Tax Considerations for Immigrants

Tax Considerations for Immigrants

Canada’s Taxation of Worldwide Income

Canada’s tax system operates on a worldwide income basis, meaning that once you become a tax resident, you must report all income earned globally, regardless of whether the money is brought into Canada. This includes interest earned from foreign bank accounts, rental income from properties owned outside Canada, pensions received from foreign sources, and capital gains from selling inherited or other foreign property. For example, if you inherited a property abroad before immigrating and later sell it as a Canadian resident, you could be subject to capital gains tax on the increase in value from the fair market value (FMV) at the time of your arrival to the sale price. Similarly, if you owned foreign investments or shares that appreciated in value after your immigration, any gains upon sale would also be taxable in Canada.

Key takeaways

  • Canada taxes new immigrants on worldwide income from the date they become factual residents by establishing significant residential ties, which CRA says is usually the date of arrival (Income Tax Folio S5-F1-C1), so first-year filing requires careful date allocation.

  • Most assets owned at the moment of immigration receive a deemed acquisition at fair market value under ITA section 128.1(1)(c); taxable Canadian property such as Canadian real estate, inventory and Class 14.1 property of a business carried on in Canada, and excluded rights such as pension rights keep their original cost — capturing this FMV in writing on arrival is the single most important first-year compliance task.

  • Foreign property over $100,000 in cost amount triggers annual T1135 Foreign Income Verification reporting; late-filing penalties under ITA section 162(7) are the greater of $100 and $25 per day for up to 100 days (at most $2,500); knowing or grossly negligent failures under section 162(10) cost $500 per month for up to 24 months (doubled after an unanswered CRA demand), and under section 162(10.1), if such a failure continues for more than 24 months, the total penalty rises to 5 percent of the property's cost.

  • Foreign corporations controlled by the immigrant trigger T1134 reporting and potential Foreign Accrual Property Income (FAPI) attribution under ITA sections 91 to 95, regardless of whether any cash is repatriated to Canada.

Failing to report foreign income can result in severe penalties and interest charges, making it critical for newcomers to understand and comply with their tax obligations.

Fair Market Value (FMV) of Assets Upon Arrival

When immigrating to Canada, most assets owned before arrival must be valued at fair market value (FMV) on the date of entry. The FMV of these assets is deemed to be their cost base for tax purposes and will impact future capital gains calculations when these assets are sold. Taxable Canadian property (such as Canadian real estate owned before arrival), inventory and Class 14.1 property of a business carried on in Canada, and excluded rights or interests such as pension rights are not stepped up and keep their original cost.

Proper Documentation of FMV

The CRA does not require a professional appraisal, but you should keep reasonable evidence of FMV at your arrival date, and a professional valuation is advisable for hard-to-value assets. Useful sources include:

  • Real Estate Agents or Valuators: For properties owned outside Canada.

  • Certified Appraisers: For high-value assets like artwork, jewelry, and collectibles.

  • Business Valuators: For shares in foreign corporations.

  • Financial Statements & Market Data: For investment portfolios, stocks, and bonds.

Proper documentation ensures accurate reporting and reduces the risk of tax disputes with the CRA.

Optional 45(2) Election for Foreign Real Estate

If you own a property in your home country and decide to rent it out upon moving to Canada, you may be able to avoid capital gains tax on growth after your arrival by making an election under subsection 45(2) of the Income Tax Act. This election allows you to treat your foreign property as your principal residence for up to four years, even if it is rented out, provided no other property (in Canada or elsewhere) is designated as your family's principal residence for those years and no capital cost allowance is claimed on the property. Gain that accrued before you arrived is already removed by the fair market value step-up on immigration.

Key Considerations for the 45(2) Election:

  • The election must be filed with your tax return for the year the property starts being rented.

  • Selling before you buy a home in Canada is not a condition, but no other property can be designated as your principal residence for the same years, and capital cost allowance cannot be claimed on the rental property.

  • If you do not make this election, the property may be subject to capital gains tax from the date of your immigration to Canada.

This election can be beneficial for newcomers who are transitioning their financial affairs and planning to purchase property in Canada in the near future.

Compliance Requirements for Foreign Assets & Corporations

Foreign assets and corporations: T1134 reporting for foreign affiliates, T1135 foreign income verification, and FAPI rules

Newcomers who own foreign assets or interests in corporations must comply with additional tax reporting requirements.

1. T1134 – Foreign Affiliate Reporting

If you own at least 10% of a foreign corporation, either directly or indirectly, you may need to file Form T1134 (Information Return Relating to Controlled and Non-Controlled Foreign Affiliates). This form provides details about:

  • The foreign corporation’s financial information.

  • The nature of your investment.

  • Any income earned and repatriated to Canada.

Failure to file T1134 can result in penalties, even if no taxes are owed.

2. T1135 – Foreign Income Verification Statement

If your foreign assets exceed $100,000 CAD (excluding personal-use property like a vacation home), you must file Form T1135. This includes:

  • Foreign bank accounts.

  • Shares of foreign corporations, including those held in a non-registered account at a Canadian broker (holdings in registered plans such as RRSPs and TFSAs are excluded).

  • Interests in foreign businesses.

  • Rental properties outside Canada.

Penalties for failing to file T1135 are significant, with fines accruing daily for non-compliance.

3. Foreign Accrual Property Income (FAPI) Rules

If you control a foreign corporation, you may be subject to FAPI rules. These rules are designed to prevent Canadian taxpayers from deferring tax on passive income earned in foreign entities. The key implications include:

  • Passive income (e.g., interest, dividends, rental income) from the controlled foreign corporation is taxable in Canada, even if it is not distributed.

  • You must report this income annually and pay tax on it as if it were earned personally.

Why Proper First-Year Tax Filing Matters

Filing your first Canadian tax return accurately is essential to avoid penalties and ensure compliance with Canadian tax laws. Proper FMV documentation and disclosure of foreign assets and income prevent costly audits and financial consequences.

If you’re a newcomer with foreign assets or business interests, Modern Axis CPA can help navigate these complex tax requirements and ensure full compliance with CRA regulations.

Disclaimer: This blog post is for informational purposes only and does not constitute professional tax advice.

Frequently asked questions

When do I become a tax resident of Canada as a new immigrant?

You become a Canadian tax resident on the date you establish significant residential ties — typically the date you arrive with the intent to settle, secure permanent housing, and bring family. CRA applies a facts-and-circumstances residential-ties test set out in Income Tax Folio S5-F1-C1. Your first Canadian return covers worldwide income from that residency date forward, while income earned before arrival is reported only if it is Canadian employment income, income from a business carried on in Canada, or a gain on taxable Canadian property.

Do I have to pay Canadian tax on income earned before I immigrated?

Generally no, unless it was Canadian employment income, income from a business carried on in Canada, or a gain on taxable Canadian property, which go on your first return under ITA sections 114 and 115(1). Canadian rental income earned while you were non-resident is generally subject to 25 percent Part XIII withholding unless a section 216 election is filed, rather than being reported as ordinary income on that return. Pre-residency foreign employment income, foreign rental income, and foreign investment income are not taxed in Canada. The split happens on your "date of arrival," and your first Canadian return prorates personal credits and basic personal amount accordingly.

What is fair market value of assets at immigration and why does it matter?

Under ITA section 128.1(1)(c), Canada treats you as having acquired most of your assets at FMV on the date you became a tax resident; taxable Canadian property such as Canadian real estate, inventory and Class 14.1 property of a business carried on in Canada, and excluded rights such as pension rights keep their original cost. This "stepped-up basis" means future capital gains are measured from the FMV at immigration, not from your original purchase price. Documenting FMV in writing (appraisals, brokerage statements, comparable sales) on the arrival date is critical — without it, CRA may default to original cost and over-tax future gains.

Do I need to report foreign property on my Canadian tax return?

Yes, if the total cost amount of specified foreign property exceeds $100,000 CAD at any point in the year. Form T1135 captures foreign bank accounts, investment accounts, real estate (other than personal-use), and foreign corporate shares. The reporting threshold is cost amount, not market value, and applies starting in your second year of Canadian residency. Late-filing penalties under ITA section 162(7) are the greater of $100 and $25 per day for up to 100 days (a maximum of $2,500), and larger penalties under sections 162(10) and 162(10.1) apply to knowing or grossly negligent failures.

What is a T1134 and when does it apply to new immigrants?

Form T1134 is the Information Return Relating to Controlled and Non-Controlled Foreign Affiliates. A Canadian resident files it for each foreign affiliate, meaning a foreign corporation in which you hold at least 1 percent directly and at least 10 percent together with related persons (ITA subsection 95(1)). Under ITA section 233.7, no T1134 is required for the year you first become resident. The late-filing penalty under section 162(7) is the greater of $100 and $25 per day for up to 100 days (a maximum of $2,500 per return), with larger section 162(10) penalties for knowing or grossly negligent failures. Foreign Accrual Property Income (FAPI) rules under ITA sections 91 to 95 can attribute passive income of the foreign corporation back to you personally even with no dividend paid.

Can I keep my foreign rental property without triggering Canadian tax?

No — once you are a Canadian tax resident, rental income from foreign real estate is fully taxable in Canada under the worldwide income principle. You may elect under ITA section 45(2) to defer the deemed disposition rules on a former principal residence converted to rental, which preserves the principal residence exemption for up to four years. Foreign tax paid generates a foreign tax credit, but careful coordination is needed to avoid double taxation.

Alex Ataman, CPA
Founder
Modern Axis CPA