Planning ahead to learn the country's tax laws can help ease the transition.
With its multicultural population, universal health care and a variety of diverse communities, it’s easy to understand the appeal of moving to Canada.
But such a move also means understanding how the country’s tax laws may impact your income and wealth planning. Getting proper advice and planning ahead is key to ensuring the process goes smoothly, says Iggy Chong, head of enterprise private clients at RBC Wealth Management in Asia.
“In meeting with many of our global family clients, we notice many Asians spend more energy choosing a property they’re going to buy in Canada than looking at how the Canadian taxation system could potentially impact their finances,” he says.
Moving to Canada may entail becoming a Canadian resident for tax purposes, or being a “deemed resident.” This is a designation independent from citizenship or landed immigrant status, and it’s important to understand what triggers it.
Canada has a residence-based income tax system, which is different from the territorial-based system one finds in regions like Hong Kong and Singapore. In a territorial-based system, residents are taxed on income based solely on where that income is earned.
In Canada, residents pay taxes on their global income no matter where they earned it. For example, if someone is considered a deemed resident in Canada and has business interests in Hong Kong, they could end up paying Canadian taxes on their Hong Kong income.
While Canada has tax treaties with Hong Kong, Singapore, mainland China and several other countries that limit the risk of double taxation, the resident will generally pay the higher rate between the two countries.
“It’s a fundamental difference, and obviously the tax rates in Hong Kong and Singapore are much lower than in Canada,” says Octavia Liu, a wealth planner at RBC Wealth Management in Asia.
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 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, or having a spouse or other dependents in the country. This may come as a surprise to someone who prefers to avoid the designation.
“I think the residency is the big thing people get caught off guard with,” says Chong. “They don’t realize that having all these connections to Canada could cause that deemed residency.”
Another area that can come as a surprise is the different taxation of income from investments in Asia versus Canada. Capital gains and dividends, for instance, are taxed in Canada, but not in Hong Kong or Singapore. As the investment income is only taxed in Canada, it isn’t covered by tax treaties, which generally seek to prevent tax overlap. This means that somebody moving from Singapore or Hong Kong to Canada could find themselves owing taxes on offshore investments that had, up until that point, been tax exempt.
One possible way to deal with this is to sell, or crystallise, the assets before the move, in order to trigger the capital gains before becoming a deemed resident.
“You may need to sell some investments that have already generated some capital gains prior to moving,” says Liu. “That’s why I think it’s very important to speak to a tax professional before you move.”
Moving to Canada also means disclosing certain foreign assets – something that people may find unpalatable – perhaps due to the misconception that they will be taxed on the assets on their arrival. But declaring the value of assets means the Canadian government won’t have to estimate their value at a later date, says Liu.
“The idea is that when you declare these assets, you’re basically telling the Canadian government that you’ve acquired these foreign assets prior to your becoming a tax resident,” she explains. This allows the government to establish a cost basis for the asset at the time of the move, meaning taxes will only be levied for any appreciation following arrival in Canada. “It is important to consider these issues and obtain proper advice,” says Liu.
Not fully disclosing assets can result in fines from the Canadian Revenue Agency (CRA), and could also result in the CRA treating an asset as if it was acquired while in Canada, which could trigger additional taxes or an audit, says Liu.
Beyond taxation concerns, there are other areas such as currency and real estate where a bit of advanced planning could save you money in the long run.
Transferring wealth from an Asian region to Canada involves converting funds to Canadian dollars. To avoid taking losses because of a disadvantageous exchange rate, plan conversions well ahead of time to average out the volatility.
“Let’s say people plan on moving to Canada in the next three years; start to talk to your financial institutions and start to convert,” Chong suggests. “There’s many ways you can do it, but you do it over time.”
Regarding real estate, Canada has a real estate taxation scheme considerably different from Asian markets, which may make buying property in the country more appealing for some or less appealing for others. For instance, someone from Singapore who has paid hefty stamp duties there may be surprised to find Canada has no stamp duty. However, most Canadian provinces do impose a smaller land transfer tax, and there are other property taxes to consider, including speculation taxes that can change depending on the homeowner’s residency status.
Having a clear understanding of the consequences of Canada’s residence-based system requires early planning and advice from both estate-planning and taxation scenarios.
“We stress the importance of holistic planning prior to moving to Canada and speaking to a qualified tax professional,” said Liu.
In addition to subjects like tax status and declaring foreign assets, it’s important to have a clear understanding of retirement products and how they can benefit someone who’s moving to Canada.
“The key thing is to make sure you get the advice before you make the decision,” says Chong. “Don’t get the advice after and wonder, ‘Why didn’t I know that?’”
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