Tax Issues when moving from Canada to New Zealand
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 from New Zealand to Canada? Check out our article 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 New Zealand tax year end is 31 March (making the tax year April to March). This can complicate a few calculations.
- The NZ tax authority is Inland Revenue (IR or IRD).
- Canada deems you to have disposed of most of your assets the day you become non-resident in Canada. This can result in significant tax obligations if not properly managed.
- NZ’s closest equivalent to an RRSP is called Kiwisaver. Employers contribute as well as the employee and there are no tax breaks on these contributions. Tax is paid on earnings within the fund and there is no NZ tax on the withdrawals.
- NZ does not have anything like an RESP or TFSA.
- NZ does not have any “Provinces” so there is only one layer of income tax and it is much flatter and simpler than Canadian rates (10.5% to 39%. But there are basically no deductions allowed against your income (unless you are self employed) and no tax-free amount.
- Kiwis earning only salary/wages and/or NZ investment income do not usually need to file a tax return. The IRD will advise you if you need to pay tax, and you can easily check your status and file for a refund if one is owed. Different rules apply to you in your first year and if you have foreign income. The NZ individual tax return (for those who need to file one) is known as an IR3 (equivalent of a T1).
- NZ has a national Goods and Services Tax of 15% that applies to almost everything (including education, groceries, medical, etc.) apart from financial services and residential housing. There is no GST rebate.
- The NZ equivalent of a SIN is called an IRD number.
- There is a general exemption on foreign income in the first four years on residency
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 considered to be 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. Getting this wrong can be very expensive.
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 normally will only be taxable in the country where the work was performed. NZ does not have CPP or EI. You may be offered Kiwisaver, but unless you are a permanent resident/citizen you are not able to join Kiwisaver. Payroll withholdings (called PAYE – Pay As You Earn) are very reliable and most NZ Salary/Wages earners do not need to file a tax return. PAYE also includes small ACC (Accident Compensation Corporation Ievy which is sort of like Workers’ Compensation insurance.
If you continue working in NZ for your Canadian employer you should advise them that you are non-resident and they should stop deducting income taxes and EI. However, many companies may not be comfortable with that. Getting the taxes back is usually done by filing a 5013-R return (the T1 tax return filed by a non-resident person), but CRA will ask for proof and expect to see a letter from your employer on letterhead acknowledging that the work was performed in NZ. Many employers may want to treat you as self employed from a Canadian perspective. This is probably not correct, but satisfactory for you as far as your Canadian tax is concerned. This income will be fully taxable in NZ and you will not be able to deduct any expenses against it (unless you have become truly self-employed). In addition, you are required to pay monthly PAYE to IRD (see IRD webpage or guide IR356).
If you started working for your Canadian employer while you were resident in Canada then they are still required to deduct CPP on your earnings. But if you are first employed while not a Canada tax resident then they should not deduct CPP. However, many employers do not understand the rules any may handle this correctly.
If you work for the Canadian government (including armed forces and consular services) different rules may apply.
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 NZ 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 of in each country. While you won’t need to pay CPP, EI or Workers Comp on your NZ income, you will need to pay ACC (which you get billed for a year later).
Leaving Canada is considered a sale of the business and capital gains tax will apply in Canada based on the fair market value of your business. In some cases there may be no fair market value, but you should talk to a tax professional before departure to see what your exposure may be. If you business will continue to be operated from a Physical Establishment in Canada then it is exempt from the deemed sale rule, but other rules may apply and Canadian tax may still apply.
Private and government pensions, annuities, CPP, OAS, sickness plan payment (including accident and disability plans) etc. are generally fully taxable in NZ. The Canadian 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 then you should be able to get the withholding reduced. Pension income qualifies for the 4 year Transitional Resident exemption (see below)
Most Canadian 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 Canada. Canadian banks may deduct 10% withholding tax on any interest paid. Interest is taxable income in NZ, and a Foreign Tax Credit is allowed for Canadian NRWT, and the 4 year Transitional Resident exemption (see below) applies.
If you sell your Canadian principal residence before you depart then you should have no issues. You will need to report the fact on your T1 (as normal) but no tax is usually payable.
If you vacate your Canadian principal residence but it doesn’t sell until after you cease to be a Canadian tax resident you need to file form T2062. If you don’t then your real estate agent or lawyer may not release the funds. You should submit this form as soon as you have a conditional offer that looks like it will go the distance as it can take several months to get the response from CRA.
Sale of your Canadian principal residence will not be subject to tax in NZ and no reporting is necessary.
If you retain your principal residence and turn it into a rental property then see the next section.
If you retain real estate properties that you rent out in Canada when you move to New Zealand get ready for some hassles. While you do NOT need to treat the property as having been sold (deemed disposition), you will still have to pay capital gains tax on the property when you eventually sell it (or die), even if you no longer live in Canada.
You are now considered a non-resident landlord and subject to a 25% withholding tax on your gross rents (not net profit). Your tenants or property manager/agent is responsible for withholding this and remitting to CRA monthly. If they fail to do so you will be liable for penalties and interest, even if you don’t make any net profit from renting the property. This is normally a final tax with no deductions allowed.
You can elect to claim deductions under section 216. To do this you need to file an annual income tax form T1159 within two years. Tax is calculated on the net profits (usually 22.2%) and the difference between the tax withholdings and the tax payable is refunded to you. You calculate the net income on the same basis as normal (mortgage interest is deductible but principle payments are not) but losses do not carry forward.
You can also opt for lower withholding taxes. To do this you need to get form NR6 approved by CRA before Dec 31 of the year before (this may be a challenge in the year of departure; I’ve heard that CRA have indicated that if the application is received by Dec 31 it will be considered effective even if approved after). You will need a local agent who provides a guarantee to CRA that they will pay CRA if you don’t file the necessary return and pay the necessary taxes, so this person is likely going to be family. If this is a professional agent/property manager then expect them to withhold your funds until after you have proven that you filed the necessary return. You then need to file your T1159 by June 30 of the year after the income year. You need to get a new NR6 approved every year.
Your net rental income is also taxable in NZ using NZ rules(foreign properties are not subject to NZ’s new limitation on interest deduction. Furthermore, NZ does not allow you to deduct depreciation (CCA equivalent) on the building. All other expenses (including property management) are allowed deductions. It is not uncommon for a property to have a loss under Canadian rules, but have a taxable profit under NZ rules.
If you sell the property while a non-resident of Canada withholding tax of 25-50% on the sale price must be deducted. You need to notify CRA within 10 days of the sale date using form T2062. Canadian Capital Gains tax will need to be paid on the sale and any surplus tax withheld will be refunded when you file the necessary tax returns. While NZ does not have a general capital gains tax, any gains from property sold within 10 years of acquisition may be treated as income (depending on when the property was acquired). You should definitely seek professional advice. Rental income qualifies for the 4 year Transitional Resident exemption (see below).
All Residential Real Estate
If you own any residential real estate in Canada (including your primary residence) and you are NOT a Canadian Citizen or Permanent Resident (immigration status, not tax status) then you may need to file a return under the Underused Housing Tax Act – even if the house is fully occupied. This will capture any property owned by a Canadian Corporation, Foreign Corporation, Partnership, Trust or non-Citizen/PR, even if no tax is payable. Tax of 1% of the value of the property may be payable if your property meets the requirements. Penalties of AT LEAST $5000 per year apply.
While New Zealand doesn’t (yet) have a full-on capital gains tax, there is a form of capital gains tax on the sale of residential land called the “Brightline test.” If land (including land outside New Zealand, and land that you owned prior to becoming NZ resident) is sold by a NZ resident and it was held for less than 10 years it may be subject to taxation (the gain is treated as 100% ordinary income).
If you have a mortgage or loan outside NZ then you may also be subject to tax on the change in value (due to FX movement) of the principle balance.
Registered Retirement Savings Plan (RRSP) & Other Retirement Plans
You do not need to liquidate your RRSP before departing Canada.
You may continue to contribute to your RRSP after you leave, but you are unlikely to earn new contribution room as your foreign income will not be counted in Canada. Please note that contributing to your RRSP while non-resident will complicate your NZ tax if you subsequently withdraw funds.
There is no provision for transferring funds from an RRSP account to a Kiwisaver account. While you can withdraw from your RRSP account and make a voluntary contribution to your Kiwisaver account, there is no advantage to doing so other than preventing you from accessing these funds prior to retirement.
If you withdraw lump-sum funds while a New Zealand tax resident then the withdrawal will be subject to a 25% withholding tax in Canada. If you make the withdrawal within four years of becoming a NZ tax resident then you do not need to report this on your NZ tax return (Transitionary Resident rules – see below). If your withdrawal is after the fourth year then a portion of the amount will be included in income – growing from 4.76% in year 1 to 100% from year 26 onwards. The 25% Canadian withholding may be included in your calculation as Foreign Tax Credits but you may not be able to use it all as the NZ tax may be less than the 25% already paid (due to the 4-year exemption). If you are leaving Canada at the beginning of the year and have no other income you may want to consider withdrawing your RRSP before departure if your Canadian average tax rate will be less than 15% (note that your personal deductions will likely be prorated so you won’t get the full amount of the tax-free amount as normal).
Annuity payments from an RRIF or pension plan received while a NZ resident are fully taxable with no exemption, but Canada will withhold 15% non-resident withholding tax. The withholding tax may be included in your calculation for Foreign Tax Credits on your NZ return.
If you have made Home Buyers Plan or Lifetime Learning Plan withdrawals from your RRSP you need to repay these amounts within 60 days of becoming a non-resident resident or allocate an RRSP contribution to fully repay the HBP balance or have the entire balance treated as income in your final year.
Withdrawals from RRSP/Pension Plans qualifies for the 4 year Transitional Resident exemption (see below)
Registered Education Savings Plan (RESP)
You can only make contributions to an RESP if the beneficiary is a resident of Canada. If you have left Canada but your children remain in Canada then you should still be able to contribute. You can leave your RESP open when you leave.
You should be able to pay for foreign education from your RESP (schools outside of Canada do not need to be registered, but the course must be at least 3-weeks full time for universities or 10-weeks for non-universities). However, if the student (beneficiary) is no longer tax resident in Canada they can no longer any portion of the CESG or CLB as part of their Education Assistance Payment. The Act does not specify how much may be withdrawn. CRA has put in place policy limits for the first withdrawal and annual amounts, but you can go over these amounts if they are “reasonable” (which includes moving expenses and transportation). The limit for 2023 is $26,860. Fund promotors are not required to ask for receipts or explanations if under the limit (but often do).
If you wish to close the plan or make non-EAP withdrawals you may have to repay any unspent grant and pay withholding taxes on any income. Repayments of capital are always tax free.
The RESP is not tax-sheltered in NZ. You should include it under Other Investments below.
Tax Free Savings Account (TFSA)
You do not need to close your TFSA when you leave Canada, but you can not contribute to it (penalties apply for over-contributions of 1% per month of the over-contribution) and your annual contribution room will not increase.
The TFSA is not tax-sheltered in NZ. You should include it under Other Investments below.
Companies that you own
If you own more than 10% of the shares in a Canadian 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 Canadian Company migrate to New Zealand 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 Canadian companies prior to emigrating. Please remember that you must have a registered office and at least one Director (apart from corporations incorporated in BC)resident in the jurisdiction of incorporation.
If you are not a Director of a Canadian company then it is likely that it will not be considered NZ resident, even if you own 100% of the shares. However, the CCPC status of the company may now be lost in Canada meaning you will pay more in Canadian taxes. New Zealand’s Controlled Foreign Corporation rules may also attribute income to you as the owner even if that income is never distributed.
When you depart Canada you will have a deemed disposition of the shares meaning that capital gains tax will be payable on the value of the shares (Lifetime Capital Gains Exemption may apply).
Any dividends paid to you will be subject to a 5% withholding tax in Canada (15% if you hold less than 10% of the voting shares)and will be fully taxable in New Zealand (a Foreign Tax Credit for the Canadian tax deducted will be allowed).
If you sell shares in a Canadian company while resident in NZ you will not have to pay any tax on the capital gain in NZ. If these shares derive (or have derived in the past 60 months) their value from investments in real or immovable property in Canada then you will need to notify CRA of the dispoisition.
Foreign dividend income qualifies for the 4 year Transitional Resident exemption (see below). Foreign Tax Credits may also be allowed.
New Zealand taxes you on your world-wide income, so any income from investment is fully taxable in NZ. Canadian and US Investments may have withholding taxes deducted (usually 15%), which is a final tax in Canada, and can usually be offset on your NZ tax return. You should notify your Canadian banks/brokerages that you will be NZ resident. If a T slip is issued when you are non-resident you need to write a letter to CRA detailing the situation and they will assess you for the missed withholding tax (consider using a Voluntary Disclosure to achieve this).
New Zealand doesn’t (yet) have a full-on capital gains tax (but gains from sale of property held for under 10 years may be treated as income under the “Brightline rules” if sold while you are a NZ resident). But if you sell any Canadian investments (such as Canadian equities, bonds, property, etc.) you may have additional reporting and tax obligations (and you won’t be able to offset that tax against your NZ return).
If you have more than NZ$50,000 in certain foreign investments then you will be subject to the NZ Foreign Investment Fund rules which may require an income inclusion even when no dividends have been received or capital sold. FIF rules will also cover funds held in TFSA and RESP accounts, but not RRSPs or other pension plans.
Foreign Investment income qualifies for the 4 year Transitional Resident exemption (see below).
Like Canada, active trading in securities is considered business income. All profits from sales of crypto currency is considered to be 100% taxable income.
See ‘Canadian Deemed Disposition (“Exit Tax”) Rules’ below.
Foreign trusts get very complicated. You should get professional advice. Any distribution from a Canadian trust is likely to be taxable on receipt in New Zealand. If you are a Trustee of a Trust your presence in New Zealand may make the trust tax resident in NZ and subject to NZ tax. You should consider resigning as Trustee before departing Canada.
Income from Trusts qualifies for the 4 year Transitional Resident exemption ( see below).
Canada Child Benefit and GST Credits
You are not eligible to receive CCB or GST Credit benefits once you become a non-resident of Canada. These will need to be repaid if you receive them after ceasing to be a tax resident in Canada.
Transitional Tax Resident - 4 Year Exemption
As a new immigrant to NZ you are given a very generous exemption for 48 months after becoming a new tax resident on many forms of foreign income (IRD Page).This includes:
- Income attributed under New Zealand's controlled foreign company rules.
- Income attributed under New Zealand's foreign investment fund rules.
- Withdrawals from foreign superannuation schemes.
- Overseas income subject to non-resident withholding tax or approved issuer levy.
- Income arising from the exercise of overseas employee share options.
- Accrual income from overseas financial arrangements.
- Foreign-sourced beneficiary income from foreign and non-complying trusts.
- Rental income from overseas.
- Overseas interest and dividends.
- Royalties from overseas.
- Income you earned from working overseas before you came to New Zealand.
- Gains on sale of overseas property, held on revenue account.
- Overseas business income not related to the performance of services.
The following income is NOT eligible for this exclusion:
- Foreign-sourced employment income.
- Foreign-sourced income relating to services (including self-employment).
To be eligible you cannot have been a tax resident in New Zealand in the 10 years prior to re-acquiring tax residency. All income earned after the 48th month is now taxable under normal rules.
Canadian Deemed Disposition (“Exit Tax”) Rules
When you depart Canada you have a “deemed disposition of most of your assets. CRA “deems” your Canadian self to have sold them to your NZ self on the date that you ceased to be a Canadian tax resident. You will need to report any capital gains or losses on these investments in your final tax return and pay tax accordingly, which will be at your highest marginal tax rates. Form T1243 needs to be included with your final T1. If you intend to return to Canada at a future date you can elect to defer the deemed disposition under section 220(4.5) and a security deposit may be required.
Tax Filing Obligations in Canada
You are required to file a T1 in Canada for the final year of residency (use the provincial forms applicable for the province you resided in prior to departure). As mentioned, there is a “deemed disposition” of most of your assets (including shares, jewelry, paintings, investments) and you will need to declare any resulting capital gains income (this is often referred to as “departure tax”) and include form T1243. Most standard deductions (such as the basic amount) are pro-rated based on the number of days that you were a Canadian Resident. You may also want to file an NR73 form that requests a determination of residency status. While we don’t normally recommend this, it can be helpful if your situation is tricky and you want to ensure that CRA agrees with your position.
Once you have filed this final return you do not need to file a T1 for future years, but you may have other reporting obligations if you have other Canadian sourced income.
If your net assets (excluding cash, bank accounts, pension plans, some property and personal use property) exceeds $25,000 you will need to file form T1161 “List of Properties by an Emigrant of Canada” with your T1. Penalties of up to $2500 apply for failing to file this form.
If you continue to have additional Canadian source income you may be able to reduce your withholding taxes by electing under Section 217.
You should also notify your financial institutions, pension plan managers and property managers that you are no longer tax-resident in Canada.
Tax Filing Obligations in New Zealand
You should apply for an IRD number as soon as you arrive in NZ (equivalent of a SIN). You are required to file an IR3 return (equivalent of T1) for the first year you are in NZ. 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(but you may have obligations to make payments earlier than this in some situations). Installments may be due (called “Provisional Tax”) if your tax liability (after deducting source payments) exceeds $5,000 and is usually due 28 August, 15 January and 7 May. You can get an extension of the filing and payment date by engaging a Tax Agent.
In your second year you may not have to file any income tax returns if you only have income from NZ employment and NZ investments (you can check your IRD account to see if you get a refund and request it within seconds). But if you still have foreign source income or other income not taxed in NZ at source then you will need to file a return.
Form IR1261 should be filed with your IR3 to document your overseas income.
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
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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.