What immigrants should know when coming to Canada

Learning to navigate the financial system in a new country is far from easy. Of course, some aspects are consistent regardless of where you are—for example, it’s always a good idea to create a budget to balance income and expenses, and to set aside an emergency fund for unexpected events. 

However, becoming a tax resident of Canada comes with specific challenges relating to taxes on foreign income, managing your credit report, and understanding the various tax credits and deductions available.

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CPA Canada already offers a wide range of free resources and tools to help newcomers. We also asked CPAs Sandra Urizar and Martin Caron, both experts in international mobility, to identify some of the most important things to consider. 

Registered accounts 

In addition to the traditional chequing and savings accounts, newcomers need to know about Canadian registered accounts and how they work. These accounts allow Canadians to shelter some of their money (including income) from tax in order to save—for retirement, among other things. 

“In their first year in Canada, newcomers cannot contribute to an RRSP (Registered Retirement Savings Plan), since they did not earn any contribution room the previous year. However, they can put money into a TFSA (Tax-Free Savings Account) or an RESP (Registered Education Savings Plan) starting the very first year,” explains CPA Sandra Urizar, Partner, Tax at KPMG Canada. However, be careful not to start contributing to the TFSA before becoming a tax resident of Canada, as any amounts contributed before that are subject to a penalty of 1% per month as long as the money remains in the account. 

Urizar also points out that accounts that are not taxable in another country may be taxable in Canada, and the same applies to Canadians. For example, profits from U.S. financial securities are sheltered from U.S. tax if they are held in an RRSP, but not in a TFSA. 

Credit scores 

Credit reports and credit scores are very important in Canada. A credit report is a historical record of your credit products and loans and how well you have managed them. It is a crucial aspect of the credit score calculation, which assesses the likelihood that you will repay a loan. However, many newcomers find it difficult to make their credit reports available and as a result find themselves without a credit history, which hinders their access to loans. 

“Some of the big banks operate in several countries, which makes it easier for their clients to transfer their credit reports, but things can get complicated when you’re dealing with a small local financial institution,” says CPA Martin Caron, Tax Partner, Global Mobility Services at Raymond Chabot Grant Thornton. 

Newcomers who have to rebuild their credit score need to understand how it is calculated. Your payment habits account for more than a third of the credit score, while your credit usage is worth almost a third. The ideal is to use less than 50 per cent of your card’s credit limit. The age of the accounts, number and type of accounts receivable, and number of applications made also play a role. 

Beware of double taxation 

Taxation is a more complex field, and mistakes in this area can be costly. Fortunately, CPAs are well positioned to help navigate the challenges. 

“Newcomers should pay close attention to the date on which they become tax residents of Canada because that’s when they have to start reporting their worldwide income,” says Caron. Newcomers must report all their income, including income from abroad, such as a house that they have kept and rent out in their country of origin. But they can also claim expenses that enabled them to generate this income, which will reduce the amount on which they are taxed. 

In some cases, a portion of foreign income may be exempt from tax under a tax treaty between two countries. This is the case, for example, with income from U.S. Social Security benefits, for which Canada offers a 15% tax credit. 

That said, and even in the absence of a treaty, a new taxpayer can claim federal foreign tax credits. They must file a form for each foreign country in which they paid tax. “A taxpayer will not be taxed twice on the same income,” explains Martin Caron. “They will only pay the difference between the Canadian tax rate and the tax rate in the foreign country.” Provincial tax credits, which vary from province to province, may also be available. 

Newcomers with more than $100,000 in foreign assets must also remember to complete Form T1135. Some properties, such as a principal residence or a vacation home, are exempt. Failure to complete the form will result in a penalty of $25 per day late, up to a maximum of $2,500. 

Credits, gains and deductions 

All tax residents of Canada are entitled to most of the same tax credits. “However, if you have a temporary work permit and are not a permanent resident, you must spend 18 consecutive months in the country before you’re entitled to the Canada Child Benefit or provincial or territorial child benefits,” says Sandra Urizar. 

Basic non-refundable tax credits are also pro-rated for the number of months spent in Canada as a tax resident. “However, if a person earned 90% or more of their income for the year in Canada, they will be entitled to 100% of the non-refundable tax credits,” says Caron. 

Sandra Urizar also advises all newcomers to prepare a balance sheet of all their property and assets as of the date on which they become a Canadian tax resident. “A newcomer to Canada is presumed to have acquired all their property and assets on that date,” she explains. “This has major implications for the taxation of capital gains and capital loss deductions.”  

For example, let’s say an individual purchased a share in 2014 for $45. When they become a Canadian tax resident in 2018, that share is worth $55. They then decide to sell it in 2024 for $60. The capital gains tax will only apply to the $5 in profits they earned since becoming a Canadian tax resident. The same logic applies to losses: Losses incurred before becoming a tax resident cannot be deducted. 

Finally, newcomers should be wary of fraud, some of which targets them specifically. For example, some scammers pose as landlords offering apartments or houses for rent in exchange for cash deposits. No matter where you live, it’s important to be cautious!