Newcomers to Canada: Be Prepared
Know your tax obligations!
Have you recently relocated to Canada? Understanding the tax responsibilities linked with your newfound Canadian residency status is crucial.
Specifically, it's essential to prepare adequately for your inaugural Canadian income tax filing.
Irrespective of the intricacy of your tax circumstances, it's advisable to seek guidance from an international tax specialist promptly. They can assist in pinpointing the risks pertinent to your situation and guide you through the necessary steps to mitigate any potential issues, thus averting unwelcome surprises.
Do you have tax obligations in Canada?
Tax regulations vary based on whether you're deemed a Canadian resident for tax purposes or not. Establishing your tax residency status is the initial stride in determining your tax duties in Canada.
Broadly, if you're lawfully admitted to Canada as either a permanent or temporary resident (worker or student), the Canada Revenue Agency and Revenu Québec (for new residents of Québec) would regard you as a tax resident provided you establish significant residential ties with Canada.
These ties encompass factors like owning a home, having a spouse or dependent child in Canada, or spending more than six months in the country during the year.
Other secondary ties, such as employment location or asset placement, might also factor into this evaluation.
In certain scenarios, you might meet the criteria of a Canadian tax resident while still maintaining substantial residential ties to your home country. In such cases, if Canada has a tax treaty with your home country, the treaty would be utilized to ascertain your country of residence for tax purposes using tie-breaker criteria outlined in the agreement. This prevents double taxation of your income.
What income do you report?
As a recognized tax resident, you're liable for taxation in Canada on your global income from the moment you settle in the country, including income received from your home country after your relocation to Canada.
However, it's noteworthy that such foreign income might also be subject to taxation in your home country concurrently. Once again, if there exists a tax treaty between Canada and the foreign country, double taxation can often be circumvented.
To exemplify this taxation mechanism, consider the case of a U.K. expatriate relocating to Canada, deemed a tax resident as of June 1st. Between June 1st and December 31st, they earned employment income in Canada, received rental income from a U.K. property, and obtained interest and dividend income from investments in the U.K. For this scenario, the investment income isn't tax exempt in the U.K.
As a Canadian tax resident, their employment income earned in Canada is solely taxed in Canada. Rental and investment income earned prior to their arrival in Canada (before June 1st) is taxed exclusively in the U.K.
Conversely, rental and investment income earned post-settlement in Canada is taxed both in Canada (as the country of residence) and in the U.K. (as the country of income source). Double taxation is mitigated here by applying the provisions of the Canada-U.K. tax treaty and Canadian tax laws, which grant a taxpayer credit in Canada for taxes paid in the U.K., thereby reducing or nullifying the Canadian tax on the same income.
Different tax regulations may apply to other types of income (such as pension income, capital gains, etc.), necessitating a thorough analysis of the relevant tax treaty provisions to determine the applicable tax regime.
In some instances, double taxation cannot be evaded even with a tax treaty, particularly if taxation in Canada and the foreign country occurs in different taxation years (timing mismatch). Additionally, foreign income might be subject to an exemption or favorable tax treatment in the home country not recognized by Canadian tax laws.
These complexities underscore the importance of consulting with an international tax specialist, particularly in jurisdictions where tax information exchange agreements are rigorously enforced.
Preparing for your first tax return
1. Compile an inventory of assets owned on your arrival date in Canada, determining their market value on that date. This information is pivotal for:
Calculating Canadian tax liabilities upon subsequent sale of foreign property as a Canadian resident.
Fulfilling requirements for filing certain forms from the second year of residency in Canada (e.g., form T1134 for interests in foreign entities and form T1135 for foreign property exceeding C$100,000 in value). Failure to file these forms may incur significant penalties.
Collaborate with your tax advisor to list your foreign and Canadian income for the year of immigration.
Submit your Canadian immigrant tax returns. With assistance from your tax consultant, file your first income tax return by April 30th of the subsequent year following your move to Canada (Québec residents must file both federal and provincial income tax returns). This tax return serves three key purposes:
Recording your date of entry in Canada in your tax dossier to confirm the change in residency status.
Reporting Canadian and foreign income earned post-relocation to Canada and, where applicable, claiming a foreign tax credit to prevent double taxation.
Reporting foreign income earned pre-relocation to Canada. Although not taxable in Canada, it factors into calculations for certain Canadian tax credits.
What is the 90% rule for newcomers to Canada?
Federal non-refundable tax credits lower your tax liability. For instance, the Basic Personal Amount allows a person to earn income tax-free. In 2023, this amount is $15,000 for federal taxes.
If you've only lived in Canada for part of the year, this amount is adjusted proportionally. However, if 90% of your income during the non-residency portion of the year is from Canadian sources, you can claim the full Basic Personal Amount (along with other nonrefundable tax credits).
Tax for work-permit holders in Canada
Nonresident work-permit holders in Canada are subject to income tax, but the specifics vary. For instance, seasonal agricultural workers from other countries who are nonresidents for tax purposes pay income tax solely on their Canadian income. If you hold a permit to work in Canada, it’s a good idea to review the CRA guidelines that apply to your situation.
What are some tax breaks and how do new immigrants get them?
New immigrants can access these breaks by filing an income tax return as soon as they are eligible to do so. In some cases (see below), you can apply for benefits when you first get to Canada, before you have filed a tax return.
As a newcomer to Canada, here are three specific tax benefits you’ll want to know about.
1. GST/HST credit
The GST/HST tax credit is a rebate on sales tax that you’ve paid for the purchase of goods and services. If eligible, the government calculates the amount of the credit based on your family’s net income, plus the number of dependent children.
Eligibility requires filing the RC151 GST/HST Credit Application Form upon becoming a resident. Payments are issued every three months, contingent upon filing tax returns on time annually.
2. Canada child benefit
A tax-free monthly payment to eligible families raising children under 18. Application necessitates filing Form RC66, Canada Child Benefits Application, and RC66SCH, Status in Canada/Statement of Income. Regular tax return filing is necessary to continue receiving payments.
3. Climate action incentive payment (CAIP)
A payment to offset federal pollution pricing costs, contingent on provincial residency. Application occurs automatically upon tax return filing, or newcomers can apply via mail using forms RC66 (with children) or RC151 (without children). The CRA has an online guide on how the CAIP works.
