countries that impose an exit tax. So far, these are the countries I’ve been able to find (note that most of the usual suspects are on there):

• United States
• Canada
• Australia
• France
• Germany
• Spain
• South Africa
• United Kingdom
• Norway
• Finland
• Sweden
• Netherlands
• Portugal
• Eritrea

The exit taxes vary quite a bit between each of these countries – this is definitely not a ‘one size fits all’ approach. Wikipedia does a good job of explaining some of them here.

Now, let’s dig a little deeper into the exit tax situation for Canadians and Americans, since that’s who most of our readers are.

Canada

Assuming you have already jumped through all the required hoops and have become a tax non-resident – congratulations! Now, it is time to settle the bill.

Once you become a tax non-resident, Canada will deem that you have disposed of certain types of property at their fair market value (FMV), even if you still hold these assets. This is officially called deemed disposition and, as mentioned above, amounts to calculating your unrealized capital gains.

Here in Canada, where the housing bubble reigns supreme, this could become an issue for anyone looking to continue to hold property in Canada after they leave, especially in a market that has seen a lot of appreciation. Imagine having to pay capital gains tax on a property you haven’t even sold and, thus, have not realized any capital gains from?

United States

The United States, with its citizenship-based taxation, is a different can of worms. The exit tax for the U.S. applies to citizens with a net worth over $2 million, as well as permanent residents and green-card holders, in certain situations.

The same deemed disposition rule applies here, too. But, unlike Canada, there is a $767,000 capital gains exemption.

The United States looks at your worldwide assets for exit tax calculation, rather than just domestic assets like Canada does. So that’s an important factor to keep in mind as you start to research your potential tax obligations.

Are Exit Taxes all they’re cracked up to be?

The mere thought of exit taxes has caused me to gnash my teeth. And, for wannabe expats, the threat of an exit tax may be enough for them to stay put.

But, when you really do the math and see what the requirements are, I’m of the opinion that exit taxes aren’t the threat they are cracked up to be, for the vast majority of people at least. Heck, some American citizens can actually get away without paying any exit tax at all!

Exit taxes can potentially cost you a lot of money – that much is true. But, with proper planning BEFORE you intend to become a tax non-resident, you can mitigate your risk substantially.

Unless you are moving out of the country tomorrow, you have plenty of time to do your research and implement a plan that helps you to minimize your exit tax obligations.

Don’t let Exit Taxes hold you back!

I honestly was surprised when I researched this topic, because I thought the exit tax situation was actually a lot worse than it is. What I’ve learned is to not let all the doom and gloom on X and other social media platforms necessarily inform my thinking – nothing good comes from that.

All this is to say that while the exit tax may feel like a big, bad boogeyman, it doesn’t necessarily live up to the hype. Just make sure you educate yourself about the exit tax in your home country and work with a professional during the process to make sure you get everything taken care of properly.

Ultimately, the exit tax should NOT hold you back from leaving your country. You probably have some very powerful reasons why you feel the urge to leave. Things that go beyond just cost of living. Things that you can feel in your bones.

Compared to that? The exit tax is a minor annoyance, at best. Plan for it and you’ll be fine.

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Thanks for reading and have a great week!

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Lisa is an aspiring expat from Canada who is working to put together her Plan B with a young family in tow. She is excited to pair her lifelong love of writing with her passion for offshore strategies and outside-the box investments in her weekly articles for Escape Artist readers. Follow this “rebel with a cause” as she walks the path less traveled and shares her experiences along the way.

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