Canada Taxes Explained: VAT, Corporate Tax & More

Moving to Canada as an expat brings exciting opportunities, but it also introduces new responsibilities regarding taxes and social security. Understanding Canada taxes, social security agreements, and benefit programmes is essential for managing your finances effectively and ensuring you receive all the support you’re entitled to. This guide provides essential information to help you navigate these requirements successfully.

Understanding Canada’s Social Security Agreements

Canada has established social security agreements with numerous countries to protect the pension rights of people who have lived or worked in multiple nations. These agreements are designed to eliminate barriers that might prevent individuals from receiving the benefits they’ve earned through their contributions and residency periods.

How Social Security Agreements Help You Qualify for Pensions and Benefits

Social security agreements serve two primary purposes for expats. They allow individuals to combine periods of contribution or residency in Canada with those in another country to meet minimum eligibility criteria for benefits. Additionally, these agreements can reduce or eliminate restrictions related to citizenship requirements or the payment of pensions when living abroad.

When you don’t meet the normal contributory or residence requirements for Canadian benefits due to having lived and worked in multiple countries, these agreements can bridge the gap. The agreements work by recognising your contributions and residency periods in partner countries as if they were made in Canada, helping you qualify for benefits you might otherwise miss.

Which Canadian Benefits Are Covered by International Agreements?

The Canadian benefits included in social security agreements are specifically those paid under two major programmes: the Old Age Security (OAS) programme and the Canada Pension Plan (CPP). These are Canada’s primary retirement income security programmes, and the agreements ensure that your international mobility doesn’t jeopardise your access to these essential benefits.

Qualifying for Canadian Benefits Using Time Abroad

For CPP benefits, periods of contribution under another country’s pension legislation may be considered when determining your eligibility. This means that if you’ve contributed to a pension scheme in a country with which Canada has an agreement, those contribution periods can help you meet the minimum requirements for CPP benefits.

For OAS benefits, both periods of residency and contribution under another country’s legislation may be considered as periods of residency in Canada. The specific terms depend on the particular agreement between Canada and your country of origin or previous residence.

Using Canadian Contributions to Qualify for Foreign Pensions

These agreements work both ways. Your periods of contribution to the Canada Pension Plan or periods of residence in Canada can be considered as periods of contribution or residence under a foreign social security programme, helping you qualify for benefits from your previous country of residence.

How Benefit Payment Amounts Are Calculated Under Agreements

Whilst social security agreements help with qualification, it’s important to understand that the actual payment amounts for Canadian or foreign benefits are determined by your real contributions to the respective plans or years of residency in the specific country. The agreements don’t increase your benefit amounts; they simply help you qualify for benefits you might otherwise lose.

For Canadian benefits, your payment will be calculated based on your actual Canadian contributions or residency periods. Similarly, foreign benefits will be calculated based on your actual contributions to those systems. 

• See also: Opening a Bank Account in Canada

Newcomers and the Canadian Tax System

What Is Considered a ‘Newcomer’ for Tax Purposes?

The Canada Revenue Agency (CRA) considers you a “newcomer to Canada” for the first year you are a resident of Canada for income tax purposes. This designation comes with specific rights and obligations that differ from those of long-term residents. Your newcomer status affects when you can apply for benefits, what income you must report, and how your taxes are calculated.

Role of the Canada Revenue Agency (CRA) for New Residents

The CRA is the government agency responsible for collecting taxes and administering various government payments, benefits, credits, and programmes. For newcomers, the CRA plays a crucial role in determining eligibility for benefits and ensuring proper tax compliance from the moment you establish Canadian residency.

The CRA provides extensive resources specifically designed for newcomers, including digital services, forms, guides, webinars, videos, and infographics to help you understand your tax obligations and available benefits.

Determining Your Residency Status for Taxes in Canada

Your tax obligations in Canada are determined by your residency status for tax purposes, which is separate from your immigration status. 

You become a resident of Canada for income tax purposes when you establish sufficient significant residential ties in Canada. For most newcomers, this begins on the first day they live in Canada. The CRA generally considers you a tax resident if you are legally admitted as a permanent or temporary resident and establish significant ties to Canada.

Your residency status can change from year to year based on various factors, including the length and reason for your stay, temporary or permanent departures, or periods of living outside Canada. It’s essential to keep the CRA updated about any changes to your residency status to ensure proper tax treatment and benefit eligibility.

Understanding Significant Residential Ties

Significant residential ties are the primary factors the CRA considers when determining your tax residency status. These include having a home in Canada, having a spouse or common-law partner in Canada, and having dependants in Canada. Establishing any of these ties typically indicates that Canada has become your primary place of residence.

Secondary ties that may also be relevant include personal property such as cars and furniture, social ties like club memberships, economic ties such as bank accounts and credit cards, holding a Canadian driver’s licence, possessing a Canadian passport, and having provincial or territorial health insurance coverage.

When and How to Get Help with Residency Status (Forms NR74/NR73)

If you’re uncertain about your residency status for tax purposes, the CRA provides formal mechanisms to help you determine your status. You can complete Form NR74 if you’re entering Canada or Form NR73 if you’re leaving Canada to request an official determination from the CRA.

These forms require detailed information about your residential ties, the circumstances of your move, and your intentions regarding your stay in Canada. The CRA will review your situation and provide a written determination of your residency status, which can provide certainty for tax planning and benefit applications.

Your Tax Obligations in Canada as an Expat

Understanding your tax obligations as an expat in Canada involves navigating both Canadian tax law and potential obligations to other countries. The Canadian tax system has specific rules for new residents that affect what income you must report and when.

Filing Your First Tax Return as a Newcomer to Canada

You must file your first Canadian income tax return by April 30 of the year following your move to Canada. If you or your spouse are self-employed, the deadline extends to June 15. Quebec residents must also file a provincial tax return with Revenu Québec in addition to the federal return.

Your first tax return serves several important purposes beyond simply calculating taxes owed. It formally establishes your date of entry to confirm your residency status change, allows you to report both Canadian and foreign income earned after your arrival, and enables you to claim foreign tax credits to avoid double taxation on the same income.

This return also provides an opportunity to report foreign income earned before your arrival in Canada. Whilst this income isn’t taxable in Canada, it’s considered for calculating various Canadian tax credits and benefits, making accurate reporting important for maximising your benefits.

What Income You Must Report as a New Tax Resident

As a tax resident of Canada, you’re legally required to pay tax based on your worldwide income and personal situation. This includes all income earned from the day you establish Canadian tax residency, regardless of where in the world that income originates.

You must report Canadian income such as employment earnings, business income, investment income, and rental income. Additionally, you must report foreign income received after becoming a Canadian resident, including foreign employment income, business income, rental income, investment income, and pension payments.

Your employer typically deducts taxes directly from your Canadian employment income, but you’re responsible for ensuring all income is properly reported and any additional taxes are paid when you file your return.

How Canada Taxes Worldwide Income and What’s Exempt

Once you become a Canadian tax resident, Canada taxes your worldwide income from the day you establish residency. This means income from foreign sources received after your arrival in Canada is subject to Canadian tax, even if it’s also taxed in the country where it was earned.

However, foreign income earned before becoming a Canadian tax resident is not subject to Canadian tax. This distinction is based on when you earned the income, not when you received it. For example, if you earned employment income in your home country before moving to Canada but received the payment after arriving, that income wouldn’t be taxable in Canada.

The timing of when you establish tax residency is therefore crucial for determining your tax obligations. Careful planning around your move date and the timing of income receipts can have significant tax implications.

Using Tax Treaties to Avoid Double Taxation

Canada has tax treaties with many countries designed to avoid double taxation and prevent tax evasion. These treaties use “tie-breaker” criteria to determine your country of residence for tax purposes when you have significant residential ties in both Canada and another country.

When double taxation does occur, treaties or Canadian tax laws often allow for a foreign tax credit to reduce Canadian tax on the same income. This credit system ensures you don’t pay tax twice on the same income, though the relief may not always be complete due to differences in tax rates or timing between countries.

Double taxation might not always be completely avoided, particularly due to timing mismatches between when different countries recognise income or if foreign income exemptions aren’t recognised by Canadian tax rules. Understanding your specific treaty provisions can help optimise your tax position.

International Money Transfers: What Expats Need to Know

Transferring money internationally, known as sending a remittance, is a common need for expats in Canada. Whether you’re supporting family in your home country, moving additional funds to Canada, or managing international investments, understanding your options and the associated costs is crucial for effective financial management.

How to Choose the Right Money Transfer Method and Provider

Money can be sent internationally through various methods, including cash pickup, bank account deposits, or credits to credit, debit, or prepaid cards. You can access these services through banks, credit unions, money transfer businesses, cheque cashing businesses, and currency exchanges. Many money transfer businesses also operate through outlets in post offices, grocery stores, pharmacies, and convenience stores.

When choosing a provider, research their trustworthiness by asking family and friends about their experiences, checking with the Better Business Bureau, and contacting your provincial consumer protection office. Transactions can typically be set up online, by telephone, email, or in person, depending on your preferences and the provider’s capabilities.

Understanding Transfer Fees, Exchange Rates, and Delivery Times

Federally regulated financial institutions in Canada must disclose their fees for sending money abroad, though these don’t include any charges that may apply in the recipient country. Fees vary significantly among providers and may depend on the amount being sent or the payment method chosen.

Some providers offer discounts for repeat business or large transfer amounts, while financial institutions with branches in both countries might offer lower transfer fees due to their existing infrastructure and relationships.

Exchange rates represent another significant cost factor, as some businesses profit by charging higher-than-usual exchange rates. Always inquire about the current exchange rate and compare it with other currency exchange services to ensure it’s reasonable. Exchange rate fluctuations can affect the final amount the recipient receives, so ask whether the amount is based on the exchange rate at the time of payment or collection.

Transfer time can range from minutes to several days, with faster services typically being more expensive. Consider whether the increased speed justifies the additional cost based on your specific situation and the urgency of the transfer.

Legal Rules for International Transfers Over CA$10,000

Moving large amounts of money into and out of Canada is governed by specific regulations designed to prevent money laundering and terrorist financing. Understanding these rules is essential for compliance and avoiding penalties or legal complications.

Reporting Large Transfers to CBSA, FINTRAC, and CRA

The movement of money into and out of Canada is governed by the Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations (PCMLTFA), enforced by the Canadian Border Services Agency (CBSA) and the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

If you’re entering Canada with CA$10,000 or more in cash, cheques, travellers’ cheques, bonds, stocks, or other monetary instruments, you must declare these to the CBSA. This applies whether the amount is in Canadian dollars or other currencies. Failure to report is a criminal offence that can result in serious consequences.

When you receive CA$10,000 or more in cash, whether in a single transaction or multiple transactions within 24 hours, a large cash transaction report must be submitted to FINTRAC by the receiving institution.

Bringing Money Into and Out of Canada Legally

For incoming electronic transfers of CA$10,000 or more, your service provider (whether a bank or third-party provider) will automatically report these transactions to FINTRAC and Canadian tax authorities. This reporting requirement applies to individual payments of CA$10,000 or more, or several payments that sum to CA$10,000 or more in quick succession, including virtual currency transfers.

When taking CA$10,000 or more in cash or equivalent instruments out of Canada, you must declare this amount at a CBSA office before security if travelling by air, or at the closest CBSA office if travelling by land, boat, or rail.

For electronic payments of CA$10,000 or more sent overseas, your payment provider will report these transactions to FINTRAC and the Canada Revenue Agency (CRA) as part of efforts to guard against tax evasion and money laundering.

What Are the Tax Implications for Large Transfers?

Since 2015, all banks and third-party providers handling international payments of CA$10,000 or more are required to report these transfers to the CRA simultaneously with FINTRAC reporting. As an individual, you don’t need to personally report electronic transfers, as this responsibility lies with the service provider. You only need to report personally when physically carrying cash or equivalent instruments across the border.

In general, bringing large amounts of money into or out of Canada is permissible provided you transparently report payments and have properly filed and paid all required taxes. The reporting requirements aim to deter criminal activities, including tax evasion, rather than prevent legitimate financial transactions.

Failing to report cash or equivalent instruments can result in fines of up to CA$5,000 and seizure of the funds. Any undisclosed income or capital gains that are sent or received will be noted by the CRA, potentially leading to additional tax bills, penalties, or legal proceedings.