Expat taxes in Canada

Posted: June 16th, 2014 Regina City CanadaRegina

An individual is resident for tax purposes if he or she is present in Canada for 183 days or more (referred to as “deemed” residence), or has close connections with Canada (such as a permanent home (or other personal property such as a car or furniture), bank accounts, a spouse or common-law partner, or family, economic and/or social ties).

A Canadian-resident individual is taxed on his or her worldwide income; a non-resident individual is generally taxed on his or her Canada-source income only. Interest that is paid by an “arm’s length” (i.e. unrelated) payer is exempt from withholding tax.

If an individual spends a part of the tax year in the United States for health reasons, on vacation or for other reasons, but maintains close connections with Canada, the person is considered to be a “factual resident” for tax purposes, and remains fully liable for taxation as if he or she had never left Canada.

The taxation year of immigration is divided into two parts: the non-resident part in which only Canadian-source income is taxed, and resident part, which is fully taxed.

Non-Canadian property owned at the time of immigration is deemed to have a fair market value on the date that Canadian residency is obtained.

Traditionally, one of the most commonly used planning techniques for immigrants to Canada who have significant wealth is the formation of an "immigrant trust" in a foreign jurisdiction. If properly structured, this will allow investment income earned during the first 60 months of Canadian residency to be exempt from Canadian taxation.

Canadian foreign reporting requirements, in force since 1997, require Canadian residents including expatriates to report if they own foreign property with a cost that exceeds CAD100,000 (including contingent property rights in stock options) in total; transfer or loan money or property to a foreign trust or closely held foreign company; or receive distributions from, or borrow from, foreign trusts in which they are beneficially interested.

'Immigrant trusts' therefore need to be reported, but their tax status has not (yet) been attacked.

There are some exceptions to the reporting requirements for expatriates:
• property used in an active business conducted by the expatriate;
• an interest in a non-resident trust that was not acquired for consideration by the expatriate (eg a family trust of which the expatriate is a beneficiary but not a settlor);
• an interest in a retirement plan which is a qualified plan in the foreign jurisdiction and therefore qualifies for tax exempt status;
• personal use property of the expatriate, including automobiles, boats and vacation homes used solely for personal use.

For reporting purposes, the assets are measured at their cost amount, but for expatriates it will be fair market value on arrival that matters.

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