If you’re a newcomer to Canada, you might be nervous about filing taxes in Canada for the first time. I’m going to walk you through what to expect when filing taxes in Canada as a newcomer.
I’m not an accountant or lawyer, I’m an American living in Canada who files her own taxes. This is a starting point for your own research and/or a discussion with your trusted advisors, not legal advice.
Just like filing US taxes, the amount of money you need to pay each year depends on how you file. You can allocate deductions among family members and make financial decisions in ways that legally reduce the amount of taxes you owe. Knowing the marginal tax rate (MTR) of different investment options can help maximize your assets over time. The better you understand tax laws, the better you can make smart financial decisions.
In Canada, you start with Schedule 1 for federal taxes and form 428 for your province or territory. Like the 1040 in the US, everyone has to complete this form and some people need additional forms, based on their specific tax situation.
The easiest way to file your taxes is by using tax software. Be sure to use software that covers your province and your specific situation. If you have foreign income or it’s your first year in Canada, it’s imperative that you select tax software that calculates your foreign tax credit.
In order to file online, you’ll need to create a CRA account. You’ll need to confirm your identity, create a username and password (or use your bank credentials), and provide the security code they’ll send you in the mail. You can opt to get your mail from the CRA electronically.
The regular tax filing deadline is April 30th. If you are self-employed, the filing deadline is June 15th. However, all taxes are due on April 30th, so if you expect to owe taxes you should submit an estimated payment before April 30th.
In Canada you only have to file a single income tax return, since the federal government collects taxes on behalf of the provinces and territories. Except Quebec. As you know already, things are different in Quebec.
To get a quick idea of your allowable deductions and credits, take a look at the CRA’s tax bracket thresholds and benefit amounts.
Things to do when you first arrive
After you get a SIN, you should apply for benefits and credits you’re entitled to, like the GST/HST credit, provincial and territorial benefits and credits, and the Canada child benefit. If you’re a permanent resident or a protected person, you’re eligible to apply as soon as you land. If you’re a temporary resident, you’re eligible in your 19th month of living in Canada.
Once you’ve filed for those benefits, you just have to file your income tax return and keep your personal information up to date.
Your tax forms will ask for your date of entry into Canada. This isn’t necessarily the date you declared landing in Canada, this is when you became a Canadian resident for income tax purposes.
Do you need to file?
Even if you have no income, you should file your Canadian taxes. You’ll likely qualify for refundable tax credits and it’s a simple process.
If you have a low enough income that you’re not required to file taxes, you’ll still want to establish your RRSP deduction limit and establish the guaranteed income supplement or working income tax benefit. If one spouse earns significantly more, you can split certain income sources, tax credits, and deductions to reduce your tax burden. This is especially important for young adults, even if they have low or no income.
Just like with a W-4 in the US, you’ll need to file a TD1 at the start of a new job and update it if your life circumstances change. If you qualify for a large number of tax refunds, you can submit form T1213 to the CRA, who will notify your employer to reduce your tax withholdings.
If your income is commission based, you can use form TD1X to reduce your withholdings based on your expenses. You file this directly with your employer.
If you move, you’ll need to submit a change of address. You’re taxed based on the province or territory you live in on December 31st of the tax year.
You can file taxes for your children. This is beneficial if they have any amount of income or if they’re 18 or older.
Common-law couples are treated the same way as married couples. If your marital status changes, you need to file form RC 65 by the end of the month after the change. In case of separation, you must wait 90 days to file the form. If you divorce, some tax credits will be split and others will go to one person or the other.
If you are married or have dependents over 18, be sure to choose tax software that automatically links your tax returns together and allows you to optimize your allocation of deductions and credits. So long as it’s legally possible, you’ll want to allocate income and expenses to keep each spouse in the lowest tax bracket.
|First $45k is taxed at||15%||$45k|
|Next $45k is taxed at||20.5%||$90k|
|Next $50k is taxed at||26%||$140k|
|Next $60k is taxed at||29%||$200|
|Any income over $200k||33%||Over $200k|
There are some instances where you can legally split your income between spouses or transfer assets to your spouse and children. Spouses can split their Canada Pension Plan and private pensions. Spouses can also transfer capital properties on a tax-free basis.
Attribution rules generally mean that whoever provided the initial cash is responsible for the income taxes, meaning they can be stuck paying taxes on gifts to spouses and children. This is meant to deter tax avoidance schemes.
Generally, attribution rules don’t apply to funds invested in a TFSA, principal residence, education costs, car purchases, a child’s or spouse’s business, or other similar investments. Payments into a child’s RRSP, RESP, or RDSP are also safe. If you loan money to a family member and charge interest, future profits are exempt from attribution rules.
If you’re married or in a common-law relationship, you’ll need to include their worldwide income on your tax return, even if they aren’t a resident of Canada.
RRSP & PRPP
Your earned income will be used to calculate your RRSP or PRPP contribution allowance. Like a traditional IRA, an RRSP can reduce your taxable income in both the US and Canada. You won’t be assigned an RRSP contribution amount until you’ve filed taxes in Canada.
If you’re married, you can contribute to your own or your spouse’s RRSP.
You’ll want to retain tax records for six years. Generally, electronic copies are acceptable.
You can amend a tax return for up to ten years after it was due.
A simple income tax return
If you live alone, have been a Canadian resident for the whole year, and have a single salary from a Canadian company, filing your taxes will be a breeze.
Enter your personal information. The CRA computes your GST/HST credits. Enter your T4 and any other T slips. You’re done!
A complex income tax return
Many of us have more than a single T4 to report. Here’s guidance on what to pay attention to when filing your Canadian taxes as a newcomer.
Reporting your income
All income you earned in the tax year must be reported. Different income is reported in different ways and is taxed separately.
If you were only a resident of Canada for part of the year, you still have to report some income from the part of the year you weren’t a Canadian resident.
When you weren’t a resident, you still have to declare income from a Canadian source, including salaries, capital gains, and any taxable scholarships, fellowships, etc. If the money came from Canada, you need to report it.
There’s one exception to this rule: if the Canadian-sourced income was taxed in your home country and it’s exempt from taxation through a tax treaty, you may not have to report it. Check the rules carefully.
For the part of the year you were a resident, you have to report your worldwide income. Even if it’s exempt from taxes thanks to a tax treaty, you have to report it. You then deduct the tax exempt portion on line 256.
If you work for a foreign company, you have to report this income on your Canadian tax return. Be sure to convert all amounts into Canadian dollars before you report it.
If the income is not taxable in Canada because of a tax treaty, you deduct it from line 256. If not, you complete form T2209 and claim a foreign tax credit on line 405. Most tax software will calculate the foreign tax credit for you.
Salaries and wages
If you work for a Canadian company as an employee, you fill out the TD1 when you start and you’ll get a T4 outlining your salary and/or wages at the end of the year. You can enter multiple T4s if you’ve had more than one job.
If you lose a T4, you can login to your CRA account and view the T4 the company submitted to the CRA. If you don’t receive a T4 and there’s no form submitted with the CRA, you can use your pay stubs to estimate your earnings and deductions.
If there’s an error on your T4, you’ll need to get the company to correct it. Don’t just adjust the numbers on your own.
If you got another T4 after you submitted your tax return, you can amend your return with a T1-ADJ. This can’t be filed online, so you’ll have to mail it in.
Some job benefits are taxable. Others are not. Check to make sure you’re paying taxes on what you owe and not overpaying. Taxable benefits include:
- Board and lodging or discounted rent
- Personal use of a company car
- Cash gifts (depending on amount) as well as prizes or awards (over $500)
- Provincial health and hospital premiums, other insurance plans
- Gains and income on stock options
Tax free benefits include:
- Travel expenses, meals and travel for overtime
- Travel passes for employees (but not their families)
- Social and athletic club memberships
- Tuition for courses required by your employer
- Moving expenses for your job
- Employee counseling for health, retirement, and re-employment
- Private health plan premiums
- Wage loss replacement plan payments
- Attendants for disabled employees
Rental income is reported on form T776 and lines 126 to 160. If you’re renting out a property at below fair market value, you could be setting yourself up for an audit and additional taxes, especially if you’re renting to a relative.
Rental income is subject to attribution rules. Whoever provided the capital to acquire the property is responsible for the income taxes. If both spouses provided capital, they are each responsible for a share of the income respective to the initial capital they provided. Money in joint accounts is handled the same way.
You can deduct rental expenses like mortgage interest, utilities, property taxes, condo fees, insurance, landscaping, advertising, legal fees, office supplies, and maintenance costs. You can deduct the cost of renovations you made to make the property accessible (as opposed to treating them as a capital improvement). Be sure to classify capital improvements and claim depreciation, called capital cost allowance, properly.
Remember that land doesn’t depreciate in value, so you must separate the cost of the land and only claim depreciation on improvements. If you claim depreciation on a rental property that’s part of your primary residence, you may be putting your future capital gains exemption at risk. Claiming depreciation is not mandatory, so you may not want to claim depreciation on appreciating assets to avoid having to pay it back when you sell.
If you sell investment properties, it can be considered income or capital gain, depending on whether your real estate investing is a business. This is generally only a consideration if you continually flip houses or own a property purely for the capital increase.
Investment income will be reported to you on a T3 or T5. If you have foreign investment income, be sure to claim any applicable foreign tax credits and convert all amounts into Canadian dollars.
Remember that interest paid on money you borrowed to invest is deductible. You can also deduct investment counseling costs.
When calculating capital gains on the sale of any property you brought with you to Canada when you immigrated, the fair market value on the day you landed is used as the base cost. This is deemed acquisition. You declared the fair market value of all of your possessions on your B4 when you landed in Canada.
Plenty of people get settled in Canada before they become Canadian residents, so there’s an exception to this rule. If you purchased real estate in Canada prior to your immigration or acquired capital within Canada, you can use the original purchase price as the base cost.
Canada has a lifetime capital gains tax exemption of $800k, tied to inflation.
Capital gains from your primary residence are not taxed in Canada. Each household can only claim a single primary residence per year. If a home was a primary residence for only part of the time you owned it, you may need to pay capital gains on a portion of the proceeds. If you sold your former primary residence shortly after you became a Canadian resident, you will not owe taxes on the sale.
If you own a home but have to relocate for work, you can keep the property for up to four years and still claim the capital gains tax exemption. If you remain with that employer and move back into the home by the end of the calendar year when you leave their employ, you can avoid any capital gains taxes on the eventual sale.
Unincorporated home businesses
Businesses in farming and fishing, as well as those taking part in the AgriInvest program, have separate reporting requirements.
It goes without saying that you have to keep proper accounting records. Cash businesses with unreported income are tax evasion. If you’ve been operating a cash business, you can participate in the voluntary disclosures program and sort things out with the CRA.
Partnership income is divided among the partners based on the partnership agreement. The CRA recognizes that partners invest more than just cash into the agreement — they also bring labour, property, and skills. If one member of the partnership has another full-time job and the other is dedicated to the partnership full-time, it’s understandable that the split might not be 50/50. You’ll have specific reporting requirements if your business has significant assets.
Remember that small businesses may be required to collect GST and/or HST. If you have gross revenue under $30k and provide less than $30k in supplies per quarter, you may not need to collect GST/HST. Check tax requirements carefully. If you have a business that collects GST/HST and has employees, you’ll need to file income returns and make payments.
Bartered goods must be reported as income according to their fair market value.
Deductible expenses must be divided according to operational and capital status. Operating expenses include rent, office supplies, professional fees, travel expenses, wages, printing, shipping, advertising, insurance, and utilities. Capital assets are depreciated.
You can use losses in your home business to offset other income. Losses can be applied to three previous years and forward up to 20 years. The ability to carry forward startup costs to offset other income is a common reason to put off incorporating. Family businesses are often a legal way to split income and reduce the amount of taxes you owe. Of course, the work must actually be done, the pay must be reasonable, and all employment laws need to be followed.
If your home business is your primary source of income or your side business is particularly successful, you’ll have to make CPP contributions. This is calculated on your schedule 8.
In addition to keeping records of your income and expenses, a written business plan can go a long way toward faring well if you get audited. You’ll need to demonstrate that the goal of your business is to make an income (eventually) and that it is not a hobby.
You are required to self-report tips and gratuities. The CRA has been known to check restaurant records, where tips are recorded for all debit and credit card transactions.
If you have a research grant, you are allowed to subtract reasonable expenses related to your research and report only the net income. You cannot, however, report a loss if you spent more than the amount of your grant.
Unemployment insurance (EI) is taxable in most instances.
If you’re a protected person and have received funds or support from a charitable organization, like a church group or nonprofit, you don’t have to report this as income. If a charitable organization hired you to do work, you’ll need to report it as employment income.
Be sure to report all of your worldwide income. If there is not a specific line to report a type of income, it goes on line 130, other income. This includes annuity payments, death benefits, pension plan lump-sum payments, severance pay, RESP payments, training allowances, and trust payments.
Not all income is taxed in Canada. Exempt income includes:
- TFSA earnings and withdrawals
- Inheritance and gifts
- Life insurance policy proceeds
- Lottery winnings
- Foster care payments
- Canadian Forces in high-risk international mission income
- Provincial and federal refundable tax credits, child tax benefits
- Canadian service pensions, war veterans allowance, and compensation for holocaust survivors, military disability pensions, RCMP disability pension and compensation
- Proceeds from accident, disability, illness, or income maintenance plans
- Income exempt by statute
If you have income outside of wages and freelance income, check to see if it’s taxable.
As in the US, there are two types of tax credits: refundable and nonrefundable credits. If you have refundable credits, you can get a tax return even without taxable income. With nonrefundable credits, you can reduce your taxes due to zero.
Most tax credits in Canada are indexed to inflation, so they increase each year.
Tax programs will calculate your federal refundable tax credits, provincial refundable tax credits, off the tax return, and non-refundable tax credits.
Many tax credits are calculated automatically. These include:
- GST/HST credit
- Anyone with employment income can claim the Canada employment amount. This is meant to cushion the cost of your commute, normal work clothes, and other incidentals.
- Amount for children under 18
- Pension income amount
- Universal child care benefit (UCCB)
- UCCB bonus for single parents
- Canada child tax benefit (CCTB)
- The family caregiver amount (FCA) increases the tax credits for the spousal amount, amount for eligible dependent, amount for children under 19, and the caregiver amount.
- The disability amount and the disability amount for children.
- If your spouse is 65+, you can claim the age amount.
Other common credits:
- The public transit tax credit can be claimed, regardless of whether you’re using public transit for work, school, or any reason. This credit can be split between spouses or claimed by one. You can claim transit passes for any dependents under 19.
- Medical expenses are reduced by 3% of your net income, so the spouse with a lower income should claim them. Private health insurance and travel insurance premiums can be deducted.
- The cost of moving to a new home to accommodate a newly disabled spouse can trigger a tax credit. You can also write off part of the cost of a van for a disabled family member.
- Working income tax benefit (WITB)
- Children’s fitness amount for eligible sports and fitness expenses for children under 16.
- Children’s arts amount is for artistic, cultural, recreational, or developmental activities.
- Home buyer’s tax credit
- Student loan interest tax credit
- Tuition, education, and textbook tax credit for post-secondary education.
- The charitable contribution tax credit should be claimed on one return to maximize the credit. In 2016 and 2017, if you haven’t made a prior claim for the donation credit (since 2007) you can apply an additional 25% credit for cash donations up to $1k. You can carry claims forward for five years. Political contributions are also deductible.
- Adoption expenses
Often, if one spouse doesn’t have a high enough income to claim a tax credit, it will be transferred to the other spouse. Otherwise, it will automatically be assigned to the lower-earning spouse.
There are numerous expenses you can deduct from your taxes. There are special deductions for Canadian Armed Forces personnel, police officers, transport employees, and northern residents. While I’ve outlined the most common deductions, check with the CRA to make sure you’re not overpaying.
Deduct your RRSP contributions or report an overpayment on your schedule 8 and line 208. If you’ve never filed taxes in Canada before, you can’t claim this RRSP deduction but you can claim the deduction the second year you file taxes in Canada. You’re allowed an over- contribution $2k over the course of your life. Any overcontribution over that amount is subject to penalties.
The disability supports deduction is for expenses that allow a disabled person to go to work, conduct research, or study at a post-secondary school. This is taken on line 219.
Employee stock options get special treatment on line 249.
Line 221 is for carrying charges, including safe deposit boxes and investment loans.
Child care expenses
The cost of childcare is claimed on form T778 and line 214. You can claim babysitting, daycare, a live-in nanny, and types of lodging (for boarding schools, day camps, and overnight camps). You cannot claim medical care, clothing, transportation, or tuition. Only one parent may claim this deduction. Typically it’s the supporting parent with the lowest income, unless the lower-earner was a student or incapable of providing child care.
Remember that you’ll need receipts if you’re audited. You can’t claim payments to anyone you claim as a dependent, such as paying one child to watch another or paying an elderly parent you support.
If you make child support payments you can deduct these, regardless of where the other parent lives.
Sadly, you usually can’t deduct the cost of moving to Canada. There’s an exception if you’re a full-time student with taxable income, or if you’re a factual or deemed resident moving back to Canada.
Moving expenses can be claimed if you got a new job, are moving closer to work or school, or to run a business at a new location. Obviously, you can’t deduct any expenses you were reimbursed for. These are reported on form T1-M and line 219.
If you’re filing for the first time, you can deduct your moving expenses from your Canadian tax return, but likely can’t claim them on your US return if you’re using the US Foreign Earned Income Exclusion (FEIE).
In order to deduct moving expenses, you must have earned income in that calendar year related to the job you moved for. You can carry over moving expenses to apply against income in the next year. Full-time students (or co-op students) can claim against research grants, awards, summer jobs, and employment income.
Moving expenses include the cost of selling your old home, carrying costs of a vacant residence, purchasing the new home, traveling to your new home, storage and moving costs, and temporary living expenses.
You can’t claim a loss on your old home or deduct improvements you made to sell your old home. House hunting and job hunting expenses aren’t eligible. Neither are the value of things you couldn’t move, cleaning expenses, replacement costs, mail forwarding, plug adapters and transformers, or GST on your home purchase.
If your employer requires you to move and offers you a low-interest or interest free home loan, you must pay taxes on this benefit. You can deduct it on line 248.
In order to claim employment expenses, you’ll need to get your employer to sign form T2200. You don’t need to file T2200, but you’ll want it on hand in case you’re audited. You’ll detail expenses on form T777 (which must be submitted) and declare them on line 229 of your tax return.
For complete information about allowable employment expenses, read T4044.
If you’re a salaried employee, you can deduct travel expenses (including meals, tips, and lodging), parking and vehicle expenses (but not for commuting), office supplies, and salaries for an assistant (including to a spouse or dependent).
If you also earn commission, you can deduct additional travel and sales expenses, including promotions, entertainment, and home office costs. Expenses may only be applied to income in the calendar year, so beware of spending large sums of money in hopes of future earnings.
Capital expenditures, like a cell phone or computer aren’t deductible for employers if they’re purchased outright. They can, however, be leased. The rules for equipment purchases are very specific, so check with the CRA before you buy.
There are specific rules for artists and musicians, forestry workers, apprentice vehicle mechanics, and tradespersons.
You may be eligible for GST/HST rebates on employment expenses using form GST370.
Home office expenses are a common reason for an audit, so be sure to keep all related documents and receipts. Salaried employees can claim rent, utilities, maintenance (including cleaning supplies), and repairs. Commissioned employees can also claim insurance and property taxes. Self employed people can also claim a capital cost allowance (CCA). Claiming a CCA can impact your principal residence exemption.
Your home office expenses are limited to the amount of related income, so you can’t claim a loss.
Foreign assets and income
If you have more than $100k in assets abroad, like in the US, at any point during the year, you’ll need to file form T1135. Not all assets need to be reported, including:
- Vacation homes
- Business property
- Property in an RRSP, RRIF, or pension plan
- Mutual funds
- Shares in a foreign affiliate
Generally, if your foreign asset is for your exclusive personal use, it doesn’t have to be reported. Check to see what you need to report.
If this is your first Canadian tax return since you immigrated, you don’t have to file this form. If you still have $100k in assets abroad the second time you file taxes, you’ll have to report them.
After you file
Shortly after you’ve submitted your Canadian tax return, you’ll get a notice of assessment from the CRA. This will outline what they believe you owe or are owed. If there’s a discrepancy between your numbers and the numbers the CRA calculated, you can ask them for more information and file a notice of objection.
You have 90 days to file the notice of objection with form T400A. Some people opt to mail a letter instead.
Making a payment
If you owe taxes, you can make a payment to the CRA by online bank transfer, debit card, credit card, wire transfer, by mail, or in person at a service center or many banks.
Filing for a refund
If you have paid more in taxes than you owe or you qualify for refundable tax credits, you can get your refund through direct deposit.