Are you new to Canada?
It is always important to be knowledgeable about the Taxation System of our place. Even if it is temporary. Students and workers are as involved in Canada’s taxation system as residents and citizens.
When moving to Canada, it’s important to understand how the country’s tax laws may impact your income and wealth planning. Getting proper advice and planning is key to ensuring the process goes smoothly.
There are different types of taxes in Canada, including income, sales, property, and corporate tax. Income tax in Canada makes up the largest portion of the federal government’s revenue. It factually funds almost half of the federal government’s budget. Corporate and Sales tax each account for about 15% of the federal government’s revenue.
The Canadian Tax System is based on your residency and runs from January 1st to December 31st. If you are a resident of Canada, you should file a tax return (T4 form) each year by April 30th. You have to include income earned both inside and outside of Canada.
In case, if you live outside of Quebec, you must file one tax return including provincial and federal taxes. If you live in Quebec, you should file two returns separately for federal and provincial taxes. Similar to other countries, income taxes in Canada are progressive. This means that the more you earn, the more taxes you will pay.
The Canada Revenue Agency collects this individual tax. Canadian residents fill in an income tax return every year.
Individual residents in Canada are subject to Canadian income tax on worldwide income. Relief from double taxation is provided through Canada’s international tax treaties and via foreign tax credits and deductions for foreign taxes paid on income derived from non-Canadian sources.
The individuals who are Non-residents, are subject to Canadian income tax on income from employment in Canada, income from carrying on a business and capital gains from the disposition of Canadian taxable property.
Federal tax rates for 2022
15% on the first $50,197 of taxable income, plus
20.5% on the next $50,195 of taxable income (on the portion of taxable income over 50,197 up to $100,392), plus
26% on the next $55,233 of taxable income (on the portion of taxable income over $100,392 up to $155,625), plus
29% on the next $66,083 of taxable income (on the portion of taxable income over 155,625 up to $221,708), plus
33% of taxable income over $221,708
Click HERE to learn more about the Federal Tax rates for 2022
1. Quebec has its tax system, which requires a separate calculation of taxable income. Recognizing that Quebec collects its tax, federal income tax is reduced by 16.5% of the basic federal tax for Quebec residents.
2. Instead of a provincial or territorial tax, non-residents pay an additional 48% of the basic federal tax on income taxable in Canada that is not earned in a province or territory. Those who are non-residents, they are subject to provincial or territorial rates on employment income earned and business income connected with a permanent establishment (PE) in the respective province or territory. Different rates may apply to non-residents in other circumstances.
Tax checklist of things to consider when immigrating to Canada is below:
- Canada taxes people if they are residents here. You’ll face tax on all your income, including income outside Canada. If you earn passive income inside a foreign corporation you control, you may have to report that income on your Canadian personal tax return, and you’ll have to file Form T1134 in addition to your Canadian tax return. The penalties can be steep if you fail to report this income, called FAPI (Foreign Accrual Property Income).
- You’ll also need Form T1135 to report the existence of your foreign assets (in case you use it for personal purposes) if your total cost exceeds $100,000 during a year. Property received from foreign trusts and the ownership of foreign subsidiaries must also be reported each year to the Canada Revenue Agency (CRA).
- Obtain a social insurance number (SIN number). This key document will be your account number for any personal tax filings you must make. You’ll also need the SIN to receive government benefits, arrange certain banking services and work for an employer in Canada. If you carry on a business in Canada, you’ll need a business number and may need a GST/HST number as well. Contact the CRA to obtain these numbers.
- Check the status of your non-Canadian trusts. If you’re the settlor of a non-Canadian trust or the beneficiary of one, be sure to visit a tax pro to determine whether the trust will now be considered resident and, therefore, taxable in Canada.
- Clarify the status of your non-Canadian corporations. If you control one or more foreign corporations, they may now be residents in Canada for tax purposes. The corporations may be required to file Canadian tax returns and pay tax. However, relief may be available under a tax treaty with Canada to avoid double taxation.
- Be aware of withholding tax requirements. If you move to Canada and keep making payments of passive income such as rent, royalties or certain interest to non-residents of Canada, there may be a requirement to withhold tax from these payments and remit the tax to the CRA. This rule applies even if the payments are made from a foreign bank account.
Moving to Canada?
Two things you need to know about tax in Canada:
Canada has a residence-based income tax system, which varies from the other countries.
In Canada, residents pay taxes on their global income no matter where they earn it. For example, if someone is considered a resident in Canada and has business interests in Hong Kong, they could end up paying Canadian taxes on the Hong Kong income.
While Canada has tax agreements with Hong Kong, Singapore and several other countries that limit the risk of double taxation, the resident will generally pay the higher rate between the two countries.
The 183-day rule applies to anyone who spends more than half of the year—or 183 days—in Canada. At that point, they become a deemed resident. But in case someone who remains in Canada for less than 183 days may also become a deemed resident if other factors come into play, such as owning Canadian assets, like real estate.
One more area that can come as a surprise is the different taxation of income from investments in Asia versus Canada. As the investment income is only taxed in Canada, it isn’t covered by tax agreements, which generally seek to prevent tax overlap. Capital gains and dividends, for instance, are taxed in Canada but not in Hong Kong or Singapore. This means that somebody moving from Singapore or Hong Kong to Canada could find themselves owing taxes on offshore investments that had been tax-exempt up until that point.
Among many strategies, one possible way to deal with this is to sell or crystallize the assets before the move to trigger the capital gains before becoming a deemed resident
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