“Some Important Points for the Adviser to Consider.”
Many individuals move to Canada, become resident here for tax purposes, and only then decide to consult a tax adviser on Canadian tax aspects of their move. Here are some important points for the adviser to consider in such circumstances:
- Before arrival, the immigrant should have considered creating an offshore “immigration trust” to own capital property for the first five years of Canadian residence. Such a trust will not be subject to Canadian tax for that maximum period. Whether to set up such a trust requires a cost-benefit analysis – comparing the set-up and annual maintenance costs with the likely tax savings. Setting up such a trust after becoming resident in Canada will significantly reduce the 5-year tax-free period and there could be a gain to the extent the property transferred to the trust has appreciated since the taxpayer came to Canada.
- Capital property owned by the immigrant is deemed to have been acquired at its fair market value immediately before the immigrant became Canadian tax resident. Consequently, information must be obtained (from professional valuators in some cases) about the fair market value of all such property at the date he or she became resident here. Only gains and losses accrued and realized after becoming resident will be taxable or deductible in Canada.
- If the individual was the settlor, or is a beneficiary of a non-Canadian trust, a review of the Canadian tax consequences is essential. The trust might be deemed to be resident in Canada and subject to Canadian tax, and the individual could be liable for the trust’s Canadian tax.
- The immigrant must be advised that, from the date of becoming tax resident here, he or she is liable to Canadian tax on all income, including income from outside Canada. Passive income earned by controlled foreign corporations (FAPI) must be reported as income of the immigrant and a Form T1134 is required (separate from the tax return). Failure to include FAPI in the Canadian tax return could leave the tax year permanently open for reassessment, result in penalties and, in extreme cases, could be tax evasion ─ potentially a criminal offence. Evidence that an adviser has informed the client of this requirement will avoid the risk that the client may try to recover interest and penalties from the adviser. Documentation will also help the adviser avoid being accused of conspiring with the client to evade tax or be subjected to a very large administrative penalty.
- The immigrant will also be required to report annually the existence of all foreign assets (except personal use property) if their total cost exceeds CAD$100,000 at any time during a year, on Form T1135 (See Tax Tip 13-09). Property received from foreign trusts and the ownership of foreign subsidiaries must also be reported each year to the CRA.
- A Social Insurance Number (which will be the client’s account number) must be requested. If the client will be carrying on a business, a Business Number and GST/HST registration may be required as well.
- If the client controls one or more foreign corporations, consider whether the corporations have become resident in Canada for tax purposes because their “mind and management” are here. If so, they may be required to file Canadian tax returns and pay Canadian corporate income tax, subject to possible relief from a relevant tax treaty.
- If the immigrant is making payments of passive income, such as rent, royalties or non-arm’s length interest, to a non-resident of Canada, non-resident withholding tax may have to be withheld from such payments and remitted to the CRA. This is required even if the payments are made from a foreign bank account.
Your TSG representative would be happy to discuss immigration planning with you.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.