19 What are the main deemed acquisition issues when you become a resident of Canada?
Basil Edavilayil
The Canadian income tax system treats the assets acquired by new residents before they became a Canadian resident, as if they bought the assets (based on the fair value of the asset) on the day they became a resident.
The Income Tax Act explains it as follows:
ITA 128.1(1) (c) Deemed acquisition — the taxpayer shall be deemed to have acquired at the particular time each property deemed by paragraph (b) to have been disposed of by the taxpayer, at a cost equal to the proceeds of disposition of the property; this means that new residents to Canada are not taxed on unrealized gains generated prior to becoming a resident in Canada.
For example, in June 2017 before moving to Canada, Daljinder purchased a property in India. He became a resident of Canada on January 20, 2018 and sold the Indian property on July 31, 2018. His taxable capital gain will be calculated as follows:
|
Value of his property when he bought it |
$10,000 |
|
Fair market value of his property on January 20, 2018 |
$100,000 |
|
Value of the property sold on July 31, 2018 |
$120,000 |
|
Capital Gains in Canada ($120,000 – $100,000) |
$20,000 |
|
Taxable Capital gains in Canada ($20,000 x 50% capital gains inclusion rate) |
$10,000 |
When calculating the capital gain on sale CRA considers the ‘cost’ of the property to be the $100K fair value of the property at the time Daljinder became a resident of Canada.
Other deemed acquisition rules and issues:
• Tax evasion –New residents to Canada with significant assets may want to hide these assets to avoid having to pay tax in Canada. “Tax evasion is a crime. Whether you’re cheating on your taxes here in Canada or hiding assets or money in foreign jurisdictions, the consequences are serious. Tax evasion has a financial cost. Being convicted of tax evasion can also lead to fingerprinting, court-imposed fines, jail time, and a criminal record”- CRA (article linked below)
• Double Taxation – When selling a property in a foreign country, a Canadian resident may be required to report and pay tax in both Canada and the foreign country. This is known as double taxation. If a tax treaty is in place between Canada and the foreign country the taxpayer may be able to claim Foreign Tax Credits in Canada for tax paid in the foreign country to reduce the potential double taxation.
Interactive content (Author: Basil Edavilayil, March 2019)
Interactive content (Author: Shetal Nand, June 2019)
References and Resources:
- ITA 128.1(1) (c)
- Article – “Tax treaties” (Author: Government of Canada)
- Article – “Tax evasion. There are consequences.” (Author: Government of Canada)
- Competency map: 6.5.2
March 2019
