How a Former Oleh in Canada Deferred Israeli Exit Tax on His Portfolio

Result: An immediate Israeli exit-tax bill of roughly NIS 430,000 on an NIS 3.6M portfolio deferred in full until the assets are actually sold, with the Israeli taxable gain capped at the residency-period share · Timeline: About 7 months from the ITA query to a resolved position · Challenge: A deemed-sale tax on gains he had not realized, after he had already left Israel · Authority: Israel Tax Authority · Financial Impact: About NIS 430,000 in tax deferred and the risk of double taxation removed

Background

A man who had grown up in Toronto made aliyah in his late thirties, lived and worked in Israel for about eight years, and then, when his employer restructured, moved his family back to Canada. He came to us roughly a year after the move, not because he had done anything wrong, but because his Israeli accountant had mentioned, almost in passing, the words "exit tax," and he had not slept well since. During his Israeli years he had built up a portfolio: shares in a few Israeli technology companies, some traded on the Tel Aviv Stock Exchange, a block of vested options in the Israeli company that had employed him, and a spread of foreign securities held through an Israeli broker. None of it had been sold. On paper it was worth about NIS 3.6 million, most of that being unrealized gain. He was now a Canadian tax resident, an Israeli non-resident, and he could not understand how Israel could tax him on shares he still owned and had never sold.

The Challenge

Israel, like Canada and a number of other countries, imposes a departure charge on people who stop being tax resident. The rule sits in Section 100A of the Income Tax Ordinance 1961, and its logic is that a person should not be able to build up gains while resident in Israel and then step across a border to cash them out tax-free. Section 100A(a) achieves this by a legal fiction: on the day a person ceases to be an Israeli resident, all of their assets are deemed to have been sold one day earlier, at market value, triggering a capital gain even though nothing has actually changed hands. That deemed sale is what had frightened our client. Taken at face value, it said he owed Israeli capital gains tax on NIS 3.6 million of paper profit, on the day he left, out of money he did not have because he had not sold anything.

Two features of his situation complicated the picture further, and both cut in his favour once handled properly. First, he had been an oleh, a new immigrant, and new immigrants enjoy a ten-year exemption on foreign-source income and gains under Section 14 of the Income Tax Ordinance 1961. His foreign securities largely fell inside that shelter, which meant the exit-tax exposure was concentrated on his Israeli-source assets, the Israeli company shares and the vested options, not on the whole NIS 3.6 million. Second, Canada does not simply ignore the assets he arrived with. When a person becomes a Canadian resident, Canada treats them as having acquired their property at fair market value on the date of arrival, a deemed acquisition that resets the cost base for future Canadian tax. Left uncoordinated, the two systems could overlap and tax the same growth twice, once by Israel on departure and once by Canada on a later sale.

In Practice: Under Section 100A(a) of the Income Tax Ordinance 1961, our client's assets were deemed sold one day before he ceased to be an Israeli resident, producing a notional capital gain the Israel Tax Authority (Rashut HaMasim) valued in the region of NIS 1.7 million on his Israeli-source holdings after the new-immigrant exemption was applied. At the Israeli capital gains rates that pointed to an immediate charge of roughly NIS 430,000, none of it backed by cash, because he had sold nothing.

What We Did

We did not treat the deemed sale as a bill to be paid. We treated it as an election to be made, because that is what Section 100A actually offers. Section 100A(b) gives the departing resident a choice. He can pay the exit tax at the moment of departure on the deemed gain, or he can defer it, so that no tax is due until he actually sells the assets, at which point Israel taxes only the portion of the eventual gain that accrued during his Israeli residency. The deferral is in fact the default position, but it is one that has to be claimed and documented properly rather than assumed, because a taxpayer who quietly does nothing can find the Authority taking a different view years later. We made the deferral election explicitly and put it on the record.

The heart of the work was computing the Israeli slice of the gain correctly, because deferral does not mean Israel gets the whole future gain when he sells. Section 100A apportions it. The Israeli-taxable portion is the total real gain at the eventual sale multiplied by the number of days he owned the asset while an Israeli resident, divided by the total number of days he owned it from purchase to sale. For an asset bought two years before he made aliyah and sold, say, three years after he left, only the middle period counts as Israeli. We built that apportionment for each holding, fixed the acquisition dates and values, and documented them contemporaneously, so that whenever he does sell, the Israeli figure is already calculated on defensible numbers rather than reconstructed from memory under pressure a decade later.

Then we filed the residency side. Ceasing to be an Israeli resident is itself a reportable event, and we submitted the severance-of-residence position to the Israel Tax Authority with the facts of his move, the date his centre of life shifted to Canada, and the deferral election. Because he was abroad, he appointed us under an apostilled power of attorney to file and correspond, and named an Israeli representative address so the Authority always had someone to reach, which matters, because an unanswered ITA letter to a foreign address is how deferred positions unravel.

In Practice: Under Section 100A(b) of the Income Tax Ordinance 1961, we elected to defer the exit tax until actual disposal, and applied the statutory apportionment so that Israel taxes only the residency-period share of each future gain, calculated as the total gain multiplied by Israeli-resident ownership days over total ownership days. Coordinated with Canada's deemed acquisition at fair market value on the date he became resident, the split meant Israel taxes the pre-departure growth and Canada the post-arrival growth, and the Canada and Israel tax treaty backs that division so the roughly NIS 430,000 was deferred with no double charge.

The Outcome

The client left our office with no Israeli tax to pay on his departure and a clear, documented position for the day he eventually sells. The roughly NIS 430,000 that had kept him awake was deferred in full under Section 100A(b), and the apportionment we prepared means that when he does sell, Israel will tax only the growth that accrued during his eight Israeli years, not the growth before he arrived and not the growth that will accrue while he is a Canadian resident. The Canadian deemed acquisition on his arrival gives him a fresh cost base for Canadian purposes, so the two countries carve the timeline between them rather than both claiming the same gain, and the Canada and Israel tax treaty stands behind that split if either authority ever questions it.

What the case really turned on was not a clever argument but doing the ordinary things at the right time. The deferral election was available to anyone in his position, yet many former residents never make it properly and later face an Israeli assessment they could have avoided. The apportionment numbers were straightforward to fix while the acquisition records were fresh and would have been a nightmare to reconstruct after a sale years later. And the residency severance had to be reported cleanly, because the exit tax and the question of when Israeli residency actually ended are the same conversation. Anyone planning to leave Israel after a period of residency should understand our guide to the Israeli tax residency rules, because the date residency ends is the hinge on which the entire exit-tax calculation swings.

Key Takeaways

What this case illustrates for non-residents in similar situations:

1. Leaving Israel after a period of residency can trigger an exit tax on gains you have never realized. Section 100A(a) of the Income Tax Ordinance 1961 deems all your assets sold one day before you cease to be resident, even though nothing has actually been sold.
2. The tax does not have to be paid on departure. Section 100A(b) lets you defer it until you actually sell, and Israel then taxes only the residency-period share of the gain. But the deferral should be elected and documented, not silently assumed.
3. Fix the apportionment numbers while the records are fresh. The Israeli slice of a future gain is calculated on acquisition dates and values that are far easier to prove at departure than to reconstruct after a sale years later.
4. A new immigrant's ten-year exemption under Section 14 shelters foreign-source assets and can shrink the exit-tax base dramatically. Know which of your holdings are Israeli-source and which are foreign before you assume the worst.
5. The country you move to matters. Canada's deemed acquisition at fair market value on arrival, backed by the Canada and Israel tax treaty, splits the gain between the two countries and prevents double taxation, but only if the Israeli and Canadian positions are coordinated rather than filed in isolation.

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Facing a Similar Situation?

If you built up assets while living in Israel and have since moved abroad, or you are planning to, the exit tax under Section 100A is very likely in play, and the difference between electing the deferral correctly and doing nothing can be hundreds of thousands of shekels.

Contact us for a confidential consultation about your Israeli legal matter.