In Marcil Lavallee LLP's most recent Tax Letter, they did a fantastic job summarizing the tax-related considerations and obligations for new immigrants (Permanent Residents) living in Canada and before moving to Canada.
Tax on worldwide income
The most important thing to know is that, once a person
becomes resident in Canada, they are taxable on their worldwide income from all
sources, including foreign income. This will include, for example:
• Pensions from the home country;
• Interest being earned in bank accounts in the home
country;
• Gains from selling property in the home country.
You should also know that Canada now has tax treaties or
“tax information exchange agreements” with over 100 countries. More such
agreements are being signed all the time, specifically for the purposes of
exchanging information; and new mechanisms for computerized exchange of
information are going to be introduced in at least some situations.
Expect the Canada Revenue Agency to find out about pension
income, bank interest, sales of real property and other sources of income in
the home country. Taxpayers who do not report their income can be subject to
severe penalties and even prison.
Reporting foreign assets and trusts
All Canadian residents must state, on their annual income
tax return, whether they have foreign investments (cost exceeding $100,000), or,
in some cases, whether they are beneficiaries of foreign trusts or own shares
(directly or indirectly) in foreign corporations. Starting next year, the
information required for foreign assets and investments will be very detailed.
New immigrants need to take particular note of this
requirement, and disclose assets or investments they have left behind in the
home country.
Steps before immigrating to Canada
There are a number of tax planning steps that the prospective
immigrant should consider before
moving to Canada.
• Arrange to receive all payments for pre- immigration
employment outside Canada before immigrating. If employment income is received
after immigration, Canada will tax it.
• For immigrants with substantial assets, consider setting
up an “immigration trust”.
If structured
properly, this can allow the immigrant to keep funds offshore and not pay any
Canadian tax on the income for five years.
• Note that capital property (e.g., real estate) is generally deemed disposed of and reacquired at fair market value on immigration. This will boost the cost base of the
property up to its current value, for purposes of future capital gain or loss calculations.
The immigrant may want to obtain a formal evaluation of such properties to
document the value for later.
• Any Canadian professionals who are advising the immigrant
(e.g., lawyers or accountants) should render an account for time spent to date before the immigrant moves to Canada. The account will not bear GST or HST.
Tax issues after becoming resident
If you are a new immigrant, you should consider the
following:
• As noted above, you will pay tax on your worldwide income
from all sources. Make sure to identify and report these to the CRA, even if
you have left the income offshore. Note that some forms of income (e.g.,
pension income) may be given special relief by the tax treaty between Canada and
your home country.
• Obtain a Social Insurance Number upon arriving in Canada.
This number will be used as your Canada Revenue Agency account number.
• If you are carrying on business, consider whether you need
to register for GST/HST, and to collect and remit GST or HST on your revenues.
• Have you become resident in Canada for tax purposes? Aside
from the ordinary meaning of “resident”, if Canada has a tax treaty with the
home country, check how the “tie-breaker” rule applies if you might still be
resident in both countries.
For example, if you
still have a home in both countries and travel back and forth, the answer may
not be obvious.
• If you control a foreign corporation, you generally have
to report its passive income as “foreign accrual property income” (FAPI), and
pay Canadian tax on it each year. The FAPI rules are very complex and you will
need professional advice.
• If you receive income that is subject to foreign tax
(e.g., foreign withholding tax on
interest or pension income), you can normally claim a “foreign tax credit” for this tax on your Canadian return, up to a limit of your Canadian tax on the same income. The rules can become complex, but in
general you end up paying the higher of the two countries’ tax rates in total.
• If you are a US citizen, you must continue to file US tax
returns even though you are no longer resident there. To reduce the impact of
double taxation, you will want to claim the US “foreign earned income exclusion”
against your employment or self-employment income in Canada, as well as US
foreign tax credits and any relief provided by the Canada-US tax treaty.
Professional advice
from a specialist in both Canadian and US tax law is usually recommended. Note
also that the US and Canadian tax systems differ in many ways, and your
calculation of income for the two systems may be very different.
• Consider setting up a TFSA (Tax-Free Savings Account) and
contributing funds to it so that you can earn a certain amount of investment
income tax-free. (If you are a US citizen, this is normally not advisable.)
• After your first year of earning employment or business
income, set up a registered retirement
savings plan (RRSP) and contribute the
maximum possible to it (unless you are
planning to emigrate from Canada within
a few years, in which case there could
be negative consequences).
• If you have children under 6, apply to the CRA for the
Universal Child Care Benefit. If you have children
under 18 and your family is relatively low-income, apply for the Canada Child
Tax Benefit. If your family is low-income, apply for the GST/HST Credit. (See
cra.gc.ca for more information.)
• Payments under pre-existing spousal support obligations
may be deductible for Canadian tax purposes. If the payments qualify, keep good
records and make the claim on your Canadian tax return.
• A person who dies while owning property in the US, or a US citizen who dies, is subject to US estate taxes. A credit to reduce or eliminate this tax is provided by the Canada-US tax treaty.
