Published: September 18, 2023
Last Updated: September 18, 2023
Introduction: Canada Welcoming Immigrants
Canada has been welcoming historical number of immigrants for the past few years. Statistics Canada reported that over 145,000 immigrants arrived in Canada during the first three months of the year, which is the highest number on record for a single quarter since comparable data became available in 1972. In the 2022 Annual Report to Parliament on Immigration, Immigration, Refugees, and Citizenship Canada (“IRCC”) announced the 2023-25 Immigration Levels Plan, aiming to welcome over 1.2 million immigrants into Canada with the upper limit set at nearly 1.6 million.
Despite the similarity between Canadian and US taxation systems, for newcomers working and living in the Canadian, it is important for them to be aware of tax-related issues they may encounter in Canada. For those who intend to stay in Canada temporarily, they may also have extra tax filing obligations at the time of departure. This article is part one of the A Canadian Tax Lawyer’s Guide for New Immigrants in Canada series, which discusses general obligations that new and existing Canadian immigrants may have when filing their taxes.
Canadian Tax Resident VS Non-Resident: Factors Determining Where And How A Taxpayer Pays Taxes
There are two primary factors that determine where and how a taxpayer needs to pay his or her taxes. For new immigrants in Canada, the most important thing to remember is that once they become a Canadian tax resident, they are required to report their worldwide income on their Canadian tax returns. In contract, a non-resident only needs to report Canadian income in his or her Canadian tax returns. Worldwide income includes Canadian income and income earned in any other countries. It is also necessary to understand the difference between the concept of residence in the immigration and tax contexts. Unlike immigration status officially confirmed by immigration documents in black and white, tax residence is determined based on specific facts and circumstances. There is not necessarily a direct relation between a taxpayer’s immigration status and the taxpayer’s tax residence. A Canadian citizen can be filing taxes in Canada as a non-resident if he or she lives abroad. A temporary worker who has resided in Canada for a few years may have always filed taxes as a tax resident in Canada. However, immigration status maybe part of your tax residence determination when other factors are not determinative.
When a person comes to Canada, his or her first year of arrival can be crucial in setting the tax records onto the right track. Additionally, there are ongoing tax filing obligations for Canadian taxpayers who have foreign assets and property. A few common issues include: entitlement to the Basic Personal Amount, determination of tax residence, and obligation to report foreign property with costs over $100,000 Canadian Dollars on form T 1135 and all foreign income on the Canadian personal T1 return.
Entitlement to the Basic Personal Amount and Tax Residence
The Basic Personal Amount is a non-refundable tax credit that can be claimed by all Canadian tax residents. This tax credit is calculated based on a taxpayers’ net income and the length of his or her tax residence in Canada. For newcomers to Canada, it is important to determine the date you become a Canadian tax resident and file your taxes properly. Failure to do so may result in additional taxes, penalties and interests.
For more information on your entitlement to Basic Personal Amount, please refer to our article on this topic: A Toronto Tax Lawyer’s Guide to Basic Personal Amount Tax Credit.
For more information on how tax residence can be determined, please check out other articles that discuss tax residence in detail: Tax Treaty Residence Determination and Tax Residence in Canada.
T1135: Information Return For Foreign Property
T1135 Foreign Income Verification Statement is an information return that must be filed by Canadian resident individual, corporations, certain partnerships, and certain trusts that, at any time during the year, own specified foreign property costing more than $100,000. Under section 233.3(1) of the Income Tax Act, specified foreign property includes but is not limited to: intangible and tangible property, funds, share of capital stock of a non-resident corporation, precious metals, gold certificates, debt owed by non-resident, an interest in a foreign insurance policy, cryptocurrency or NFTs and an interest in a non-resident trust. Generally, Form T1135 is due on the same date as the income tax return for individuals, corporations, and trusts, and due on the same date as the partnership information return. For example, if you are self-employed, you need to file Form T1135 on or before June 15 every year. For a corporation, Form T1135 must be filed no later than six months after the end of the corporation’s fiscal period. Often, taxpayers file Form T1135 together with their annual tax filing.
Since Form T1135 is an information return, there normally will be no additional tax payable when filing it. Form T1135 is also not required for any newcomers’ first year of arrival in Canada. However, non-compliance penalties relating to foreign reporting can be significant. Under section 162(7) of the Income Tax Act, failure to file Form T1135 can result in a maximum penalty of $2,500 for each return. If the Canada Revenue Agency (“CRA”) found that the failure to file was “done knowingly or under circumstances amounting to gross negligence”, there can be additional penalties for up to $12,000 under section 162(10)(a) and up to $24,000 under section 162(10)(b) of the ITA.
Special Restrictions On Newcomers In Canada
The Prohibition on the Purchase of Residential Property by Non-Canadians Act was effective as of January 1, 2023, which prevents non-Canadians from buying residential property with three dwelling units or less in Canada for two years, with certain exceptions. Non-Canadians include: 1) an individual who is not a Canadian citizen, a person registered as an Indian under the Indian Act, or a permanent resident of Canada; 2) a corporation that is incorporated outside of Canada; and 3) a corporation incorporated in Canada with its shares not listed on a stock exchange in Canada under section 262 of the Income Tax Act and controlled by a non-Canadian. Exceptions were originally allowed for refugees, temporary residents who satisfies prescribed conditions, and temporary residents who purchase properties with a spouse or common-law partner who is a Canadian citizen, permanent resident, or registered Indian. A recent amendment of the legislation was released on March 27, 2023, which allows individuals in Canada with a work permit with at least 183 days left to purchase a residential property while working, if they do not already own a residential property.
However, the restrictions on property purchase are just the first hurdle a newcomer has to overcome. There may be property-related taxes for new immigrants in Canada in addition to the usual land transfer taxes. For example, the Ontario Foreign Homebuyer Tax is a one-time 20% province-wide tax on non-resident homebuyers. Similarly, a British Columbia property located in the Capital Regional District, Fraser Valley Regional District, or the Metro Vancouver Regional District, will be subject to 20% tax on the fair market value of the property. Anyone who contravenes the Prohibition on the Purchase of Residential Property by Non-Canadians Act or assist others in doing so may be subject to penalties up to $10,000. Therefore, it is important to learn about your tax obligations before you purchase a property as a new immigrant in Canada.
Pro Tax Tips – Understand Your Tax Filing Obligations!
The Canada Revenue Agency is the government branch that is responsible for taxation. However, it is often to obtain answers from the official websites and difficult to understand what your obligations are as a new taxpayer in Canada. The first step to understand your tax filing obligation is to understand your tax residence. In general, if you have resided in Canada for more than 183 days in a year, you are likely a deemed tax resident in Canada. Other factors that may help to assess your tax residence include but are not limited to:
If you require assistance on legal issues, such as determining your tax residency and tax planning, please contact our experienced Canadian tax lawyers. We have years of experience helping our clients minimize taxes, issuing legal opinion on tax residence determination and reporting obligations.
Frequently Asked Questions
Do I need to file T1135 for my foreign properties?
If you have properties with costs exceeding $100,000 Canadian dollars outside Canada, whether they are intangible or tangible, it is best to file Form T1135 when you are filing your personal or business tax returns. If you have failed to file Form T1135, you can contact one of our experienced Canadian tax lawyers to learn more about the consequence of late filing and potential solutions to the issue. If you are unsure about whether you need to file Form T1135, you can also contact our Toronto tax lawyers for a legal opinion.
What does a Canadian tax resident mean?
The concept of tax residence is different from the definition of residence under the immigration context. A Canadian tax resident is required to report his or her worldwide income when filing Canadian taxes and may be entitled to claim foreign tax credit for taxes paid outside Canada. In addition, a Canadian tax resident is not subject the 25% withholding tax imposed on non-residents.
What happens if I fail to file taxes properly in Canada?
After taxpayers file taxes every year, the CRA reviews and audits tax returns. If the CRA believes that a tax return is filed inaccurately, the CRA can issue a notice of reassessment, request additional information and documents, and/or investigate the taxpayer. Penalties and interests can also be imposed on the Taxpayers, which significantly increase the total amount owed to the Canada Revenue Agency. The worst case scenario, albeit relatively rare, is when the CRA finds the taxpayer to be engaged in tax fraud, which is an offence under section 380 of the Canadian Criminal Code. If you have been contacted by the CRA or if you have concerns with regards to your tax filing obligations, please contact our experienced Canadian tax lawyers for legal advice.
I immigrated and received a foreign pension that is not taxable in my home country. Do I have to declare this for Canadian tax purposes?
If you are filing taxes as a resident in Canada, you are required to report worldwide income on your income tax returns, regardless of the tax treatment of such income in another country. As a result, a foreign pension that is not taxable in your home country will be taxable in Canada if you file taxes as a Canadian tax resident.
However, if you’re filing taxes as a non-resident in Canada, you are not required to report any foreign income on your Canadian tax return.
If you have not reported your foreign pension or other types of foreign income, you may be eligible to have one of our Canadian income tax lawyers submit a voluntary disclosure to avoid penalties and possibly reduce interest owed to the CRA.
Disclaimer:
“This article provides information of a general nature only. It is only current at the posting date. It is not updated, and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions, you should consult a Canadian tax lawyer.”
Disclaimer:
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."
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