Canada: Ten Important Canadian Tax Compliance Considerations For New Canadians

The Canada Revenue Agency's recently announced "postal code project" targets Canada's richest neighbourhoods, to identify non-compliance apparent from discrepancies between residents' tax reporting with their apparent wealth.  Even prior to the postal code project, which focuses on any potential high net worth individual, the CRA had enhanced audit activity on high net worth individuals who had entered Canada and obtained permanent residence status ("landed immigrant") for immigration purposes.  A wealthy individual who has purchased a home and moved to Canada with his or her spouse and dependent children may have maintained significant personal and economic ties with his or her country of origin.  Canadian residents are generally taxable on their world income.  Sometimes landed immigrants, rightly or wrongly, have filed tax returns as Canadian residents yet only reported minimal income relative to their net worth, or apparent lifestyle, or reported only their Canadian source income (i.e. they have not reported employment, business or investment income from their country of origin).  When the CRA discovers situations like this, for example, through initiatives such as their postal code project, a wide range of possible Canadian tax non-compliance gets red flagged.  This typically includes reassessments for unreported income, which are often a combination of newly identified sources of income or unidentified bank deposits coming from offshore accounts.

While each situation is unique, here are ten key important Canadian tax compliance considerations for landed immigrants determining their i) Canadian tax obligations upon immigration to Canada; or ii) optimal response to a CRA audit or reassessment.

1.  Landed Immigrant Status for Immigration Purposes versus Residence Status for Tax Purposes

New Canadians are often under the impression that once they obtain their landed immigrant status, they are Canadian residents for tax purposes and must file tax returns in Canada accordingly.  Nonetheless, residence for Canadian tax purposes is a question of fact, with status for immigration purposes being only one factor in that determination.[1]  In most cases, however, once individuals have immigrated to Canada, they will have likely established the requisite degree of nexus or residential ties to Canada to be considered factual residents for Canadian tax purposes.   In exceptional cases, particularly where the children become adults and the landed immigrant begins to sever certain key residential ties with Canada and spend the majority of his or her time in the country of origin, they may no longer be factually resident in Canada for tax purposes.  This is regardless of whether they still maintain their landed immigrant status for immigration purposes.  The more common exception to Canadian tax residency is where the landed immigrant, who is unquestionably a factual resident of Canada based on his or her residential ties with Canada, is deemed to be non-resident of Canada pursuant to the dual resident provision in subsection 250(5) of the Income Tax Act ("Act").

2. Dual Resident (Subsection 250(5) of the Act)

A landed immigrant can be resident in more than one country at the same time ("dual resident").  Where an individual is a tax resident in Canada as well as a tax resident of another jurisdiction, the final determination of the individual's residence status for Canadian tax purposes may depend on the application of subsection 250(5) of the Act.  In brief, if subsection 250(5) applies, it deems a taxpayer who is otherwise a factual resident of Canada to be a non-resident of Canada if, pursuant to the dual residence tie-breaker rule of the applicable tax treaty, the tie is resolved in favour of the other country.  A non-resident of Canada is generally only taxable in Canada on certain Canadian source income.  This is therefore a critical line of defence where high net worth individuals have significant non-Canadian sources of income, including business, employment or investment income, from their country of origin.

3. Treaty Tie-Breaker Rules

The vast majority of Canada's tax treaties utilize a set of internationally standard tie-breaker rules, including the permanent home test, centre of vital interest test, place of habitual abode test and citizenship test.  The permanent home test is the first tie-breaker test.  Because the individual usually has a permanent home available to him or her in both states, this test may not resolve the tie.  With landed immigrants, particularly once the children have grown up and are no longer attending school in Canada, the parents may gradually spend more time in their country of origin.  In addition, with many landed immigrants, the economic ties are often stronger in their country of origin.  Consequently, either the centre of vital interest test or the place of habitual abode test (which emphasizes the physical days present in each country) may resolve the tie in favour of the landed immigrant's country of origin.

A landed immigrant with significant income earned outside Canada may substantially benefit if subsection 250(5) applies to deem him or her to be a non-resident of Canada, if this results in the foreign income being subject to tax rates far less than what would be assessed in Canada.  However, where families are receiving many of the benefits of living in Canada while the main income earner is not subject to a material level of tax in Canada is often a sensitive matter with the CRA that will cause them to exercise their due diligence before conceding to deemed non-residence status.  In addition to adequately supporting that the tie-breaker rules go in favour of the country of origin, the tie-breaker rules in the applicable treaty have to in fact apply.  For the treaty tie-breaker rules to apply, the individual has to be a resident of both contracting states for purpose of the treaty. To be a resident of a contracting state for treaty purposes, a person must be "liable to tax" in that state by virtue of a criterion referred to in the treaty.  The CRA have provided their views on paragraph 1 of Article 4 of Canada's treaties (i.e. meaning of "liable to tax") in paragraphs 1.41 to 1.45 of Income Tax Folio S5-F1-C1.  Consequently, taxpayers relying on subsection 250(5) of the Act should expect to have to provide support to the CRA regarding their tax status in the other jurisdiction (e.g. copies of foreign tax returns and assessments).

4. Taxpayers not bound if they have mistakenly filed tax returns as Canadian residents

Landed immigrants, when filing their initial Canadian tax returns, sometimes were unaware of the dual resident provision in subsection 250(5) of the Act and mistakenly reported themselves as Canadian residents.  Regardless of the reasoning behind reporting as a Canadian resident on a tax return, where an individual was a dual resident and subsection 250(5) should have applied to deem him or her to be a non-resident, the individual should be able to amend his or her prior tax returns assuming the taxation years are not statute barred.  Where the CRA has reassessed unreported foreign source income to a taxpayer who the CRA assumes, because of the tax returns, is a Canadian tax resident, the application of subsection 250(5) may be a valid argument to have those reassessments overturned by a CRA appeals officer, or if necessary by the Tax Court of Canada or the Canadian competent authority (see #7 below).  There is Canadian jurisprudence that supports that taxpayers are not bound by their initial mistaken tax classification as a resident of Canada.

Taxpayers need to consider that if they are successful in amending their tax returns or having reassessments overturned on the basis that they are a non-resident of Canada, and therefore not taxable on non-Canadian source income, this may have other Canadian tax ramifications (see #6 below).  Also, the CRA may be limited to how many years they can go back to reassess an amended tax return if those years are statue barred.

5. Foreign Reporting Obligations

Canadian residents have foreign reporting obligations.  The most common foreign reporting obligation that may impact landed immigrants is pursuant to section 233.3 of the Act.  In particular, Form T1135 – Foreign Income Verification Statement ("Form T1135") must be filed by Canadian resident individuals, corporations and certain trusts that, at any time during the year, owned specified foreign property costing more than $100,000.  Form T1135 is due on the same date as the corporation or individual's income tax return.  "Specified foreign property" in subsection 233.3(1) of the Act includes, but is not limited to, shares of the capital stock of a non-resident corporation, funds or intangible property situated or held outside Canada, as well as tangible property situated outside Canada.  The penalties where taxpayers do not fully comply with their foreign reporting obligations can be onerous.

Landed immigrants who have been assessed, or are about to be assessed by the CRA, for unidentified bank deposits that the CRA are asserting give rise to unreported income, may find themselves in a predicament.  For example, landed immigrants, to establish that certain Canadian bank deposits were simply transfers of funds from a foreign bank account holding funds accumulated prior to becoming a resident of Canada, must disclose that account that was not reported on Form T1135.  Where taxpayers find themselves in this predicament, or where taxpayers simply have not complied properly with the foreign reporting rules and are exposed to potential significant penalties, they should obtain advice from a Canadian tax advisor (see #10 below).

6. Principal Residence Exemption, Departure Tax and Part XIII Withholding Tax Consequences

Where an individual is a dual resident, subsection 250(5) should have applied to deem him or her to be a non-resident and the taxpayer is considering amending his or her prior tax returns or arguing against a proposed assessment of unreported income by the CRA on that basis, consideration must be given to the impact this change of residence status may have on other Canadian tax matters, including the principal residence exemption, the Canadian departure tax rules and the Part XIII tax system.

Capital gains arising from the sale of a principal residence are generally exempt from Canadian taxation for Canadian residents.  Consequently, any determination of non-residence status could impact the formula for computing the principal residence exemption.[2]

Pursuant to the Canadian departure tax rules, when an individual ceases to be a resident of Canada, he or she has obligations under paragraph 128.1(4)(b) of the Act.  This provision deems an individual to have disposed of his or her property at its fair market value and then reacquired it for the same amount at the time the individual ceased to be a resident of Canada for tax purposes.  This deemed disposition triggers capital gains and losses that accrued prior to becoming a non-resident.  Any capital gains would be taxed in the year of the change in residence.  Certain types of property are excluded from this deemed disposition, including Canadian real or immovable property.

Finally, any change in classification from a Canadian resident to a non-resident triggers the possible application of Canada's Part XIII withholding tax system on certain Canadian source passive income (e.g. interest, dividends, royalties, rent, etc.).  If amended tax returns are needed, the impact this would have on failure to withhold assessments on payments made in the period the taxpayer erroneously filed as a Canadian resident must also be considered.

7.  Mutual Agreement Procedure vs. Notice of Objection vs. Tax Court of Canada

Where landed immigrants are involved in a tax dispute with the CRA and the issues involve the application of the treaty tie-breaker rules, or Canada's taxing rights on income earned from the landed immigrant's country of origin, consideration should always be given to filing a competent authority request under the Mutual Agreement Procedure ("MAP") article of the applicable tax treaty.[3]  The MAP is provided by the treaty and does not impact a taxpayer's domestic notice of objection or Tax Court of Canada appeal rights.  While the most effective dispute resolution mechanism to deploy should be determined on a case by case basis, notice of objection rights should always be protected first.  Notices of objection can be held in abeyance while a resolution of the tax dispute is pursued under the MAP.

8.  Exchange of Information Article in Tax Treaties

Landed immigrants, especially dual residents, involved in a tax dispute with the CRA must also bear in mind the Exchange of Information ("EOI") article in a tax treaty.  For example, if a dual resident taxpayer is disputing a CRA assessment of unreported income (e.g. unidentified Canadian bank deposits) on the basis that the deposits were transfers from offshore accounts that were earned or accumulated prior to becoming a Canadian resident, the CRA's competent authority has the ability to request information on those foreign assets or income streams from the foreign tax authority (i.e. the competent authority of its treaty partner) through its powers under the EOI article.  Landed immigrants must also be aware that any information provided to the CRA in defence of their filing position or reassessment can be forwarded to the other competent authority under the EOI, which may bring to light areas of tax non-compliance in that foreign jurisdiction.

9.  Gross Negligence Penalties and Burden of Proof

Where the CRA has reassessed significant amounts of unreported income, subsection 163(2) of the Act provides for gross negligence penalties that are often assessed as well.  Landed immigrants being assessed by the CRA on their unidentified Canadian bank deposits often have gross negligence penalties assessed simply because the CRA have not been provided satisfactory answers to the source of such deposits.  Canadian courts have held that gross negligence involves a neglect beyond a failure to use reasonable care.  In other words, there is generally a burden of proof on the CRA to establish that the taxpayer acted with a high degree of negligence tantamount to intentional acting or indifference as to compliance.  There are many cases where landed immigrants, despite being assessed gross negligence penalties by the CRA on unreported income, did not act with the degree of negligence required to support such penalties.

10. Voluntary Disclosures Program

Landed immigrants who filed tax returns as Canadian residents may not be in a position to argue that they are deemed non-residents of Canada pursuant to subsection 250(5).  If so, they may have been non-compliant with reporting their world income and/or other foreign reporting obligations.  Where these taxpayers have not already been contacted by the CRA for a possible audit and they have an exposure to non-compliance and gross negligence penalties if audited by the CRA, they should give immediate consideration to applying for penalty, interest and potential criminal prosecution relief under the CRA's Voluntary Disclosure Program ("VDP"), especially in light of the CRA's announced changes that once implemented will significantly restrict the application of the VDP.

The Canadian Government has invested one billion additional dollars to tackle tax evasion and perceived abusive tax avoidance.  The CRA has touted these enhanced resources, along with increased collaboration and cooperation with their international partners, "to detect and crack down on tax cheats and ensure that those who choose to break the law face the consequences and are held accountable for their actions".  Landed immigrants need to understand the Canadian tax compliance considerations to determine their Canadian tax obligations upon immigration to Canada or, if they are already in the CRA's cross-hairs, their optimal response to a CRA audit or reassessment.

Footnotes

[1] The CRA's Income Tax Folio S5-F1-C1, Determining an Individual's Residence Status, provides more information regarding determining an individual's residence status for tax purposes.

[2] The following is a link to the CRA's publication regarding "Principal Residence", which provides more information on this formula and eligibility for the exemption:  https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/folio-3-family-unit-issues/income-tax-folio-s1-f3-c2-principal-residence.html#N112E1

[3] The CRA's guidance on how to apply to the Canadian competent authority under the MAP is available in Information Circular 71-17R5 Guidance on Competent Authority Assistance under Canada's Tax Treaties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Miller Thomson LLP
Rotfleisch & Samulovitch P.C.
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Miller Thomson LLP
Rotfleisch & Samulovitch P.C.
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions