Tax and pension tips for immigrants

There’s a lot to like about a Canadian dual citizenship. It allows you to fully take part in Canadian life while retaining most of the rights, privileges, (and sometimes obligations) of your home country, provided it recognizes dual citizenship.

As long as you’re not from the U.S., dual citizenship isn’t a serious issue at tax time.

“The vast majority of countries categorize individuals for tax purposes on the basis of residence, not citizenship,” explains Ray Kinoshita, national global mobility services partner at Grant Thornton LLP in Toronto.

Residence status, Kinoshita notes, is generally determined through four tiebreaker rules, in order of priority:

• permanent home;
• centre of vital interests;
• habitual abode;
• nationality.

But there are still some financial considerations to be aware of if you’re residing in Canada, and from another country. How and if your trusts and pensions are affected depends on your individual circumstance.

Douglas Rosser, international tax specialist at MNP in Kelowna, B.C. has a client who moved from the U.K. to retire in Kelowna, B.C. She has the option to receive a lump sum U.K. pension, which could cause a problem.

“She’s looking at it from the U.K. tax perspective, where the pension is tax-free,” he says. “But if she takes it all out in a lump sum, Canadian tax would be in excess of 40% on a portion of the income.”

On his advice, she didn’t take the lump sum and, instead, continued to receive annual payments.

Also, if you contribute to a foreign trust, that trust can be deemed resident in Canada and subject to tax. And Kinoshita explains, the foreign trust becomes taxable in Canada even if you contributed prior to becoming a resident.

It gets more complex. For instance, you can make an election to treat only the portion of the assets contributed by a Canadian resident as a Canadian resident trust.

“You look at the trust and determine what portion of the foreign trust was contributed by the Canadian resident,” says Kinoshita. “It’s therefore possible that no portion of the trust has been contributed by a Canadian resident, so it isn’t necessarily going to be pulled into the net.”

One U.K. client planning to move to Canada may actually benefit from our foreign trust rules. He has an offshore family trust in a low-tax jurisdiction there, which had capital gains in the past.

“It appears that, under the U.K. rules,” explains Kinoshita, “the U.K. resident beneficiaries of the offshore trust would be subject to U.K. tax on those gains when amounts were distributed by the trust.”

He adds, “So the client wouldn’t be subject to tax until the amounts were distributed by the trust. And if the client became resident in Canada, conceivably, those capital gains wouldn’t be taxed at all.”

That’s because, under our rules, when the trust becomes a resident trust, those previous capital gains constitute trust capital for Canadian tax purposes. Any prior gain won’t be subject to Canadian tax.

For those holding family wealth in their home countries, Steve Harding, director, International Solutions, RBC Wealth Management in Toronto establishes an inbound trust. This lets a Canadian non-resident transfer the gift or inheritance directly to that trust, with the Canadian resident as a beneficiary.

“Canadian tax rules allow the income and gains earned within the trust to accumulate on a tax-free basis,” explains Harding. “Access to the funds is maintained through capital distributions, which, although reportable on the tax return of the Canadian beneficiary, is not subject to any Canadian tax.”

Plus, income and gains can be reinvented inside the trust, he says. This allows Canadian resident beneficiaries to eventually receive such gains as capital distributions.

And, if you inherit from a deceased foreign relative, you won’t be subject to tax in Canada because taxes would’ve been paid through the estate to the country of jurisdiction. But you could face foreign exchange risk and be subject to capital gains depending on when you withdraw the funds, warns Rosser.

Why your country of origin matters

It’s not just those from the U.S. who have additional financial considerations to weigh with a dual citizenship.

Shoshana Green, barrister & solicitor, Green and Spiegel LLP in Toronto, notes you could lose financial incentives from back home. In particular, if you’re from a country that doesn’t respect dual citizenship, like Germany and Japan, you risk losing your state pension.