With Canada’s complex tax system, tax and financial advisors who exercise additional diligence to ensure immigrants and emigrants remain tax compliant can offer valuable advice. What tax deductions, credits and filing requirements should you make sure they don’t miss?
Part-year Residency. Taxpayers who immigrate to (or emigrate from) Canada are required to file a Canadian tax return to report their world income during the period of the tax year in which they were resident in Canada. This means that immigrants (and emigrants) may be required to report income, deductions and credits from two periods: the residency period (based on the actual number of days as a resident here during the year), as well as the non-residency period on the same tax return, depending on their Canadian income sources generated before arriving (or after leaving) the country.
Asset Valuation on Immigration. Those who immigrate to Canada must determine the Fair Market Value (FMV) of their assets at time of immigration. Canada is not able to tax any accrued capital gains before this, nor will Canada recognize accrued losses in that period.
The residency period is covered under the Income Tax Act S. 114 (a). All income must be calculated in the normal manner, but only for the residency period. This requires some unusual reporting:
- Personal amounts are, therefore, prorated according to the number of days the taxpayer was resident in Canada.
- Provincial taxes are due to the province of residence up to the last day of residency for emigrants and the last day of the year for immigrants.
- Generally, refundable tax credits (GSTC, CTC, and provincial credits) are not available to emigrants.
Full Claims: Deductions. All deductions normally allowable to reduce taxable income are permitted, but only for the residency period and not for the full year. Allowable deductions can include:
- RRSP contributions made within the calendar year or the normal 60-day period after year end. Amounts may also be transferred out of an RPP, DPSP or RRIF to an RPP, RRSP or RRIF. Complete form NRTA1 Authorization for Non-Resident Tax Exemption.
- Support payments made to an estranged spouse that are normally deductible.
- Child care expenses
- Carrying charges: Interest on loans incurred will continue to be tax deductible by a non-resident, but only if they offset business income. For investment loans, interest is generally deductible only to date of emigration, unless paid to maintain Taxable Canadian Property.
- Other employment expenses
- Clerics’ residence deduction
- Other deductions on Line 232
- Employee Stock Options and Shares Deduction
- Other deductions on Line 250
- Losses on lines 251, 252, 253
- Capital gains deduction
- Northern residents’ deduction
However, it must be shown that these amounts are attributable to income earned in the period of Canadian residency.
Full Claims: Non-Refundable Tax Credits. If an immigrant or emigrant is eligible for any of the following non-refundable tax credits during the residency period, those amounts can be claimed in full:
- CPP and EI premiums paid in the residency period
- Provincial Parental Insurance Plan Contributions
- Canada Employment Amount
- Home Buyers’ Amount (and in 2016/17 the Home Accessibility Tax Credit)
- Adoption Expenses
- The Pension Income Amount
- Interest on Student Loan Amount
- Tuition Amounts
- Medical Expenses
- Charitable Donations
- Spousal transfers for income earned in the residency period
- Amounts transferred from child (tuition for residency period and a prorated disability amount)
Note: Part-year residents are required to take into account S. 94.2(5)(c) with regard to interests in a foreign investment entity. Reporting on such entities will be restricted to the period of time the taxpayer was resident in Canada.
Non-residency period. S. 114(b) requires the reporting of actively earned Canadian-source income (employment or self-employment in Canada) by a non-resident, or the reporting of Taxable Canadian Property dispositions. In addition, reserves for debt forgiveness, recovery of exploration and development expenses, and recaptured depreciation from the sale of a business interest will be reported. For the non-residency period, (See S. 115) the taxpayer may deduct only the following:
- Losses under S. 111(1) (non-capital losses, net capital losses, restricted farm losses, farm losses, limited partnership losses), that offset any income reported under S. 114(a)
- Deductions under S. 110(1)(d) and S. 110(1)(d.1), employee stock options and benefits deduction
- Deductions under S. 110(1)(d.2) prospectors’ and grubstakers’ shares
- Deductions under S. 110(1)(f): certain social benefits, treaty exempt amounts and employment income from international organizations
If all or substantially all (which generally means 90 percent or more) of the non-resident’s world income is reported for the period, all deductions normally allowed to a full-time resident will be allowed to the non-resident. Otherwise, non-residents are not allowed to claim any personal amounts.
Recent Jurisprudence: Non-residents and CCTB. Thorpe v The Queen, 2007 TCC 410.
The appellant argued that because her husband was a non-resident throughout the year and at all material times, his net income should not be included in the calculation of the Canada Child Tax Benefit for the base taxation years in question. The appellant’s husband visited the Canadian home frequently, paid for a car in Canada on a monthly basis for his wife, but no other family expenses. In finding for the appellant, the court stated (at paragraph 11) that the provisions in question (122.61/122.63) should be read generously in favour of enabling the children to receive the benefit of the CCTB.
Read part one of this two-part series: “Newcomers Need Advice: Can You Explain Our Complex Tax System?”