The Tax Implications of Repatriating to Canada
By Jean McDonell, CPA, CGA, TEP, Associate Partner
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This past April, the sixth annual Best Countries report proclaimed Canada the best country in the world to live. Being ‘open for business’, having an ‘entrepreneurial’ economy, strong ‘social purpose’ and exceptional ‘quality of life’ all helped Canada achieve the #1 ranking for the first time.
So, it should come as no surprise then that many people who left Canada want to come back and make it their home again. In many cases, the pandemic has helped accelerate the return.
If you’re one of these people looking to make Canada your permanent residence, there are income tax considerations of which you should be aware. This article will help you determine the best time to officially make Canada your permanent place of residence.
Canadian tax is based on residency, so the date you officially become a Canadian resident is very important for determining how your income is taxed. Some factors that can be considered for official proclamation of residency include:
- The date you establish residential ties;
- When a residence in Canada becomes available to you;
- The date a spouse, partner or dependent joins you in Canada;
- The existence of other ties to Canada;
- Personal property
- Social ties
- Canadian driver’s license
- A Canadian bank account or credit cards; or
- Provincial health insurance coverage.
Once you are considered a Canadian resident for tax purposes, all of your worldwide income (Canadian or foreign) is subject to Canadian tax from that point forward. You are also deemed to have reacquired all assets you hold when entering Canada, other than taxable Canadian property, at their fair market value on the date you establish your Canadian residency. For example, if you held shares in Disney and originally paid $10 per share but are they worth $15 per share on the date you enter Canada, you will have a cost basis of $15 per share for Canadian tax purposes when you sell them.
You must file an individual income tax return as a resident of Canada, regardless of whether you are only a resident for a portion of the taxation year. It is beneficial for you to file an income tax return if you are eligible for certain government benefits, even if you have no income to report or tax to pay. You are required to file an income return in order to receive payments or credits such as the GST/HST (Goods and Services Tax/Harmonized Sales Tax) credit, or the Canada Child Benefit.
Certain deductions on your income tax return are not available to you in the first year after you become a resident of Canada. For example, Registered Retirement Savings Plan (RRSP) contributions cannot be deducted in the first year unless you have RRSP room carrying forward from when you were previously a resident of Canada. Typically, this would only have occurred if you had earned income when you previously resided in the country and did not make the maximum contributions to your RRSP during those years.
You will incur moving expenses on your move back to Canada. Generally, they would not be considered deductible. The exception to this rule would be if you entered Canada as a student enrolled in a full-time post-secondary program, and you received a taxable Canadian scholarship, bursary, fellowship or research grant.
Some deductions which you may become eligible for in the year you move include the ability to split pension income and the ability to deduct support payments. If, for example, you or your spouse were residents of Canada as of December 31st, you could elect to split your qualifying pension income. It does not matter that you were not a Canadian resident for the entire year.
Similarly, if you become a Canadian resident and make support payments to an ex-spouse/partner you may be eligible to deduct the support payments even if the former spouse/partner is not resident of Canada.
It is recommended you speak with a tax advisor before making any decisions, because if you are coming from a country with a lower tax rate than Canada, your worldwide income will be taxed at a higher rate than in the past.
Your foreign income will have to be reported on your Canadian tax return, and may require additional disclosure forms, in particular for any foreign investments held, even if they are held in a Canadian broker account.
The importance of speaking with your tax advisor to explore all the opportunities, and potential challenges, of establishing residency in Canada cannot be overstated. GGFL has experienced tax advisors who can help with your tax planning if you were considering repatriating to Canada.