Relocating to Canada: Tax Issues to Consider

If you are relocating 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.

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.

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 the following:

• Whether and when you have a home in Canada available for your use;
• Whether you have a spouse or common-law partner and/or dependants who live in Canada;
• Whether you have other ties to Canada such as:
1. personal property (i.e. a car or furniture)
2. social ties in Canada
3. a Canadian driver's license,
4. Canadian bank accounts or credit cards,
5. health insurance with 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.

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 before relocating to Canada 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.

If you are relocating 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.

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 before relocating 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.

• You should keep a detailed travel log of travel inside and outside Canada during the year of your move.
• On relocating 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.

The article "Relocating to Canada - Tax Issues to Consider" was written and submitted by
By Mohammad (Mo) Ahmad, BA LL.B With edits by Wayne Bewick, CA, CFP, CPA

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, and has offices in Vancouver, Toronto and in London, UK.

For further information on the firm and the services it provides, please contact Mo or Wayne.

Phone: Mo 604-288-7700
Wayne - 416-214-7833 Ext:101
Email: Mo.ahmad (at) trowbridge (dot)ca
wayne.bewick (at ) trowbridge (dot) ca
Website: www.trowbridge.ca