Provide a Year End Checklist of Tax Facts for New Canadians

Navigating our tax system can be challenging for most; yet it can have a significant impact on a newcomer’s financial life. The good news is Canada’s tax regime it is very generous, especially for families with low incomes. At year end, there is an excellent opportunity for advisors to gain – and retain - new clients before the tax season rush, with information sessions designed to empower new Canadians. Are you working with newcomers to Canada? Here is a brief case study and six important tax concepts to discuss:

Abbas, his wife Alima and 6 year-old son Amar became residents of Canada on March 15 of the current tax year, as refugees. Having lived in a refugee camp for more than a year, neither parent had any income before arriving in Canada. After arriving in Canada, Abbas was able to find employment and earned $8,500 before being laid off. He also received non-taxable federal assistance and $10,000 of pandemic assistance and employment insurance.

What are the special considerations to be taken when preparing returns for this family?

  1. Immigrants must file a tax return to report worldwide income earned based on the date they became a resident of Canada. Abbas’ return will include the employment income, pandemic support and employment insurance.
  2. As refugees, the couple is eligible for the Canada Child Benefit (note that most immigrants are not until they have been permanent residents for 18 months). Alima should file a T1 return so she can continue to receive the CCB for her son.
  3. In the year of immigration, personal amounts are prorated by the ratio of the number of days the taxpayer is resident to the number of days in the tax year. However, if 90% or more of the taxpayer’s income for the year is from Canada, no proration is required. With no income before immigration, no proration is required by either of the parents in this case.
  4. Had Abbas been a resident of Canada all year, he would qualify for the Canada Workers Benefit but, in the year of immigration, the benefit is not available.
  5. For immigrants, the question of assets owned outside of Canada is important to ensure Form T1135 is filed if required. No Form T1135 is required for this family, as they have no assets outside of Canada.
  6. Next year, this family will have earned income for RRSP purposes based on Abbas’ employment income. Their tax advisor explains why this tax deferred income is important as well as the option to contribute to a Spousal RRSP.

Checklist of Important Tax Concepts for New Canadians:

1. Always File a T1 - Always file a tax return for every adult in the family with the Canada Revenue Agency (CRA). Canadian residents must file a tax return to report worldwide income in Canadian funds. The purpose of this annual requirement is also to:

 

· Recoup any overpaid taxes and receive a tax refund

· Pay any additional taxes owing or make contributions to the CPP (Canada Pension Plan)

· Receive social benefits, including the federal OAS (Old Age Security), CCB (Canada Child Benefit) and GST/HST Credit. In some provinces, there are additional credits.

· You will need a SIN (Social Insurance Number) to do so

2. No income? File even if you have no income, in order to qualify for refundable tax credits, which are based on your family net income.

3. Family net income is an important concept in tax filing and planning, as it is used to determine the size of tax credits available. For these reasons, file family tax returns together.

4. Owing Money to CRA? You may owe money, in which case it’s important to file by the tax filing deadline. This is April 30 for most filers; June 15 for proprietorships. This can occur if your taxable income is higher than allowable deductions and personal amounts. Discuss which deductions and personal amounts are available for each family member with your tax advisor.

5. Owe a balance due? If after filing your annual tax return you owe more than $3000 as your balance due ($1800 in Quebec) you will be asked to prepay your taxes for next year in advance. CRA will send you a billing notice to pay quarterly tax remittances. Ask about options to estimate current year income and submit based on this amount instead if to your advantage.

· Farmers/fishers can make one annual remittance on December 31.

6. What is included in the definition of income?

  • Total income – amongst the most significant sources: employment income, pensions, government supports, investment income, capital gains and losses, net business and net rental income.
  • Net income – arrive at this figure after deductions for employer-sponsored and private pensions (RPP and RRSPs), child care, moving expenses, employment expenses and other deductions. This is the figure that refundable and non-refundable tax credits are generally based on, as well as Old Age Security.
  • Year of immigration : certain tax provisions are prorated based on the number of days you are resident in Canada, as described above. Therefore it is important to declare date of immigration.
  • Taxes payable - this is the amount that is left to pay after personal amounts and other tax credits are calculated.
  • Provincial taxes payable – these taxes are added to federal taxes payable (except in Quebec where a separate return is filed) based on your province of residence as of December 31 of the tax year.

Additional Educational Resources: Check out the newly updated DFA-Personal Tax Services Specialist Program and join us at the November 10, 2021 Virtual CE Summit to enhance your credentials in these areas.