For newcomers or individuals moving back to Canada, it can be an exciting yet daunting time, as there is a lot to learn about a new country. One particular learning curve of importance is understanding the Canadian tax system. Below is a list of five tax rules that all newcomers should be familiar with before they move to Canada.

Residency: Income taxes are calculated based on the residency of an individual, not citizenship. Canadian residents are required to pay taxes on their worldwide income. Non-residents only need to pay taxes on their Canadian source income. Keep in mind that the date you become a resident for income tax purposes could differ from the day you become a resident for immigration purposes. Speak with our team or a tax professional to help determine your residency status.

If you are a tax resident of both Canada and a foreign country at the same time, it is imperative to check if there is a tax treaty between the two countries. The treaty may have certain rules to deem you a non-resident of one country, known as a “treaty tie-breaker.” If a treaty does not exist, you may have to file taxes in both countries.

Deemed Acquisition Rules: The day you are considered a Canadian resident for tax purposes is also the day you are deemed to have sold and reacquired all your worldwide assets at the fair market value. (Excluded in this calculation is the real estate you owned in Canada). The fair market value becomes the new adjusted cost base for calculating your Canadian taxes in the future. The purpose of this rule is to ensure that any gains/losses that have accrued prior to moving to Canada will not be part of any future tax calculations as a Canadian resident. Only the gains/losses that are earned while you are a Canadian resident will be taxed.

Tax Implication for moving foreign assets to Canada: There is no tax implication for physically moving foreign assets (i.e., currency or securities) in kind (as is) into Canada. However, if you convert foreign currency into Canadian dollars or use it to purchase another asset, this is considered a taxable event. The gain/loss will be calculated based on the difference in exchange rates on the day of the taxable event and the day you were a Canadian resident.

Foreign Retirement Plan: In most cases, a tax deferral is allowed on income from a foreign pension plan until the actual payment is distributed. To minimize double taxation, a foreign tax credit may also be claimed for any taxes paid to a foreign government on your foreign pension income. In some circumstances, you may be allowed to move the gross amount of the foreign pension plan into an RRSP. When you are receiving a payment from a foreign pension plan, you may also be eligible to split your foreign pension income with your spouse for overall tax savings.

Income Tax Return: If you are declared a factual resident of Canada for tax purposes partway through the year, you will need to file a “part-year return” that reports your worldwide income from the date you became a resident to the end of the year. If you are deemed a resident of Canada, you are considered a resident starting January 1st and will need to file a “full-year return.” The deadline for filing a part-year or full-year return is the following year, on April 30th.

These are five general rules that all newcomers moving to Canada should be aware of, but there are many other nuances. Speak with your advisor or a qualified tax/legal representative to fully understand how the Canadian tax system may affect you and to effectively structure a customized tax plan.

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