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Updated on December 12, 2024
Did you recently immigrate to Canada? It is important to know the tax obligations associated with your new Canadian residency status.
In particular, you need to prepare properly for your first Canadian income tax return.
Regardless of the complexity of your tax situation, it is recommended you consult an international tax expert as soon as possible. They will help you identify the risks specific to your situation and accompany you in the implementation of appropriate actions. This will help you avoid unpleasant surprises.
Do you have tax obligations in Canada?
The applicable tax rules differ depending on whether or not you are considered a Canadian resident for tax purposes. Establishing your tax residency status is therefore the first step in determining your tax obligations in Canada.
Generally, if you are legally admitted to Canada as a permanent or temporary resident (worker or student), the Canada Revenue Agency and Revenu Québec (for new residents of Québec) will consider you to be a tax resident if you establish significant residential ties with Canada.
To do this, they will use criteria such as whether you have a home, spouse or dependent child in Canada, or whether you have been in the country for more than six months during the year.
Other types of ties called secondary ties could be considered in this analysis: where you work, where your assets are located, etc.
In some cases, you may meet the definition of a Canadian tax resident and still have significant residential ties to your home country. If Canada has a tax treaty with that country, it will be used to determine your country of residence for tax purposes based on the tie-breaker criteria in the treaty. This will ensure that your income is not taxed twice.
What income do you report?
If you are recognized as a tax resident, you will be taxed in Canada on your worldwide income from the day you settle in the country. This includes income that you continued to receive from your home country after your arrival in Canada.
Nevertheless, it should be noted that such foreign income may be subject to home country tax at the same time. Again, if there is a tax treaty between Canada and the foreign country, double taxation can often be avoided.
To illustrate this taxation mechanism, let’s take the case of a U.K expatriate who has moved to Canada and is considered a tax resident here as of June 1st, applying the criteria indicated above. Between June 1st and December 31st of the year, he earned employment income in Canada, received rental income from a property he owns in U.K and received interest and dividend income from his investment accounts held in the U.K. For the purposes of this example, this investment income is not tax exempt in U.K.
As a Canadian resident for tax purposes, his employment income earned in Canada will be taxed only in Canada. U.K rental and investment income earned before his arrival in Canada (before June 1st) will be taxed only in the U.K.
On the other hand, U.K rental and investment income earned after settling in Canada will be taxed not only in Canada (country of residence), but also in the U.K (country of income source). Double taxation will be avoided, in this case, by applying the provisions of the Canada-U.K tax treaty and Canadian tax laws. These provisions give the taxpayer a credit in Canada for the tax paid in U.K, which will be used to reduce or even cancel the Canadian tax on the same income.
Other tax rules may apply for other types of income (pension income, capital gains, etc.). For each type of income, the provisions of the tax treaty must be analyzed in depth to determine the applicable tax regime.
Finally, in some cases, double taxation cannot be avoided even if there is a tax treaty. This is generally the case where taxation in Canada and in the foreign country does not occur in the same taxation year (timing mismatch). In other cases, the foreign income may be subject to an exemption or favourable tax treatment in the home country that will not be recognized by Canadian tax rules.
All of these issues highlight the importance of consulting an international tax expert, especially where tax information exchange agreements between countries are strictly enforced.
Preparing for your first tax return
1. Take an inventory of the goods/assets you owned on the date of your arrival in Canada. For each asset, you must determine the market value on that date (entry value in Canada).
Without going into detail, remember that this information will be useful to:
- calculate the Canadian tax payable when you subsequently sell your foreign property as a Canadian resident;
- determine if you have to file certain required information as of your second year of residency in Canada (form T1134 for a foreign entity in which you hold an interest and form T1135 for your other foreign property with a combined value greater than C$100,000). You could be liable for significant penalties if you fail to file these forms.
2. With the assistance of your tax consultant, list your foreign and Canadian income during the year of immigration.
3. File your Canadian immigrant tax returns. With the help of your tax advisor, you must file your first income tax return by April 30th of the year following the year in which you moved to Canada (Québec residents will have to file one federal and one provincial income tax return). This tax return will serve three purposes:
- Enter your date of entry in Canada in your tax file to prove the change in your residency status;
- Report your Canadian and foreign income earned after your arrival in Canada, and as applicable, claim a foreign tax credit to avoid double taxation;
- Report your foreign income earned before your arrival in Canada. While it is not taxable in Canada, it will be taken into consideration to calculate some Canadian tax credits.
As you can see, preparing tax returns can be a challenge for a newcomer. Our team of international tax experts can help you understand your Canadian tax obligations and prepare your next federal and provincial tax returns. Contact us to talk to one of our specialists.