Tax Issues when moving from New Zealand to Canada
We offer tax preparation, filing and consultation services in both Canada and New Zealand. To book a consultation please click here: https://nzcanada-fuelaccountants.youcanbook.me. Moving to New Zealand from Canada? Read our summary here.
While Canada and New Zealand have much in common, the tax systems are very different. Any time you move countries you should plan before you leave and ensure that you fully understand the issues as assumptions from one country may not be valid in the other. Once you have moved there is little that can be done.
Please be very careful where you get your advice from. We see many incorrect posts on internet forums. These people are often well meaning and simply telling the world what they did (or what they “got away with”). Filing a return and not having it challenged doesn’t imply acceptance. But most advice is out-right wrong and can get you in a lot of trouble. Even local accountants get this stuff wrong as they only know one side of the equation and have little knowledge of the Tax Treaty or tax issues on the other side. Please get professional, written, advice from an accountant that specializes in New Zealand and Canadian tax (like us). H&R Block doesn’t count! This advice may not be cheap, but it’s cheaper than getting it wrong!
Some interesting things to start you off:
- The Canadian tax year end is 31 December (making the tax year the same as the calendar year). This can complicate a few calculations.
- The Canadian tax authority is Canada Revenue Authority (CRA).
- Each Province levies an individual income tax in additional to the Federal Income Tax. For all provinces apart from Quebec this is calculated and paid on the Federal T1 form. Quebec residents file their income tax return direct with Revenue Quebec which includes the Federal Return.
- Canada’s equivalent of Kiwisaver is called a Registered Retirement Savings Plan (RRSP). Contribution is not mandatory, but you are given a tax break for all contributions made each year. Income grows tax free and is taxed upon withdrawal.
- Canada’s personal tax return is called the T1 return. ALL individuals within Canada with income over about $14,000 will file one. The tax rates vary by Province and go up to round 53%. There is a tax-free amount of around $14,000.
- Canada has a public pension plan (CPP) and an unemployment insurance plan (EI) that is mandatory. Both employers and employees contribute to it. An amount will be deducted from your Canadian sourced-pay cheque which will amount to up to 8% of your income. Temporary residents of Canada will contribute, even if you can’t every claim on these plans!
- Canada has a federal Goods and Services Tax of 5% which applied to most things, but excludes insurance, fresh groceries, medical, education, and financial services. BC, SK, MB and Quebec all have additional provincial sales taxes (PST, RST or QST) for an addition of up to 9.975% on top of the federal 5%, but the things that are taxed vary by Province. Ontario and the Maritime provinces have “Harmonized Sales Tax” (HST) at 13% in Ontario and 15% in the Maritimes – this replaced the 5% GST. In addition, there are local/provincial taxes on insurance, accommodation and other items. Sales taxes are NOT normally included in the price listed for sale.
- The Canadian equivalent of an IRD Number is called a “Social Insurance Number” (SIN).
- The Federal government provides all services in both French and English. Quebec requires French in some situations.
- Tipping is customary in all service industries in Canada. If it is automatically added to the bill (becoming very common) it should be subject to GST/HST, but if added voluntarily then it is not.
Tax residency is not the same is immigration residency. You can be a citizen or permanent resident of a country, and not be a tax resident, and vice versa. Determining tax residency can be quite nuanced so never take your advice from online forums – such advice is usually posted by idiots or tax evaders! All reference to residency in this document relates exclusively to tax residency.
Both countries generally determine tax residency based on the establishment/relinquishment of residential ties. Yet it is never quite as simple as that. It is common to find out that you are a tax resident in both countries. When this happens the tie-breaker tests under the Double Tax Treaty will come into effect. Both countries tax residents on world wide income so it is important to have a clear understanding of which country you are properly a tax resident of.
We do not recommend that you write to CRA or IRD to ask them about your residency status. You should seek appropriate professional advice and then file accordingly. Sometimes they will then ask you for more information or to fill out certain determination forms (such as Canadian form NR73). We recommend that you seek professional advice before submitting such forms.
Income from employment and self-employment will normally only be taxable in the country where the work was performed (or where there is a “permanent establishment”). Employment income in Canada is also subject to CPP deductions (2023: 5.95% on income between $3,500 and $66,600), and EI premiums (2023: 1.63% on income up to $61,500 income) even though you are unlikely to every get any benefit from this deduction.
If you continue working in Canada for your Kiwi employer you should advise them that you are non-resident and they should stop deducting PAYE. However, many companies may not be comfortable with that. Getting the PAYE back is usually done by filing an IR3NR return, getting the ACC back can be more difficult. Many companies may want to treat you as self employed from an NZ perspective. This is probably not correct, but satisfactory for you as far as your NZ tax is concerned. This income will be fully taxable in Canada (as Other Employement Income) and you will not be able to deduct any expenses against it (unless you have become truly self-employed; although you may be able to claim Work from Home allowances).
If you work for the New Zealand government (including armed forces and consular services) different rules may apply.
Canada has a moving expenses deduction, but you can only claim it when moving to Canada if your are a full time student.
If you have earnings from self employed (that is, you are operating a business activity in your own name and not through an incorporated company) and continue your business from Canada you may need to apportion your expenses between your Canadian operation and your NZ operation. Only report the portion of income and expenses that relate to work performed while resident in each country. In Canada you will need to pay both the employer and employee share of CPP (11.9% for 2023 on earnings between $3500 and $66,600) with your annual tax return (but not EI – self-employed earnings are not insurable for the EI program). You may also need to register for the Provincial Workers Compensation plan as well. You should perform a valuation of your business upon arrival as this may be able to save you tax when you sell it or move away from Canada (see “deemed disposition” under “Companies that you own” below), but some businesses that are 100% performed by the proprietor may not have any value. If your gross income from self employment exceeds C$30,000 in any four consecutive quarters then you will need to register for GST and charge this to your customers. You can register voluntarily before you meet this threshold.
Private and government pensions, NZ Super, sickness plan payment (including accident and disability plans) etc. are generally fully taxable in Canada. The NZ payer should deduct 15% withholding tax, but if you can prove that the payment would have been taxed at a lower rate (or not taxable at all) had you been a resident of NZ then you should be able to get the withholding reduced.
Most NZ banks will be happy to allow you to keep your bank accounts and credit card open. We recommend that you retain a bank account for at least a year after you leave so that you can make any final tax payments etc. You should notify your bank that you are no longer tax resident in NZ. NZ banks may deduct 10% withholding tax on any interest paid. Interest is taxable income in Canada.
If you sell your NZ principal residence before you depart then you should have no issues and no tax is usually payable.
If you vacate your NZ principal residence but it doesn’t sell until after you become a Canadian tax resident you should also have no tax problems. This requires a disclosure on your Canadian tax return, but should not result in any tax unless you have had to hold it for a long period or turned it into a rental.
If you have operated the rental property prior to your departure (or convert it from principal residence to rental as you leave NZ) then you should get a property valuation before departure. Canada will set the “purchase” price (for the purpose of capital gains) at the fair market value at the date of entry.
Your net rental income is taxable in NZ using NZ rules, which includes the limitation on mortgage interest for residential rental properties from 2021. You will need to file an IR3NR return for each NZ tax year and pay tax on your net income. You will also need to include this income in your Canadian return (where you can claim mortgage interest and depreciation on buildings – but not principle repayments) and can take a Foreign Tax Credit for the NZ tax paid. Mortgages held outside of Canada are treated as financial instruments and changes in FX rates can result in income inclusion in your Canadian return.
If you sell the property while a resident of Canada (or leave Canada before selling with more than 5 years in Canada) you will be subject to Canadian capital gains based on the change of value between the date of arrival and date of sale/departure. You should also pay attention to the Bright Line Rules in New Zealand. If you have owned the property for less than 10 years any gain on the sale of the property in NZ may be subject to income tax. In addition, tax withholding as a Non-resident may be deducted as Residential Land Withholding Tax. NZ tax on the gain may be eligible for a Foreign Tax Credit on your Canadian tax return, but is likely to exceed the Canadian tax and therefore you will not be able to claim all of it.
You do not need to liquidate your KiwiSaver before departing NZ. However, emigrating from NZ is one allowable reason for withdrawing your Kiwisaver funds, but can only be done after the fact. While you can continue to put funds into Kiwisaver, there is no significant advantage to doing so, especially given the tax-preferred Canadian RRSP options.
You should notify your scheme provider that you will be non-resident as different Withholding tax rates will apply. Please see the comments on PIE Investments under “Other Investments.”
There is no provision for transferring funds from a Kiwisaver account to an RRSP account. While you can withdraw from your Kiwisaver account and make a contribution to your RRSP account, you need to have available contribution room, which will only be the case if you have worked in Canada previously. If you withdraw funds while a Canadian tax resident then the withdrawal is not taxable in Canada (section 56(1)(a)(i)(C.1)). This withdrawal will not be taxable in NZ.
If you keep your Kiwisaver then it is considered Foreign Property and may be reported if on form T1135 if you are required to file it (see “Tax Filing Obligations in Canada” below).
It is unclear whether funds in KiwiSaver are required to be reported on T1135, but we presume that they are eligible.
Canada has a Registered Retirement Savings Plan scheme where you can get a tax deduction for contributions made. However, first-year residents SHOULD NOT contribute to RRSP. There are limits on contributions that are based on the prior-year employment income, and in your first year that amount will be zero. If you over-contribute there is a 1$ per month penalty. If you have employment or self-employment income in your first year return then you will earn contribution room that will allow you a safe contribution in your second year.
There is an opportunity for arbitrage if you return to NZ – consider making contributions in your highest income year (if your Canadian marginal tax rate will be more than 25%) and then withdrawing prior to departure if your income is a lot lower (and your marginal tax rate will be 25% or less) or after departure (non-resident withholding tax of 25%). But discuss this with a cross-border tax professional first as this may become taxable income in NZ.
Canada’s Tax Free Savings Account is a great investment system that allows your investment to grow tax free. It is funded with after-tax funds, grows tax-free, and has no taxes on withdrawal. There are limits to what you can do within a FTSA and limits on contribution amounts. you earn additional contribution room on 1 Jan each year. As a new resident to Canada you should be very careful with your TFSA contributions. In your first calendar year of residency you will have less than the standard contribution room (that year’s contribution amount pro-rated based on your date of arrival). If you make a contribution as a non-resident or make an over contribution you will be subject to a 1% per month penalty of the over-contribution.
Companies that you own
If you own more than 10% of the shares in a New Zealand company then you definitely will want professional advice. There are many nuances and issues here.
If most of the Directors or Senior Management of your NZ Company migrate to Canada then that company will be considered tax resident in both countries. The Double Tax Agreement does not provide any tie breaker tests and leaves it to “competent authorities” to settle the question (which is a slow and expensive proposition). You should give serious thought to dissolving your NZ companies prior to emigrating or at least ceasing to be a Director.
If you are not a Director or significant part of Management of an NZ company then it is likely that it will not be considered resident in Canada, even if you own 100% of the shares (although special reporting and taxation rules still apply on your personal return).
Any dividends paid to you will be subject to a 15% non-resident withholding tax in New Zealand and will be fully taxable in Canada. You will not be eligible to receive any Imputation Credits and this effectively results in double taxation.
If you sell shares in a NZ company while resident in Canada you will not have to pay any tax on the capital gain in NZ, but you will have to report and pay tax on the gain to Canada (the cost basis will be the fair market value of the shares on the day you became a tax resident in Canada, not your original cost).
Please note that Canada does not recognize Look Through Company Status. If your company has LTC status in NZ it means that no tax is paid by the company. Net Income from the company may be taxable in Canada and no Foreign Tax Credit will be granted for the taxes paid personally (although if it is income from property then you may be able to claim a credit as you report the income under the FAPI rules).
You will need to file form T1134 each year that you own a foreign company unless the cost of your shares was under $100K and the company is inactive.
Many NZ investments (including Kiwisaver) are Portfolio Investment Entities (PIE) and have a unique tax structure in NZ. You should notify the investment manager that you are non-resident. This will result in 28% Non-Resident withholding tax being deducted and not all of this may be claimable on your Canadian return. There are special PIE structures for non-resident investors called “Foreign Investment PIEs” and provide a more tax efficient approach for non-residents. You should talk to your fund manager about switching to one of these investments and electing to be a “Notified foreign investor” where your PIR withholding rate will be 0%.
Income from PIEs is fully taxable in Canada, as is any capital gain. Taxes withheld in NZ can be offset against Canadian taxes using the Foreign Tax Credit claim, but can’t exceed the treaty rate of 15% (so 28% NRWT on PIE income will lose 13%). There are other limits to claiming Foreign Tax Credits as well.
Deemed Disposition on Arrival in Canada
When you arrive in Canada you have a “deemed acquisition of most of your assets. CRA “deems” your Kiwi self to have sold them to your Canadian self on the date that you became a Canadian tax resident. While no tax is payable at this stage, you should keep very good records of the market value of all your investments (including shares in private corporations and rental properties) so that you can calculate the capital gain on sale or departure.
Canada taxes you on your world-wide income, so any income from investment is fully taxable in Canada. NZ Investments may have withholding taxes deducted (usually 15%), which is a final tax in NZ, and can usually be offset on your Canadian tax return as a “Foreign Tax Credit” but there are limits that could mean you don’t get full credit.
Foreign trusts get very complicated. You should get professional advice. Any distribution from a NZ trust is likely to be taxable on receipt in Canada (some exceptions apply, but the entire trust activity needs to be considered, not just the distribution to the Canadian resident). Distributions from a NZ Trust (assuming that you are not a settlor or trustee of the trust) are also reported on form T1142. Distributions may be taxable in Canada even if they are declared as capital distributions for NZ purposes.
If the settlors, trustees or anyone else who has made a contribution to the trust (including paying the mortgage or rates on a property owned by the Trust) have moved to Canada then the entire trust may be treated as resident in Canada.
If you have contributed anything to an NZ Trust while resident in Canada you must file form T1141.
Tax Filing Obligations in New Zealand
You are required to file an IR3 personal tax return for the year of departure, even if you have no income or only pre-taxed income to report. Remember that the NZ tax year ends March 31, not Dec 31. Returns are due 7 July and payments are due 7 February the following year. You can get an extension of the filing and payment date by engaging a Tax Agent.
Once you have departed you will only file NZ tax returns if your have rental property or business income earned in NZ.
Tax Filing Obligations in Canada
You should apply for a Social Insurance Number as soon as you arrive. You will need this for employment and to open a bank account.
You are required to file a T1 in Canada for the first year of residency (or TP-1-V if you reside in Quebec), even if you have no income. You should file an income tax return every year thereafter if you will owe money to CRA or are receiving certain benefits (which effectively means that you need to at least calculate the tax return to see if you need to file, and if you are due a refund then you should file anyway). We recommend filing even if you have no tax to pay. Your T1 is due for filing and payment by April 30 (or June 15 if you are Self Employed, but the tax payment is still due April 30).
In your first year you will have to file your T1 return by mail, and you won’t be able to log into CRA or talk to them as they can’t validate you until a return has been filed. Once you have filed your first return and you receive the notice of assessment you should setup access to CRA My Account for Individuals (it can take a few weeks, so start as soon as you get your assessment letter) – it will make managing your taxes much easier.
If you have certain foreign property with a cost of more than C$100,000 (we recommend determining the market value on the date of becoming a Canadian tax resident and treating this as your “cost” due to the deemed disposition rules) you will also need to file Form T1135, Foreign Income Verification Statement with your income tax return. You are exempt from filing in your first (partial) tax year.
Fuel Accountants is founded by Peter McCarroll, a citizen, Chartered Accountant and tax preparer in both New Zealand and Canada. While we normally focus on small business owners, we have a heart for Kiwis in Canada and Canadians in Aotearoa!
We offer tax preparation, filing and consultation services in both Canada and New Zealand. To book a consultation please click here: https://nzcanada-fuelaccountants.youcanbook.me
© 2021+ Fuel Accountants Professional Corporation and Fuel Accounting (NZ) Limited. All rights reserved.
While every effort has been taken to compile this information reliably, we take no responsibility for actions taken based on this information. It is provided for informational purposes only. Your unique circumstances may be different from what is assumed in this general information. You should always seek professional advice from an experienced tax practitioner.