This article was updated on June 27, 2017.
When Jonathan Zhang, an immigrant from China, got his first paycheque in Canada, he thought there must have been a mistake. After all, a large chunk of his pay was missing. But when he brought the issue to the attention of human resources, he was dismayed to find that all that money had been siphoned off legally—in the form of federal and provincial taxes, Canada Pension Plan contributions and Employment Insurance premiums. “I was amazed at how much tax I was paying,” says Zhang.
Zhang isn’t alone. Many immigrants are shocked when they realize how high the tax rates are in Canada, particularly when compared to the tax system in their former country. In China, for instance, the highest tax bracket is only 12%. Even if immigrants are aware of the tax rates in Canada, they are often baffled by the complexity of our tax system. To help process this change Janet Gray, an Ottawa-based financial planner and Money Coach, reminds her clients that Canada has a progressive tax system, where different bands of income are taxed at different rates. She also helps them appreciate that income tax isn’t the same as sales tax, which isn’t the same as tax paid on investment earnings, such as capital gains. The good news, says Gray, is that learning about how the tax system works and getting proper professional help, means it’s quite likely you’ll find some deductions and tax credits that can lower the amount you need to give to the taxman each year.
The crucial thing for immigrants to understand is that you have to report all income, even if it comes from outside of Canada. You may get credit for tax already paid in another country, especially if there is a tax treaty between Canada and your home country. Also, any assets you have outside of Canada worth $100,000 or more must be reported. You must file your Canadian tax return by April 30 of the year after the tax year (June 15th if you run a business).
If you are hanging onto investments in your home country, figure out their value at the time of your immigration. That’s because when you sell the assets, you will only be taxed on their growth since you came to Canada.
Should you file?
You need to file a tax return if you owe tax or want to receive a refund. However, even if you have no income to report or tax to pay, you should file to get the GST/HST credit (a credit given to people with low or modest incomes to offset paying sales tax) and the Canada Child Benefit (a monthly payment given to eligible families with a child under 18 years of age).
Often people who come to Canada to study don’t file a tax return because they have no income. But by filing, you will be eligible for tax credits that can be used in future years when you are working. If you didn’t file your taxes during your student years, you can go back and file them later.
Tax credits and deductions
Canada offers all kinds of tax credits that can reduce your bill—each one doesn’t offer huge savings, but their value can add up. For example, you get a credit if you are caring for a senior relative or a disabled family member, or if you moved to Canada to be closer to your place of employment (and your company didn’t reimburse you for these costs). It can get complicated, so for the first few years you file, it’s a good idea to pay for a tax professional’s services.
Business owners enjoy a wide range of deductions that can lower their income. “You can expense most things that you spend to earn income, such as your cell phone, advertising costs, and a portion of the lunch you paid for when meeting with a client,” says Toronto-based accountant and immigration consultant Eric Cheung. “If you work at home, you can deduct a certain percentage of your home office expenses.” Once you’re making $90,000 or more in after-tax self-employment earnings, consider incorporating your business to save even more.
One important concept to understand is that in Canada, each spouse has to file his or her own tax return. Couples generally pay more tax in total if one has a high income and the other one has a low income or no income. Therefore, if you own a business, it’s better if each spouse gets an equal amount of income from it, rather than having it all taxed in one person’s hands. If one spouse isn’t working, Vancouver-based accountant David Goldsmith says it’s a good idea to put any investments in that person’s name when you come to Canada. This means that income from the investments will be taxed in the hands of the lower income earner, and your family will pay less tax overall.
THE COMPLETE GUIDE FOR NEW CANADIANS:
2. Get job experience
3. Build a credit score fast
4. Property buying tips
5. Pay less tax
6. Invest wisely
7. Insurance to buy
8. Finding childcare
9. Avoid scams
10. Free resources
11. Getting started checklist