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Newcomers Need Advice: Can You Explain Our Complex Tax System?

Posted: September 17, 2018 By: Evelyn Jacks
Posted in: Strategic Thinking, taxation, knowledge bureau, Evelyn Jacks, tax reform, personal income tax, immigration, canadian newcomers, working abroad, newcomers to canada, immigrants, returning residents, Canadians returning, living aborad, Social Insurance Number, Canada's tax system, tax guidelines

Our nation’s system is complex even to tax-educated Canadians. Imagine how mind-boggling this must be for newcomers (immigrants and refugees) and returning residents to Canada. There’s opportunity for advisors to work with this vast niche market and become a trusted educator and advocate for these families.

Doing so will bring a significant multi-generational wealth management opportunity with this demographic, and the numbers support this. According to Statistics Canada, 20.6 percent of Canada’s total population is foreign born, which represents the highest proportion among the G8 countries.

Between 2006 and 2011, 1.1 Million foreign-born people immigrated to Canada from Asia (representing the largest source) as well as Africa, the Caribbean, Central and South America. The majority of immigrants live in Ontario, BC, Quebec and Alberta.

How is Canada’s tax system different? Part of welcoming and advising newcomers and returning residents to Canada, is to take the time to answer questions about our tax system and educating them on the fundamentals that make our system different than that of their home countries.

To start, explain what their Social Insurance Number (SIN) means. Explain that a SIN is a key part of an individual’s financial identity, which is private, confidential and requires protection. Helping newcomers understand that these numbers and PIN numbers must not be shared is an important part of your role as educator and advocate on their behalf.

Legislated uses of the SIN in Canada include:

  1. Canada Pension Plan, Old Age Security and Employment Insurance contributions or claims (the original purposes for the SIN); income tax identification
  2. Tax reporting by banks, trust companies, caisse populaires and stock brokers for financial instruments like GICs or Canada Savings Bonds, or services (bank accounts) that generate interest
  3. Canada Student Loans or Canada Student Financial Assistance; Canada Education Savings Grants
  4. Tax Rebate Discounting Regulations; Garnishment Regulations (Family Orders and Agreements Enforcement Assistance Act); Canada Elections Act; Canadian Labour Standards Regulations (Canada Labour Code); Farm Income Protection

Programs authorized to use the SIN: Immigration Adjustment Assistance Program; Income and Health Care Programs; Income Tax Appeals and Adverse Decisions; Labour Adjustment Review Board; National Dose Registry for Occupational Exposures to Radiation; Social Assistance and Economic Development Program.

The task of applying for SINs will lead naturally into a discussion about Canada’s tax system. This is a great opportunity for you to be an educator and/or for you to become a new, key person on the client’s financial advisory team: a trusted tax advisor. There are three key principles to convey:

1. Our tax system is based on self-assessment. That essentially means that families must file audit-proof tax returns.

2. The principle of progressivity: The more you earn in Canada the more you pay.

However, the Basic Personal Amount – different federally from provincial returns – ensures that a basic amount may be earned tax free. Newcomer clients will want to understand this, what the tax brackets are and how income splitting affects their tax filings and tax planning.

You will want to ensure that they know about the Income Attribution Rules as well. Recall that this prohibits the transfer of capital from the top earner in the family to spouses or minor children so that they can report income at their lower marginal rates.

3. Tax withholding: For most employees, the first dollars earned go directly to the government, recoverable only by filing a tax return.

In addition, do explain that the tax return doesn’t only reconcile the correct amount of tax to be paid on various income sources; it is an application form for a number of generous refundable tax credits, available even if they have no income. This is all “new money” for certain family members, and it can form the basis for important discussions about cash flow, debt management and investments.

In order to offer services appropriate to this niche market, it’s important for advisors to understand what exactly is meant by “newcomers to Canada.”

Newcomers to Canada: Individuals become a resident of Canada (as a newcomer) for income tax purposes when they establish significant residential ties in Canada. These ties are usually established on the date they arrive in the country.

So who is a “Newcomer to Canada” for tax purposes? This applies when individuals establish significant residential ties in Canada, usually on the date they arrive in the country. Newcomers to Canada who have established residential ties with Canada may be:

Returning Canadians: Those who were residents of Canada in any earlier year and are now non-residents, are considered residents for income tax purposes when they move back to Canada and re-establish residential ties.

Be sure to bring these folks up to date on tax changes and determine how the tax obligations they have in the country they emigrated from integrate with CRA rules.

Even more so, your expertise can be critical to the ability of new Canadians to adapt to life in their new country and succeed financially. Remember the needs of this significant segment of the population when you are looking for opportunities to grow your practice and serve your community.

Next time: Evelyn will focus on tax credits and deductions that advisors should ensure newcomers to Canada don’t miss.

Additional educational resources:

  1. Get the credentials to hone your skills and further establish your credibility as a tax specialist. Enroll in the Master Financial Advisor – Tax Services Specialist Designation today.
  2. What’s new to Canada’s tax system for 2019 that might affect your clients who are new to Canada? Don’t miss the CE Summits this fall.

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