Canada remains a popular destination for immigrants. I discuss below some tax considerations to be taken into account when an individual moves to Canada and becomes a Canadian resident for tax purposes.In practice, there are two likely scenarios:
The immigrant (‘Laurel’) contacts a Canadian tax adviser (‘Hardy’) by phone or email from her home country, or during a visit to Canada while still a non-resident. She has not been resident previously in Canada.
Laurel arrives in Canada as a tax resident, presents herself to Hardy and says “Here I am. What can you do to minimise my Canadian taxes”
In the second case, little can be done, except perhaps to set up an immigration trust, discussed below. I shall deal primarily with the immigrant who gives a Canadian tax adviser the opportunity to review tax aspects of the move before making the move.
As will be apparent from what follows, Laurel’s tax adviser (‘Hal Roach’) in the country from which she is departing should work closely with Hardy on this project.Hardy should ask Laurel questions to confirm whether (and the date on which) she will become a Canadian resident for tax purposes. If she is moving from a country with which Canada has a double tax treaty, Hardy will refer to Article 4 of the relevant treaty and review the definition of resident in the context of Laurel’s circumstances. If Laurel is arriving from a country which does not have a double tax treaty with Canada (for example, Colombia, Greece, Taiwan or Turkey), Hardy must discuss with Hal Roach the possibility that his client remains a resident of her former country, and so is a dual resident. Dual residence can result in double taxation, and Laurel may be able to avoid the situation by taking appropriate steps. For example, she might be advised to dispose of her former residence when she moves.
Immigration of a US citizen
If Laurel is a U.S. citizen, she remains liable to U.S. income tax on her world-wide income. Consequently, a myriad of different considerations apply, which are beyond the scope of this article. Hardy must consult an experienced U.S. tax adviser and work with the adviser to arrive at the best solution. Offshore trusts can cause tax problems for U.S. taxpayers; sometimes a U.S. resident immigration trust can be a solution.
Temporary Residence ‘Nowhere’
If the tax laws of the country from which Laurel is emigrating provide that Laurel becomes non-resident when she leaves that country, she has the possibility of short-term residence ‘nowhere’, or in a jurisdiction which does not tax individuals spending a short time there, before she becomes a Canadian resident.Depending on tax legislation in Laurel’s former country of residence, there may be tax saving opportunities for Laurel while resident ‘nowhere’. For example, income which she receives during that period may not be taxed anywhere.For this approach to be effective, advance planning is essential, as well as coordination between Hardy and Hal Roach.
Property Owned by Laurel on her Arrival Date
Hardy does not need to review Canadian tax aspects of property which Laurel owns, but which she intends to transfer to an immigration trust (discussed below).The starting point (‘adjusted cost base’) for most other assets owned by Laurel on the date she becomes resident in Canada is generally the fair market value at that date. This means that only the gain or loss between the date Laurel becomes a Canadian resident and the date the property is disposed of will be taxed. There are exceptions, including ‘taxable Canadian property’, which includes Canadian real estate and shares in Canadian private corporations.The valuation of quoted stocks is obviously not a problem. For assets not transferred to an immigration trust (for example, foreign real estate), consideration should be given to obtaining a formal valuation at Laurel’s arrival date. Canada has a ‘departure tax’. Capital assets owned by a departing resident are deemed to be disposed of immediately before departure. 50% of any capital gain is taxed as income. However, if Laurel leaves Canada permanently within 60 months of becoming resident, a special provision of the Canadian Income Tax Act (‘ITA’) provides that any deemed capital gain on her departure in respect of assets which she owned on her arrival date will not be taxed. Substituted assets do not qualify for the exemption.
Income that Laurel receives on or after the date that she becomes a Canadian resident will be subject to Canadian tax. She should therefore try to receive all significant income while she is non-resident. For example…