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Scenario: An IT consultant setups a CCPA while resident in Canada. After 4-6 year, this IT consultants decides to move to USA permanently for 2 or more years. Let's assume that CCPA has about $1M in retained earnings at the time of departure of which $200K is in cash and rest is invested in stocks/portfolio.
a) What happens to retained earnings? Is there a departure tax on these?
b) Now that the CCPA owner is not Canada resident, it won't be a CCPA anymore. In this case, can the IT consultant still without cash annually? How are taxes calculated?
If the IT consultant becomes a non-resident of Canada for tax purposes, then he will have to pay capital gains tax on the value of his shares (less the cost basis) in the capital stock of the CCPC. The value of the shares is equal to the value of the company. For an IT consultant with one or two contracts, where he is the sole operator, the value of the shares is equal to the fair market value of the assets, less any liabilities. The cost basis of the shares in the capital stock of the CCPC is likely a nominal amount (e.g. $100).
For example, assume that the company has $200,000 of cash savings and marketable securities worth $1,000,000 as of today. The company has $0 in liabilities. The cost basis of the shares that the IT consultant owns in the capital stock of his company is a nominal amount. As a result, his shares are worth $1,200,000 and the deemed capital gain upon his departure will be $1,200,000. One half of this gain (i.e. $600,000) will be included in his income in the year of departure and taxed at his Canadian marginal tax rate.
Dividends paid from the CCPC to the IT consultant while he is a non-resident of Canada will be subject to a 15% Canadian withholding tax.