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Canadian tax issues for immigrants.


Immigrants to Canada face an array of changes from their former location of residence, possibly including a new currency, a new climate, a new culture and even a new language. Of course, the location of their previous residence will determine the extent of the changes they face.

One area almost certain to change significantly is the income tax system to which they are now subject. Tax regimes vary dramatically from country to country, with most of the developed world having very sophisticated and complex tax regimes. Adding to the complexity of the Canadian tax system, many immigrants retain property or business interests in their former country of residence, and still have taxation obligations there.

Home is Where?

The Canadian tax system is based on residency. An individual's residency is determined on their residential ties, such as the location of their home, their spouse and dependents, personal property like vehicles, furniture and clothing, social ties such as church memberships and financial ties such as bank accounts and credit cards. For many people, the residency determination is fairly simple--an immigrant will commonly become resident in Canada on the date they arrive from their former home with their family and possessions. In other cases, the question is more complicated, such as for an individual who maintains significant ties in his former country of residence while gradually establishing ties in Canada. The timing of such an individual's change of residency can be difficult to determine, and may be further complicated by the terms of an income tax treaty between Canada and the former state of residence. Such treaties commonly modify an individual's tax status, and most contain provisions to resolve any situations of residency in both jurisdictions.

Citizenship has little impact under the Canadian tax system. It is considered a residential tie, but it is a very weak one. Many Canadian citizens reside outside Canada, and many Canadian residents are not citizens. A few countries, including the United States, extend the net further to subject their citizens to taxation regardless of where they reside.

All Around the World

A resident of Canada is subject to tax on his or her world-wide income. That is, no matter where the income is earned, it is required to be reported and taxed on the resident's Canadian income tax return. Depending on the tax laws in the immigrant's former country of residence, this may be a significant change. In some jurisdictions, income earned in foreign locations is exempt from tax until and unless it is repatriated, or exempt from tax completely. Some jurisdictions lack an income tax system entirely.

Differences in tax regimes have resulted in complex rules to deal with taxation of foreign holdings. Detailed provisions related to "foreign investment entities", and changes to the rules governing foreign trusts, were proposed in the 1999 budget. These changes have not yet been finalized ten years later. A detailed review of an immigrant's holdings may be required to determine the income tax issues relevant to the individual.

Tell Me All About It

Since 1999, all residents of Canada have been required to disclose their ownership of income-earning property held in foreign countries. Significant penalties can apply where this annual disclosure form is not filed. While not unique to immigrants, individuals who have lived in foreign countries are more likely than most Canadians to own property in a foreign country. The definition of foreign property is broad, sometimes surprisingly so, and includes shares of foreign companies (even if held through Canadian brokerage accounts) and bank accounts held outside Canada. No filing is required if the cost of the property, for income tax purposes, does not exceed $100,000 Canadian at any time in the year. In addition to this filing, more detailed disclosure is required for significant holdings in foreign corporations (generally, 10% or more of the shares held by the individual and/or related persons) or for involvement in foreign trusts.

The income tax regime surrounding such holdings is complex, and can be uncertain. For the year in which the individual first becomes resident in Canada, this disclosure is not required. However, many immigrants retain such property well past December 31 of the year of their arrival, and are subject to these disclosure requirements.

Everything Old is New Again

The Canadian income tax legislation provides that an individual is deemed to dispose of and re-acquire most types of property immediately prior to becoming a Canadian resident, for proceeds equal to the property's fair market value. Property not subject to this deemed disposal typically has some pre-existing connection to Canada--for example, Canadian real estate, shares of some private Canadian corporations and assets used in a business carried on in Canada.

As a consequence of this provision, the immigrant's income tax cost of assets held at the time he arrived in Canada is re-set at its fair value on the date of his arrival. Appreciation while not resident in Canada therefore avoids Canadian taxation. In addition to eliminating Canadian taxation on gains accrued while a non-resident of Canada, this provision is extremely helpful where an individual immigrates from a jurisdiction where capital gains are not taxable, resulting in a lack of detailed records of the cost of the individual's assets. Unfortunately, this provision also results in property which has declined in value between its acquisition and the individual's commencement of Canadian residency having its income tax cost reduced to its value on the date of arrival.

Benefits and Credits

A number of benefit programs are administered through the income tax system, and are commonly based on an individual's income for a prior year, as reported on their Canadian income tax return. New immigrants can qualify for payments under these programs, but must file special applications, as they will not have filed Canadian tax returns as residents in prior years.

Form RC 151 is filed to apply for the GST/HST Credit, and Form RC66 is filed to apply for the Canada Child Tax Benefit. These are income-tested benefits, and the forms require disclosure of the world wide income of the applicant and his or her spouse for periods up to two years previous in which they were not Canadian residents. "Proof of birth" is also required in respect of each child. This might be a passport, Record of Landing, Confirmation of Permanent Residence, birth certificate or hospital record.

Form RC66 also registers children for the Universal Child Care Benefit (UCCB), a payment of $100 per month for each child under age 6. Unlike the two programs above, the UCCB is not income-tested--all residents of Canada are eligible to collect this payment,

All of these applications require a Social Insurance Number (SIN), so the immigrant may have to apply for and receive their SIN prior to filing these applications. Individuals ineligible to obtain a SIN would not be entitled to benefits under these programs.

Credit Where Credit is Due

As noted above, the date on which the individual became a Canadian resident must be determined, and disclosed on the tax return for the year residency commenced. The personal tax credits normally available must generally be pro-rated for the number of days the individual was a resident of Canada. Income earned while a nonresident of Canada is generally not required to be reported, unless it was earned from sources in Canada. Where "all or substantially all" of an individual's income for the year is subject to reporting on their Canadian tax return, this pro-rating does not apply. The Canada Revenue Agency (CRA) interprets the phrase "all or substantially all" to mean 90% or more.

The Costs of Immigration

Costs of immigration are generally considered personal expenses, and are not deductible for income tax purposes.

Normally, an individual is permitted to deduct moving expenses against their employment or self-employment income earned in their new location of residence. Unfortunately, moving expenses to or from a foreign country are deductible only where the individual was a resident of Canada both before and after the move, so new Canadians are generally not permitted to claim any deduction for the likely substantial costs of their international move.

But I Paid Over There!

Many immigrants continue to generate income from their prior country of residence, and are subject to taxes there. As discussed above, world wide income is also subject to Canadian taxation. It would clearly be unreasonable for the same income to be taxed in both countries, and two tools exist to prevent such a result.

First, Canada has an extensive network of income tax treaties with most other countries with developed income tax systems. These treaties govern each country's right to tax income originating in one country and paid to a resident of the other. Under Canadian law, these treaty provisions override our domestic income tax legislation.

Second, taxes payable to the country in which the income is generated are available as a credit to offset the Canadian taxes on that income. As a result of these foreign tax credits, total taxes on income earned in a foreign country generally total the higher of the Canadian and the foreign tax payable. Foreign tax credits are computed using fairly complex mathematical formuli, and preparing such computations by hand can be quite onerous. Fortunately, most computer tax software performs the computations accurately.

Advance Planning

In some cases, it is possible to undertake planning prior to becoming a Canadian resident to defer or reduce the Canadian taxes payable, particularly on income generated from property held outside Canada. For example, it is often possible to transfer property to a foreign trust in a manner which permits a five-year tax holiday on income from this property. Such strategies must be carefully planned and implemented to ensure they comply with all of the technical requirements of the legislation. Generally they must be undertaken prior to commencing Canadian residency if they are to be effective.

An individual planning on immigrating to Canada should consider the implications of the Canadian tax system. Taxes can be a significant cost, as those of us residing here already are well aware. Being caught by surprise by the Canadian tax system could easily lead to financial disaster, especially if the immigrant's education in our tax regime comes in the form of a Canada Revenue Agency audit.

Hugh Neilson CA TEP is an independent contractor to Ernst & Young LLP, where he is in the area of Taxation Services.
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Title Annotation:Special Report: Immigration Law
Author:Neilson, Hugh
Date:Nov 1, 2009
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