If you’re preparing to move to Canada, sorting out your tax affairs and making sure you are informed about your tax liabilities should be an important part of your preparations. So here is what you need to know about Canadian taxes when moving to Canada.
First of all you must tell HMRC if you’re either leaving the UK to live abroad permanently or going to work abroad full-time for at least one full tax year (the tax year runs from 6th April to 5th April the next year). For this you will need to complete HM Revenue and Customs’ P85 form.
When you leave the UK you don’t immediately and automatically lose your tax status in the UK. So, for some people who move to live and work abroad, they are still liable to UK taxation. If you’re moving to live and work in Canada, you will also of course come under the umbrella of Canada’s tax authority who will also want you to pay tax! So it’s fortunate that there is what’s called a ‘double taxation agreement’ in place between the two countries.
The double taxation agreement offsets your Canada taxes against any ongoing liability that you have in the UK for the current, and even the following tax year. How long you are considered to be tax resident in the UK depends on when you leave, whether you leave permanently, how often you return home to visit…and so on and so forth. Your absolute best bet all round is to complete the P85 form and then once you’re settled in Canada, find an accountant who is used to helping expats.
Becoming a Canadian Tax Resident
Establishing residency for tax purposes can be a very complicated matter, but usually if you move to Canada to live and work there on a permanent basis, you become a resident for tax purposes and are therefore liable to Canada taxes. You should keep a detailed travel log of travel inside and outside Canada during the year of your move, in case there are any questions as to the date your residency was established. An good accountant will be essential for you in the first year or so, just to iron out any cross border liability issues.
In the year that you become a tax resident in Canada, you will be treated as a part-year tax resident. As a tax resident of Canada, you are subject to Canadian tax on your worldwide income. If you are a non-resident of Canada, you are only subject to Canadian tax on Canadian source income.
On relocating to Canada, you will need to obtain a social insurance number (SIN) or a tax identification number (TIN) to file a Canadian tax return.
Knowing the Canada Taxes Essentials
Tax matters are never simple, so regardless of how much reading you do on taxes you will never be able to fully understand a taxation system in your new country of residence unless you are a qualified tax adviser/accountant. Therefore consulting a tax adviser/accountant is a very wise step for those moving abroad. However, there are some essential facts you need to be aware of to be able to keep your taxes in order:
If you are going to be employed in Canada, your income tax will be normally paid under PAYE system, i.e. it will automatically come off your paycheque.
Canadian Tax Year
Another thing to add a soupçon of confusion to the mix is that the tax year in the UK is from April the 6th to April the 5th, whereas in Canada it is from the 1st of January to the 31st of December. As a resident of Canada for any part of a tax year, you will generally need to file a Canadian tax return by April 30th of the following year if you owe tax or if you want to receive a refund because you paid in too much tax in a tax year.
Types of Canadian Taxes
Other than straight federal income tax in Canada, there are municipal and also provincial taxes. Municipal tax is similar to UK council tax and it is levied at varying rates on your property, and provincial tax is a form of income tax and ties in with the federal tax rate except in Quebec which imposes a separate definition of taxable income – just to confuse things! Note, when you file your tax return in Canada you have to do it as an individual even if you are married – there is no provision for joint returns.
For most provinces, you only need to file one tax return for both the federal and provincial taxes. If you live in Quebec, you may need to file a separate provincial tax return.
If you keep assets outside of Canada worth more than $100,000 there are additional Canadian tax filing requirements that must be filed and there are some potentially large penalties for not being compliant with the foreign reporting requirements.
Tax Credits and Deductions
Now for the good news – charitable tax deductions and credits!
If you make regular charitable donations make sure you keep a receipt of them. A tax credit is available limited to 75% of net income. The tax credit for the first CAN $200 of donations is at the lowest personal tax rate (except for Quebec, which uses 20%), and the tax credit for the amount over CAN $200 is at the highest tax rate in 2016 for all provinces and territories except Alberta, New Brunswick and Ontario.
When it comes to tax relief these are usually in the form of credits rather than deductions, there are the following credits from federal taxes: personal credit amount, married credit amount, equivalent to spouse credit amount, age amount, dependent amount, disability amount, CPP premiums credit, tuition fees and education credit amount, and medical expenses credit.
There are a few deductions that may be applicable to you, they include child care expenses, (up to set limits), alimony and maintenance payments, carrying charges and certain interest expenses, personal moving expenses, (under certain circumstances), and registered retirement savings plan (RRSP) contributions (up to set limits). You must file a tax return to receive these credits even if you have no income to report or tax to pay.
Unlike in some nations, general home ownership expenses such as mortgage interest payments, insurance, and property taxes are not deductible. However, if you’re a landlord or you work from home and have an office or business premises within your home then you are usually able to deduct some of the expenses connected your situation.
In conclusion, until you familiarise yourself with the intricacies of Canadian taxes and what you can and cannot claim, a good accountant will be invaluable to you. Find one who is used to dealing with expats so that they can help you with any dual nation tax liabilities for example.