By Mohammad (Mo) Ahmad, BA, LL.B
With Edits by Wayne Bedwick, CA, CFP, CPA |
This article identifies some of the tax issues individuals moving to
Canada may face. Since tax implications will vary with an individuals
specific circumstances, professional tax advice should be sought before
acting on any information provided in this article.
If you are moving to Canada for the first time, or if you are a
repatriating Canadian, you will need to consider the various tax
implications of your move. Liability to Canadian tax is based on residency
so it will be important to determine exactly which day you become a
Canadian tax resident. It’s important to keep in mind that your status for
tax purposes can be very different from your status for immigration
purposes and that the two do not necessarily go hand in hand.
Please note that our review of the issues outlined below is of a general
nature only and you should consult with a tax advisor proficient in
cross-border tax issues well in advance of your move to consider issues
specific to your situation.
Tax Residency Status
As liability to Canadian tax is based on your residence status for tax
purposes, the date on which you become a resident of Canada is relevant in
determining when and how your income is subject to Canadian tax. Generally,
the date you begin to be a Canadian tax resident is the date that you
establish residential ties to Canada. This is usually the date of your
physical move to Canada. However, it could be a different date depending on
a number of factors, including:
» If or when you have a home in Canada available for your use.
» Having a spouse or common-law partner and/or dependants who
live in Canada.
» Having other ties to Canada such as: personal property (i.e. a
car or furniture), social ties in Canada or a Canadian driver’s license.
» Canadian bank accounts or credit cards.
» Health insurance in a Canadian province or territory.
Another important consideration in determining when you become a tax
resident of Canada is whether you are considered to be a tax resident of a
country with which Canada has entered into a tax treaty. If this is the
case, then the tax treaty may impact your residency status in Canada.
Your Canadian Tax Obligations
In the year that you establish Canadian tax residency, you will be
treated as a part-year tax resident. For the period of time you are a tax
resident of Canada, you are subject to Canadian tax on your worldwide
income. As a non-resident of Canada, you are only subject to Canadian tax
on Canadian source income.
As a resident of Canada, you will be taxable on your worldwide income,
as determined under Canadian tax rules. This is an important consideration
for someone coming from a lower tax jurisdiction as you could be hit with a
large tax bill given that Canadian tax rates are higher than many countries
in the world. You will need to consider the Canadian tax impact on any
foreign income, such as employment income or investment income (e.g.,
interest, dividends, and royalties) from sources outside Canada, income
from property (e.g., a rental property in the individual’s home country),
income from business investments outside Canada, and income from foreign
retirement plans received while a resident of Canada.
Careful planning is required to avoid Canadian taxation on any foreign
payments you receive after you become a tax resident of Canada. To the extent
possible, it would be beneficial to receive all income such as a bonus
payment for a prior year period before you become a tax resident of Canada.
If this is not possible and the income is also subject to foreign tax, then
you can claim a foreign tax credit in Canada but you will be subject to
Canadian tax rates. Also, where possible you should plan the date of
commencement of Canadian residency to take advantage of lower marginal tax
rates in a part-year of income.
Employment Related Issues
If you are moving to Canada in a transfer with your current employer or
to take on a new job in Canada, there are some specific issues you should
be aware of. Careful planning may be required if your date of transition to
the Canadian employer is not the same as the date that you become a
Canadian tax resident. In this case, the employment income must be
allocated between the resident and non-resident periods to determine what income
is taxable in Canada.
Another consideration for employment related moves is the Canadian tax
treatment for moving expenses. Generally, under the Canadian tax rules, you
can only deduct moving expenses you incur for moves within Canada. However,
if your employer reimburses you for moving expenses in an
employer-sponsored move then this may not be a taxable benefit to you. It
will be important to review the timing and the method of payment for moving
expenses to get the best tax result as the tax costs of not structuring
this properly can be quite large.
Also, if you continue to participate in a foreign stock option plan or
other equity compensation plan, then you will need to consider the Canadian
tax rules applicable to your particular plan. You may be subject to both
the foreign and Canadian tax rules on your participation in these plans.
The same is true if you continue to participate in foreign pension plans or
social security systems. A review of these issues is beyond the scope of
this article and you will need to consult with a cross-border tax expert
familiar with these issues. There may be some good tax planning opportunities
and expert tax planning will be required to take advantage of these
opportunities. However, there are also certain pitfalls that you will need
to identify and avoid.
Personal Assets and Capital Gains
When you become a tax resident of Canada, you are deemed to dispose of
and reacquire all your property (except for certain types of property such
as taxable Canadian property and certain excluded rights and interests) at
fair market value. This tax rule does not trigger a taxable transaction but
merely establishes a new cost base for your property. You should keep a
record of the fair market value of your marketable securities (other than
those in a tax-sheltered plan) on the day that you become a tax resident.
This value becomes the cost basis for these investments for Canadian tax
purposes. This cost basis will be relevant if these investments are
disposed of while you are a Canadian resident or when you leave Canada.
When you leave Canada or cease Canadian residency, your property will be
subject to a deemed disposition and you may be liable for capital gains tax
on any capital appreciation accrued as a Canadian resident. There are some
exceptions to this rule if you were a resident for less than 60 months in
the last 10 years.
There may be significant opportunities as well as pitfalls associated
with these tax rules. You should consult with a cross-border tax specialist
to review your investment portfolio prior to your move to Canada. You will
need to consider whether it is advantageous to sell investments either
immediately before or after becoming a Canadian tax resident and you should
consider this before you sell anything. Also, if you own significant
foreign investments then you should consider establishing an immigration
trust prior to becoming a Canadian resident to shelter income and gains on
these investments from Canadian tax for up to five years.
Administrative Items to Consider
» You should keep a detailed travel log of travel inside and
outside Canada during the year of your move.
» On moving to Canada, you will need to obtain a social insurance
number (SIN) or a tax identification number (TIN) to file a Canadian tax
return.
» As a resident of Canada for any part of a tax year (January 1
to December 31), you will generally need to file a Canadian tax return by
April 30th of the following year if you owe tax or if you want to receive a
refund because you paid in too much tax in a tax year.
» Even if you have no income to report or tax to pay, you may be
eligible for certain payments or credits. You must file a tax return to
receive these credits such as the GST/HST credit, the Canada Child Tax
Benefit, the Universal Child Care Benefit or other provincial or
territorial tax credits.
» For most provinces, you only need to file one tax return for
both the federal and provincial taxes. If you live in Quebec, you may need
to file a separate provincial tax return.
» If you keep assets outside of Canada worth more than $100,000
there are additional Canadian tax filing requirements that must be filed
and there are some potentially large penalties for not being compliant with
the foreign reporting requirements.
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| Mo Ahmad is a Tax Advisor and the Director of Trowbridge Professional Corporation’s Vancouver operation while Wayne spends time in Toronto and the UK. Trowbridge focuses on international tax services for Canadians around the world.
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