Expatriate tax ebook - Canada

What taxes?
Capital gains tax
Inheritance, estate and gift taxes
Investment income
Local taxes
Real estate taxes
Social security taxes
Stock options
Wealth taxes
Other specific taxes

Capital gains tax
Half of the net capital gains (“taxable capital gains”) on the disposition of capital property are included in the calculation of taxable income. Allowable capital losses (half of the capital loss) can only be applied against taxable capital gains and cannot be deducted against any other source of income in the current year. Any allowable capital losses that cannot be claimed in the current year to offset taxable capital gains can be carried back three years and forward indefinitely to be applied against taxable capital gains arising in those years, if any.

Capital gains arising from the disposition of an individual’s principal residence are not subject to capital gains tax. A principal residence can be located outside Canada. Families, however, can only designate one property by calendar year as their principal residence.

Capital gains arising from the disposition of qualified Canadian small business corporation shares, as well as dispositions of qualified farming and fishing property, can benefit from a lifetime maximum capital gains exemption of $C750, 000.

The following Table outlines the top 2009 combined tax rates (federal plus provincial) by province for capital gains.

Investment income
Dividends and interest are taxable when received.

Compound interest bearing securities are subject to accrual requirements, generally on an annual basis. Dividends from taxable Canadian corporations are taxed at a reduced rate through a gross up and tax credit mechanism. Two different tax rates can apply to Canadian source dividends (eligible dividends and regular dividends). Eligible dividends are taxed at a lower rate, but must be designated as such. In general, eligible dividends are paid out of corporate income that has been taxed at the general corporate rate of tax (not subject to any special tax reductions).

Income from a trust, royalties and similar income is taxed as received or allocated, depending on the circumstances.

Local taxes
A few of the provinces assess additional taxes. The most common ones are for health care and worker’s compensation programs. Both Ontario and Quebec assess an additional health premium on some individuals when they file their personal income tax returns.

Real estate tax
There are no real estate taxes in Canada as part of the income tax system. However, local jurisdictions (municipalities) assess a local property tax on most real estate. Most of the provinces also have land transfer taxes which apply on the conveyance of real property from one person to another. The tax is paid by the purchaser.

Social security taxes
Employment Insurance
Individuals employed in Canada are required to contribute to the Canada Employment Insurance Fund (EI). The maximum annual premium for 2010 is $C747.36 based on a contribution rate of 1.73% on maximum insurable earnings of $C43, 200. The employer is required to pay a premium equal to 1.4 times the employee contributions. The employer’s maximum annual premium for 2010 is $C1, 046.30. The employee premium is partially credited against federal income tax. EI contributions are not eligible for exemption under a social security agreement.

Canada Pension Plan (CPP)
Individuals employed in all provinces except for Quebec are subject to Canada Pension Plan (CPP) contributions.

The maximum annual contribution for 2010 is $C2, 163.15 based on a contribution of 4.95% on maximum contributory earnings of $C43, 700 (maximum pensionable earnings of $C47, 200 less the basic exemption amount of $C3, 500). The employer is required to match the contribution. The employee contribution is partially credited against federal income taxes. An expatriate may qualify for exemption from CPP if he or she is subject to a social security tax in the home country with which Canada has a social security agreement.

Individuals employed in the province of Quebec are subject to Quebec Pension Plan (QPP) contributions. The rules for QPP contributions are similar to the above for CPP contributions.


Stock Options
Canada taxes stock options in two possible ways depending on whether the employer is a Canadian controlled private corporation (CCPC) or not. In general, stock option benefits from a non-CCPC are taxable when the option is exercised. There are no exceptions for foreign plans or options granted prior to becoming a resident.

Options granted while resident but exercised after emigration will continue to be taxable in Canada. The benefit is equal to the difference between the fair market value of the stock, on the date of exercise, and the option exercise price. A tax deduction for 50% of the resulting employment benefit can be claimed on the employee’s tax return provided the option meets certain criteria.

The taxable event for CCPC options may be deferred until the shares are sold. Non-CCPC options exercised after February 27, 2000 may also qualify for deferral of the taxable event until the shares are sold. However, in this case, the amount eligible for deferral is limited to an annual vesting amount of $C100, 000 and an election is required.

Wealth tax
There are no wealth taxes in Canada.

Other specific taxes
When individuals leave Canada, they are deemed to have disposed of all their capital property, with limited exceptions, at fair market value. Half of any resultant gain, if any, would be brought into taxable income. Canadian real property, assets used in a business, certain pensions and stock options are excluded from the departure rules, as they remain subject to Canadian tax upon disposition. The departure tax can be deferred by posting acceptable security with the Canada Revenue Agency. Security is not required on the first $C100, 000 of capital gains. The deferred tax is due when the assets are finally sold.

Information about Canada:

• introduction
• facts and figures
• basis of taxation
• what taxes?
• tax planning opportunities