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Frequently Asked Tax Questions
Q: I received some dividends from a company in the United States from which United States income tax was withheld. My neighbour told me that I have to report the dividends on my Canadian tax return and pay tax on it again. Why do I have to pay tax on the same income twice?
A: Canadian residents must pay tax to Canada on their worldwide income even though foreign income may also be taxed in the country from which it arises. However, to avoid double taxation, Canadians who pay income or profits tax to a foreign country are allowed a foreign tax credit to offset the foreign taxes paid.
Q: I receive Social Security retirement benefits from the United States. Should I be paying tax to the United States government for these benefits?
A: U.S. Social Security benefits paid to a resident of Canada are fully exempt from tax in the United States and partially exempt from tax in Canada. The entire amount of benefits is reported as income on your Canadian return and the exempt portion (15% of the benefits) is claimed as a deduction.
Q: This past year I worked in Australia for the entire year. I filed a return with the Australian government and paid taxes on the income I earned while I was there. Is there any reason I should file a return when I was not in Canada at any time during the year?
A: If you retained residential ties with Canada while you were away, you may be considered a "factual resident" of Canada, even though you were not physically present here. In this case you will have to report the Australian income on your tax return and claim a foreign tax credit for the tax paid to Australia. However, if you are considered to be a resident of Australia under the Australia-Canada tax treaty, you will not be taxable on this income in Canada.
Immigrating to Canada
Q: I am a U.S. resident working in Canada on a one-year contract. I have not brought my family with me and I will be returning to the United States as soon as my contract has finished.
Am I considered to be an "immigrant" to Canada for tax purposes?
A: No. Because you will be considered a resident of the United States under the Canada-United States tax treaty, you will be treated as a non-resident for Canadian tax purposes. This means you will not be taxable to Canada on your world income. However, you will be taxable on your Canadian employment income unless the total remuneration received in the year was less than $10,000 or you were in Canada for not more than 183 days and your remuneration was borne by a source outside Canada.
Q: I immigrated to Canada on July 1. Will I be taxed on my income for the whole year?
A: No. You will be taxed on that portion of your world income you earned after you established residential ties here. The only types of income earned before that which are taxable are Canadian-source employment income, business income or scholarship income, or capital gains from the disposition of Taxable Canadian Property. "Taxable Canadian Property" is a technical term that includes real estate situated in Canada, but not publicly traded shares.
Q: Can I claim the expenses I incurred in moving here?
A: You can only claim your expenses incurred in moving to Canada if you are a full-time student at a post-secondary institution. You may then deduct your expenses against any income you have from scholarships, fellowships, bursaries or research grants from that institution.
Q: I am immigrating to Canada later this year. Is there anything I can do to avoid paying more tax than I have to?
A: If you are expecting to receive any lump-sum payments (for example, a retiring allowance from your employer), you should try and time it so that you receive them before you establish residential ties here, otherwise they will be included in your income for Canadian tax purposes. You may also want to consider the possibility of transferring some of your investments to a non-resident trust before you leave. As long as the income is retained in the trust, it will not be taxable in Canada until you have been here for five years.
Moving to the United States
Q: Should I cash in my RRSPs before I move to the U.S.?
A: In most cases, it is not advisable to cash in your RRSPs before you move to the U.S. If you collapse your RRSPs while resident in Canada, you will be taxed at your marginal rate for that year. If you wait until you move, lump sums will be taxed at a rate of 25%. If you leave the money in until you convert it to a RRIF or an annuity, the Canadian tax rate drops to 15%.
Q: Will I have to file a Canadian tax return after I move?
A: If your move is temporary and you do not sever your Canadian residential ties, you will have to continue filing a Canadian return every year, reporting your world income. If you are making a permanent move and severing your Canadian residential ties, you will have to file as a part-year resident in the year you move. In subsequent years, you will not have to file a Canadian return unless you have Canadian-source employment or business income or dispose of taxable Canadian property.
Q: How will my CPP and OAS be taxed if I move to the U.S.?
A: Under the Canada-U.S. tax treaty, CPP and OAS benefits paid to a resident of the U.S. are not taxable in Canada. However, you will have to include them on your U.S. return. For U.S. tax purposes, they will be treated in the same manner as U.S. Social Security benefits.