Many newcomers make mistakes in their first few tax filings and do not even realize that they have done so. This is often because, despite the abundance of information available, there is still very little that clearly points out the specific areas newcomers need to be wary of.
As an immigrant tax professional who handles the taxes of several other immigrants, I have first-hand experience with these issues.
Below are some of the most common areas where this gap shows up.
1. Assuming Filing Taxes Is Optional If Income Is Low
Many newcomers believe that if they earned little or no income, filing a tax return is optional. In some cases, where no income was earned, filing may not be legally required. However, choosing not to file often has consequences.
In Canada, filing a tax return is how eligibility for income-tested benefits is determined. Without a return on file, benefits such as the GST/HST credit and other federal and provincial programs cannot be assessed or paid.
This is one of the most common reasons newcomers miss out on benefits in their early years.
2. Not Understanding Tax Residency Rules
Tax residency in Canada is not based solely on citizenship or immigration status. It is determined by the strength of your residential ties to Canada.
Some of the factors that may be considered include:
where you have a home or place of residence
whether your spouse or dependants live in Canada
where you work or carry on employment
where you maintain personal property, bank accounts, or provincial health coverage
how long and how consistently you are physically present in Canada
Many newcomers assume they are not tax residents if they arrived late in the year or stayed only briefly. In reality, even a short period of residency, combined with sufficient ties, can result in tax residency for part of the year.
For example, a person who spends only a few months in Canada (less than 183 days), but has a residential home in Canada, a spouse or dependants who are tax residents, or maintains bank accounts or property in Canada, may still be considered a resident for tax purposes, despite not meeting the 183-day rule.
As a matter of fact, determining tax residency is one of the most complex areas in Canadian tax, and one that has seen several cases taken to the tax courts.
Misunderstanding these rules can lead to missed filings, delayed benefits, or incorrect reporting, and the consequences can be significant. It is therefore very important for newcomers to be properly informed on this matter.
3. Contributing to an RRSP Without Having RRSP Room
This is a very common and costly mistake.
RRSP contribution room is not automatic. Contribution room is earned only based on income assessed on a previous year’s Canadian tax return. As a result, a newcomer to Canada who has not previously been a tax resident generally does not have RRSP contribution room in their first year.
Contributing to an RRSP without available room results in an overcontribution. When an 1overcontribution occurs, it must be corrected by withdrawing the excess amount and submitting a completed Form T1-OVP to the CRA.
If the issue is not corrected promptly, a penalty of 1% per month applies to the excess contribution until the situation is resolved. The administrative process can take time, during which penalties may continue to accumulate.
4. Not Applying for GST/HST Credits and Canada Carbon Rebates (CCR) Using Form RC151
For newcomers who arrive in Canada during the year, the GST/HST credit and CCR is not automatically paid unless eligibility is established through filing a tax return. Since an income tax return is not due until April 30 of the following year, newcomers often face the challenge of not receiving any benefits during their year of arrival.
To address this, the CRA introduced Form RC151, which allows newcomers to apply for the GST/HST credit and the Canada Carbon Rebate before filing their first tax return.
Without submitting this form, eligible newcomers may not receive GST/HST credits during the year they arrive, even though they otherwise qualify. Instead, they may have to wait until their first tax return is filed and assessed before receiving the benefits retroactively.
5. Refusing to Consult Professionals
Many newcomers assume they can figure things out on their own, even when they find themselves in situations that require professional guidance.
Certain requests or correspondence from the CRA require the input of someone who understands the process, or who has dealt with similar situations before. Choosing not to seek help often proves costly and can significantly prolong the resolution of issues.
Closing Thought
Most tax issues newcomers face are not the result of errors on a tax return. They arise from assumptions made where clear explanations were missing, or from simple lack of awareness.
While the government, through the CRA and other agencies, provides resources to guide taxpayers, gaps still exist, and these gaps often prove costly for newcomers. Understanding where these gaps are, and how to navigate the system confidently, can be key to avoiding mistakes that were never intended in the first place.
While, the CRA allows a one-time lifetime overcontribution limit of $2,000, this amount cannot be deducted from taxable income in the first year, as there is no deduction limit available yet.