Moving to Canada – The Tax Consequences
Yesterday evening, the Citizen and Immigration Canada website was unavailable, presumably due to the unprecedented volume of users attempting to access the site. Since so many people are suddenly very hungry for information on immigrating to Canada, we thought it would be fitting to give them some information on the tax aspects of immigrating to Canada. This is a brief overview of common considerations, and is far from a complete picture of tax planning for immigrating to Canada.
Determining Residency Status
Residents of Canada are subject to tax on their worldwide income. When moving to Canada, the key factor in determining an individual’s residency status for tax purposes will be whether he or she established residential ties with Canada. While there are many factors that go into this determination, according to the Canada Revenue Agency (“CRA”), the location of the individual’s “spouse or common-law partner, dependants, and dwelling place, if located in Canada, will almost always constitute significant ties with Canada.”[i]Landed immigrant status and provincial health coverage are also considered significant residential ties with Canada. So, where an individual applies for and is granted landed immigrant status and health coverage, they will likely be resident in Canada for tax purposes.
Even if an individual is not factually resident in Canada, there are Canadian income tax rules that may deem him or her to be resident in Canada. Specifically, if he or she sojourns in Canada for a total of 183 days or more in a calendar year, they are deemed to be resident in Canada for tax purposes.
There are also a series of “tiebreaker rules” in the Canada-U.S. Tax Treaty that determine an individual’s residence in situations where he or she is considered resident in both countries under the respective domestic tax laws. The Treaty effectively overrides domestic legislation and deems the individual to be a resident of either the U.S. or Canada.
Deemed Disposition and Re-acquisition
Paragraphs 128.1(b) and (c) deem an immigrating individual to have disposed of and re-acquired his or her property at fair market value (“FMV”) immediately before he or she becomes resident in Canada. Thus, the cost of the property for Canadian tax purposes will be the FMV of the property on that day. As a result, any capital gains accrued prior to becoming resident are not taxed in Canada.
This deemed disposition rule does not apply with respect to:
- taxable Canadian property (defined under 248(1));
- property used or held by the taxpayer in carrying on a business in Canada (including inventory of the business);
- an excluded right or interest (see 128.1(10)); and
- eligible capital property used in Canadian business (prior to 2017).
Holding Foreign Property
A taxpayer is required to complete CRA Form T1135, Foreign Income Verification Statement, where the total cost of the taxpayer’s specified foreign property exceeds $100,000. If a taxpayer immigrates to Canada, but continues to hold specified foreign property abroad, he or she may be required to complete Form T1135 every year.
Computing Income and Tax Credits
In the year in which an individual immigrates to Canada, the individual will be considered resident in Canada for part of the year and non-resident for the other part of the year. Generally, in computing a part-year resident’s taxable income for the period they are resident, paragraph 114(a) includes the individual’s total income for the year, but in respect of the non-resident period, includes only Canadian-source income such as income from employment carried on in Canada, income from a business carried on in Canada, and taxable capital gains from dispositions of taxable Canadian property.
With respect to tax credits, only a handful of credits are available with respect to the period of the year in which the taxpayer is a non-resident, and several other credits are available during the period in which the individual is resident—both sets of credits are prorated.[ii] Certain tax credits may be claimed in whole as if the taxpayer was resident in Canada during the entire year.
Moreover, newcomers must also file forms to apply for Canada Child Benefits and the GST/HST credit.
U.S. Retirement Plans
An individual with an interest in a foreign pension plan will not normally be subject to tax in respect of the income earned in the plan. Payments made out of the plan will normally be included in the individual’s income, but they may be eligible for “rollover” treatment if transferred to the individual’s registered retirement savings plan (“RRSP”) or registered pension plan (“RPP”).
Paragraph 60(j) allows an individual to transfer a lump-sum amount that is a superannuation or pension benefit (including transfers from a 401(k)) into his or her RRSP or RPP on a tax-deferred basis. The amount must be attributable to services rendered by the individual or his or her spouse or common-law partner while not resident in Canada.
A lump sum payment received from an IRA account can also be transferred into an individual’s RRSP on a tax-deferred basis (section 60.01), if the amount is derived from contributions made to the IRA by the taxpayer or the taxpayer’s spouse or former spouse.
These are some of the most common tax rules that apply to immigrants. However, tax planning for immigration becomes much more complicated where the individual is carrying on a business, has an interest in a non-resident trust, or owns foreign real estate, to name a few.[i] Income Tax Folio S5-F1-C1, para. 1.25 [ii] See 118.91(a) and (b)
By Cameron Mancell, Research Analyst, Wolters Kluwer