Immigration and Tax

Most, but not all, immigrants to Canada become tax residents. In this sense Canada is different from the USA where all immigrants (ie. “green card” holders) and all citizens are automatically tax residents even if they do not live or spend time in the USA. In Canada some immigrants can legally avoid paying income taxes provided they have minimal ties with Canada or have stronger economic and social ties to some other country. Of course such persons (if they are immigrants and not citizens) will have to consider how non-payment of tax might impact their ability to keep their immigration status.

Canada’s Income Tax Act does not make reference to citizenship or immigration status. It simply provides that Canadian tax “residents” are bound annually to pay tax on their world-wide income and to declare the existence of substantial foreign assets located outside Canada. This latter obligation is called “foreign asset disclosure”.

Who is a tax resident? Well, normally anybody (immigrants, citizens, students, holders of work permits -- even illegal immigrants who are out of status) who spends more than 183 days in any calendar year is a tax resident. Some people spend much less time in Canada but are still considered tax residents. For example, people whose home base in terms of social connections and economic ties is Canada will usually be regarded as tax residents even if they are elsewhere most of the time. Time is not the critical factor. Moreover, normally anyone with a house and/or spouse in Canada will usually be deemed to be a tax resident even if he/she spends most of his time elsewhere.

There are certain exceptions to this principal. Sometimes immigrants to Canada, especially wealthy ones who retain substantial economic and social ties in their countries of origin and who come from countries that have a tax treaty with Canada, can legally avoid becoming tax residents. This is a particularly complex matter where expert advice should be obtained before making any decisions as to how to report taxes in Canada. Many wealthy families decide to set up an “Immigrant Trust” -- a legal structure that provides immigrants with a tax exempt 5 year tax holiday on certain income generated outside Canada.

What does a tax resident have to do? As mentioned above, all Canadian tax residents have to report their and pay taxes on their annual income. Income includes worldwide revenue from employment, interest, rent, dividends (subject to tax credits), and ½ of capital gains. Failure to report and pay taxes can lead to penalties, interest and even criminal charges.

There is a complex interplay of issues linking immigration, citizenship and tax status. There is no formal obligation on an individual to maintain tax resident status so as to maintain immigration status and there is no formal obligation on a person to maintain their immigration status so as to maintain their tax status. The same can be said of tax status and Canadian citizenship. For instance, it is entirely possible for an individual to maintain permanent resident status (730 days in Canada in a five year period) or Canadian citizenship while at the same time NOT becoming a tax resident. Careful planning supported by professional advice can help a new immigrant walk the line between tax, immigration and citizenship status without jeopardizing one form of residency or the other.

By Peter Scarrow and Ryan Rosenberg

Ryan Rosenberg is a Partner and Peter Scarrow is Associate Counsel with Larlee Rosenberg, Immigration Lawyers, in Vancouver. Contact Ryan or Peter at 604-681-9887 or visit their firm website at www.larlee.com.