Q & A: Immigration and Taxation Implications of Return to Canada

Q. I am a Canadian Citizen living and working (for a Canadian employer) in the U.S. and have a green card pending (since March '98). I have been here 6 years and met and married my husband (US Citizen) down here. We are considering a move back to Canada (my family/friends are there).

We have many many questions from taxes i.e. what to do with 401 K $ if we move up there, if we sell our house and make money and move up to Canada next year 2001, will we be taxed both in Canada and US on the earnings made from the sell of the house. Also immigration questions, if I return to Canada do I keep my old SIN # or will I need to get a new one (I guess I need to change my name on it but what about a new one).

How do I tell Canada I'm back? How do I tell the US I'm leaving? If I do obtain my green card before leaving (finally!), what then are the implications of excepting it?

Answer: Immigration and taxation issues are addressed separately below.

Campbell, Cohen:

As a Canadian Citizen, there are minimal immigration implications of your return to Canada. You would retain your priro Social Insurance Number, and employers would use that to remit the appropriate income taxes on your behalf. This would effectively indicate that you have returned as a resident. If your spouse is not a Canadian, then he would be subject to immigration requirements, which would be satisfied by a sponsorship application.

Richter, Usher & Vineberg:

From an income tax standpoint, the timing of the transfer of the funds into Canada is not relevant. As a Canadian resident, you are taxable on your world income from the point at which you became resident in Canada. Thus, any income earned on the amount left in the foreign bank account will be subject to Canadian tax beginning at that time. To the extent the same income is also subject to either a withholding tax or income tax in the country of origin, it may be possible to claim a foreign tax credit in Canada to eliminate the potential for double taxation.

Canada will only subject an individual to taxation on his world income once he has become a resident of Canada. Prior to that time, he will only be taxable on any employment income or business income earned in Canada as well as capital gains on the sale of “taxable Canadian property” (“TCP”) (i.e. shares of private Canadian corporations, Canadian real estate, etc).

As such, you will not be taxed in Canada on any income (except those sources mentioned above) before you enter into Canada. After that point, to the extent you still earn income in the U.S., you may be subject to tax in both Canada and the U.S. and you should be able to avail yourself of the foreign tax credit system to minimize or eliminate the double taxation possibility.

With respect to assets you hold upon leaving the United States, Canada will generally allow you to “bump up” your cost base to the fair value of the particular asset at the time you become a resident of Canada. As such, you will only be taxable in Canada on any future gains or losses computed with reference to the fair value of the asset at the time of immigration. It should be noted that this does not include TCP that are held by you and your husband. These assets will be taxable with reference to their original cost.

Your house in the U.S. is not TCP and as such you will not be taxed on the disposition if it occurs before you once again become a Canadian resident. If you dispose of the house after you have become once again a Canadian resident, you will be taxed in Canada to the extent of any gain or loss computed with respect to the fair market value at the time you again became resident in Canada.

From an income tax standpoint, you will notify Canada (and maybe the province in which you reside) of your return by filing an income tax return stating the date which you once again became resident in Canada.

It should be noted that you and your husband might continue to be subject to U.S. taxation in some manner as the U.S. reserves the right to tax its citizens regardless of their residence. The implications of your “green card” should be properly reviewed with US counsel. Again, as mentioned above, should any double taxation issues arise, this will be eliminated by virtue of the Canada-U.S. Income Tax Treaty.

From a Canadian tax perspective, your 401K plan will only be taxable in Canada when the benefits are paid, and the amount included in your income shall not include any amounts that would have been excluded from your income had you remained resident in the U.S. To the extent any U.S. tax is levied, you may request a foreign tax credit in Canada.

Disclaimer

The nature of this facility is to provide a general response to a general question. Under no circumstances should anyone act on this information without obtaining analysis and counsel from a qualified advisor with respect to the specific situation.

Phillip Nadler, CA
Richter Usher & Vineberg
http://www.richter.ca