Immigrating can be taxing

There are a variety of income tax consequences associated with immigration to Canada. But with a little planning, tax savings can be had, both currently and in the future.

On becoming a resident of Canada, an individual is deemed to have disposed and reacquired most capital property owned immediately prior to establishing residence for proceeds equal to their fair market value at that time. Assets specifically excluded from this rule include Canadian real estate, resource property, business property and private company shares, along with pension and stock option rights.

Review portfolio before immigration

Striking a new cost base means gains accruing prior to residence won’t be taxable in Canada. It also means accrued losses won’t be available to shelter future capital gains from Canadian tax. So it’s a good idea to review a portfolio prior to the move; it may be better to sell loss properties before establishing Canadian residence if losses can be used against gains or other income in the country of origin.

Your client may have been a member of a pension plan in his or her country of origin. Generally these plans can remain intact without Canadian tax consequences until withdrawals commence. But if the employer continues to make contributions to the plan, it’ll limit the contribution room available for RPPs, DPSPs and RRSPs. Alternatively, it may be possible for your client to transfer the pension benefits from the foreign plan to an RRSP without immediate Canadian tax consequences.

If foreign employer stock options are owned prior to immigration and the country of origin taxes the benefits more favourably than Canada, it might be a good idea to exercise those options before establishing Canadian residence.

Time residency strategically

From the time an individual is considered to be a resident in Canada, his or her worldwide income becomes subject to Canadian tax. So the timing of establishing residence is significant. Commonly, this would be the date of the physical move to Canada, but determination of residence is also based on the location of family, social, business and financial interests.

In addition to being taxable in Canada, foreign-source income received after becoming a resident of Canada may also be subject to foreign tax. Canada will allow a foreign tax credit equal to the lesser of the related foreign tax paid and the Canadian tax on that income.

Therefore, if tax rates in the country of origin are significantly less than they are in Canada, your client should try and arrange to receive as much of the income as possible prior to establishing Canadian residence.

Immigration trusts

Executives who are relocating to Canada and other immigrants who own significant foreign investment assets can realize substantial tax savings on the income from these investments by using an immigration trust. An immigration trust will not be taxable in Canada for the first five years of Canadian residency.

An immigration trust is simply a non-resident trust, established in a foreign tax jurisdiction, that holds foreign investment assets. In order to be a non-resident trust, the majority of the trustees must be non-residents of Canada. It can be established prior to the individual becoming a resident of Canada or at any time within the first 60 months of Canadian residency. But since the tax-free period begins as soon as Canadian residency is established, the tax-free accumulation of income and capital gains in the trust is maximized when the trusts is set up before becoming a resident.

Keep in mind, although an immigration trust enjoys tax-free status in Canada, the tax regime in the trust’s country of residence must be considered. Generally, immigration trusts are established in jurisdictions that don’t impose taxes on income or capital gains earned by the trust.

Gena Katz, FCA, CFP, an executive director with Ernst & Young’s National Tax Practice in Toronto. Her column appears monthly in Advisor’s Edge.