Immigration into Canada
17 March 2015
Posted by: Authors: Jack Bernstein and Ron Choudhury
Authors: Jack Bernstein and Ron Choudhury (Aird & Berlis LLP, Toronto)
Canada’s political stability and economy make the country a logical choice for people who want to emigrate from the United Kingdom, Hong Kong, South Africa, and other jurisdictions. Multinationals and US companies often relocate their executives here temporarily. The demand for Canadian residence and the high Canadian personal tax rates make tax planning an important issue for prospective newcomers. This article deals with some tax matters relevant to new immigrants or residents, including recent and significant changes.
Residence. An individual becomes subject to Canadian income tax on worldwide income when he or she moves to Canada and takes up residence. That person is considered to be ordinarily resident in Canada. The precise date of becoming a resident may depend on when the person becomes a landed immigrant, moves to Canada, or commences employment in Canada. For the year of immigration, the immigrant is taxable in Canada on Canadian-source income received before the date of immigration and on worldwide income earned after that date. The new immigrant’s first tax return must be filed by April 30 of the year following the year of arrival. Personal exemptions are prorated on the basis of the time spent in Canada.
A person who spends more than an aggregate 182 days in a year in Canada may also be deemed resident in Canada throughout the year under the sojourning rule in paragraph 250(1)(a). However, the tiebreaker clause in a Canadian tax treaty may treat him or her as resident only in the other treaty country; he or she is thus not a Canadian resident and is not subject to Canadian tax on worldwide income.
A part-year resident determines his or her income under section 114 and is taxed on worldwide income for that part of the year in which he or she is a Canadian resident; the individual is also taxable on Canadian-source income for that part of the year in which he or she is a non-resident of Canada. The immigrant’s taxation year includes the part of the year during which he or she was a Canadian resident and the part of the year during which he or she was a non-resident but had income from Canadian sources. The immigrant is treated as a non-resident until the date on which residence is assumed, and he or she is taxable on worldwide income for the balance of the year.
When an individual becomes a Canadian resident, the tax cost of each property that he or she holds (except for excluded property) is bumped to its FMV for Canadian tax purposes; Canada does not tax the accrued gain on the asset. There is no step-up in the tax cost of taxable Canadian property, inventory and eligible capital property of a business in Canada, or an excluded right or interest. Moreover, a US citizen continues to be liable for US tax based on the property’s historic cost to him or her.
The part-year rule offers an immigrant the opportunity to consider when Canadian residence should commence. For example, if an individual intends to immigrate to Canada from the United States and is considering the sale of a US business, the choice of timing of events may be influenced by whether his or her overall tax payable is greater if the business is sold after Canadian residence is established.
A resident of Canada who subsequently moves to the United States or to another country is subject to Canadian departure tax: the emigrant is deemed to have disposed of all assets except for Canadian real estate, Canadian or timber resource property, capital property and inventory used in a Canadian business, employee stock options, and rights to pension income. Some relief is available to a person who leaves Canada: if Canadian residence lasts for less than 60 months during the 10 years preceding departure, property owned by the individual at the time of immigration and a gift or bequest of assets received during Canadian residence are exempt from departure tax.
Foreign reporting. The foreign reporting rules require most taxpayers to report holdings of annually specified foreign property whose aggregate cost exceeds $100,000. A taxpayer with an FA is also subject to reporting requirements. Some taxpayers and some foreign property are exempt from reporting. For example, an individual is not required to file foreign property information returns for the year in which he or she first becomes a Canadian resident. The rules do not apply to personal-use property of a person or partnership and thus do not require reporting of foreign residences used for personal purposes; however, the exemption does not apply to a foreign residence owned by a foreign corporation.
Under the foreign reporting requirements,
- a taxpayer with interests in foreign property such as a share, a bank account, or a real property (other than a personal-use property) whose aggregate costs exceed $100,000 must report and provide details of the holdings;
- a taxpayer that has an FA (generally, a non-resident corporation if at least 1 percent of any class of shares is directly or indirectly held by the taxpayer and of which at least 10 percent is directly or indirectly held by the taxpayer and non-arm’s-length persons) must provide additional financial and tax information on each controlled FA (generally, an FA that is actually controlled by the taxpayer or that would be controlled under certain deeming rules);
- a beneficiary of certain non-resident trusts must file an information return for the year in which he or she receives a distribution or a loan therefrom;
- a person who transferred or loaned property to a non-resident trust must file an annual information return in respect of the trust; and
- a person must report a transaction or a series of transactions that relate to a business carried on in Canada in which the person and a non-arm’s-length non-resident participated.
The FIE rules may apply to a prospective resident’s investments in offshore investment fund properties. However, the purpose test in subsection 94.1(1) may exempt the holding from Canadian tax, particularly if the investments in the offshore investment fund were made long before the investor became a Canadian resident.
Immigration trusts. Until very recently, an immigration trust was commonly used by a prospective Canadian resident to achieve a tax exemption on certain income and capital gains for up to 60 months following immigration. However, the February 11, 2014 federal budget announced the elimination of the immigration trust exemption. An immigration trust is now subject to the Canadian non-resident trust rules, a change expected to significantly affect planning done by new residents and prospective immigrants.
This article first appeared on ctf.ca.