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Tax Considerations for Immigrants

Tax Considerations for Immigrants


Canada’s Taxation of Worldwide Income

Canada’s tax system operates on a worldwide income basis, meaning that once you become a tax resident, you must report all income earned globally, regardless of whether the money is brought into Canada. This includes interest earned from foreign bank accounts, rental income from properties owned outside Canada, pensions received from foreign sources, and capital gains from selling inherited or other foreign property. For example, if you inherited a property abroad before immigrating and later sell it as a Canadian resident, you could be subject to capital gains tax on the increase in value from the fair market value (FMV) at the time of your arrival to the sale price. Similarly, if you owned foreign investments or shares that appreciated in value after your immigration, any gains upon sale would also be taxable in Canada.

Failing to report foreign income can result in severe penalties and interest charges, making it critical for newcomers to understand and comply with their tax obligations.

Fair Market Value (FMV) of Assets Upon Arrival

When immigrating to Canada, all assets owned before arrival must be valued at fair market value (FMV) on the date of entry. The FMV of these assets is deemed to be their cost base for tax purposes and will impact future capital gains calculations when these assets are sold.

Proper Documentation of FMV

The CRA requires that FMV assessments be conducted by professionals, such as:

  • Real Estate Agents or Valuators: For properties owned outside Canada.

  • Certified Appraisers: For high-value assets like artwork, jewelry, and collectibles.

  • Business Valuators: For shares in foreign corporations.

  • Financial Statements & Market Data: For investment portfolios, stocks, and bonds.

Proper documentation ensures accurate reporting and reduces the risk of tax disputes with the CRA.

Optional 45(2) Election for Foreign Real Estate

If you own a property in your home country and decide to rent it out upon moving to Canada but plan to sell it before purchasing a home in Canada, you may be able to avoid capital gains tax by making an election under subsection 45(2) of the Income Tax Act. This election allows you to treat your foreign property as your principal residence for up to four years, even if it is rented out, provided you do not claim another principal residence in Canada during that period.

Key Considerations for the 45(2) Election:

  • The election must be filed with your tax return for the year the property starts being rented.

  • If the property is sold before purchasing a home in Canada, it may reduce or eliminate capital gains tax.

  • If you do not make this election, the property may be subject to capital gains tax from the date of your immigration to Canada.

This election can be beneficial for newcomers who are transitioning their financial affairs and planning to purchase property in Canada in the near future.

Compliance Requirements for Foreign Assets & Corporations

Newcomers who own foreign assets or interests in corporations must comply with additional tax reporting requirements.

1. T1134 – Foreign Affiliate Reporting

If you own more than 10% of a foreign corporation, either directly or indirectly, you may need to file Form T1134 (Information Return Relating to Controlled and Non-Controlled Foreign Affiliates). This form provides details about:

  • The foreign corporation’s financial information.

  • The nature of your investment.

  • Any income earned and repatriated to Canada.

Failure to file T1134 can result in penalties, even if no taxes are owed.

2. T1135 – Foreign Income Verification Statement

If your foreign assets exceed $100,000 CAD (excluding personal-use property like a vacation home), you must file Form T1135. This includes:

  • Foreign bank accounts.

  • Investments in foreign stocks (held outside Canadian brokerage accounts).

  • Interests in foreign businesses.

  • Rental properties outside Canada.

Penalties for failing to file T1135 are significant, with fines accruing daily for non-compliance.

3. Foreign Accrual Property Income (FAPI) Rules

If you control a foreign corporation, you may be subject to FAPI rules. These rules are designed to prevent Canadian taxpayers from deferring tax on passive income earned in foreign entities. The key implications include:

  • Passive income (e.g., interest, dividends, rental income) from the controlled foreign corporation is taxable in Canada, even if it is not distributed.

  • You must report this income annually and pay tax on it as if it were earned personally.

Why Proper First-Year Tax Filing Matters

Filing your first Canadian tax return accurately is essential to avoid penalties and ensure compliance with Canadian tax laws. Proper FMV documentation and disclosure of foreign assets and income prevent costly audits and financial consequences.

If you’re a newcomer with foreign assets or business interests, ModernAxis can help navigate these complex tax requirements and ensure full compliance with CRA regulations.