Whether you or your client are considering making Aliyah from Canada to be with family, out of concern for changing Canadian tax rates, or out of fear of the rise of antisemitism that we’ve seen of late, individuals choosing to emigrate should always consider the tax impacts that must be looked at prior to making such a life-changing determination. Below are some things for a potential emigrant to consider, both on leaving Canada and on arrival in Israel.
Income Tax Regime
Canada’s tax system is based on a taxpayer’s residency: if you are deemed a resident in Canada, then you must file a Canadian T1 income tax return and pay income taxes to the Canadian government on your worldwide income.i In order to avoid double-taxation by Canada and the foreign country in which a taxpayer earns other income, Canada has tax treaties with many foreign countries. If a tax treaty is in place, the general principle is that a Canadian resident will pay the difference (if any) to the Canadian government between the tax rate of the foreign country and the tax rate on the same income if it had been earned in Canada. Therefore, to negate the need to file Canadian tax returns and pay Canadian tax as a resident, one must cease to be a Canadian resident.
To determine residency status if leaving Canada, the following criteria will be applied by the Canada Revenue Agency (the “CRA”):ii
Generally, if any of the above are answered “yes,” then an individual will not have sufficiently severed their significant residential ties and will continue to be a factual resident of Canada subject to Canadian tax on their worldwide income.
Personal Tax Implications of Leaving Canada
If an individual ceases to be a resident of Canada for tax purposes (an “emigrant”), there are certain “departure tax” implications. The most significant being that the individual will be deemed to have disposed of almost all of their property at its fair market value (FMV) and then re-acquire the same property for the FMV. This can create a capital gain between the original acquisition price (known as the adjusted cost base) and FMV, of which 50% of the gain is taxable at the taxpayer’s marginal rate. Property that is not subject to the deemed disposition rule includes:
The exception for real property means that a taxpayer does not necessarily have to sell their principal residence before leaving Canada (notwithstanding the commentary above regarding severing residential ties). However, if they do not sell and lease the dwelling to a third-party, they will not qualify for the principal residence tax exemption for the period it was not occupied as their principal residence and tax on the capital being could apply.
If the FMV of all worldwide property (exempt or otherwise) exceeds $25,000, Form T1161 must be filed with the taxpayer’s T1 income tax return for the year of exit.viii
Deferring Payment of Deemed Disposition Tax
Taxpayers leaving Canada have the option to defer the payment of deemed disposition tax until the property is actually sold in the future.ix However, if the amount of federal deemed disposition tax owing is more than $16,500, the CRA requires the taxpayer to post “adequate security”—this amount is determined in consultation with the CRA and Ministry of Finance. To take advantage of the deferral, Form T1244 and the requisite amount of security must be filed on or before April 30 of the year following the year of emigration.
Trusts and Estates Tax Implications of Leaving Canada
Residence of a trust (including an estate) is generally determined where the central management and control of the trust takes place. Therefore, in most cases, the residency status of the trustee(s) will determine where the trust is a resident for tax purposes. If there are multiple trustees, the trust will reside where the more substantial central management and control takes place. If the settlor and/or beneficiaries of the trust exert influence over the management and control of the trust, this will be considered in the determination of the residence of the trust as well.
If the trust is determined to be factually resident outside of Canada, the same “departure tax” deemed disposition rules that apply to individuals apply to trusts. This can create a large, unintended tax event for both trusts and estates that can negatively impact the value of trust property held for beneficiaries. Subsection 250(6.1) of the Income Tax Act (Canada) does extend the Canadian residency of a trust until the end of the tax year in which it is no longer resident but cannot cure an unintended departure in future years.
Immigration is never an easy step. Language, cultural, employment, and education considerations are some of the more important issues to consider but there are also financial and tax considerations that should not be overlooked.
Israel's tax system, like that of Canada’s, is based on residence and not citizenship. Individuals, who are residents of Israel, are taxed in Israel on their worldwide income and gains with tax credits granted generally for foreign taxes paid, subject to specific conditions. As a general rule, the tax system is based on a withholding system and not every Israeli resident files an annual tax return.
Notwithstanding the worldwide tax regime, new immigrants and long-term returning residents are currently exempt from tax and reporting obligationsx on foreign-source income and gains for a period of 10 years.
The current tax rates, generally, for individuals for the year 2021 are:
There may also be a surtax depending on the amount of taxable income annually (3% over approximately 650,000 shekels), and national insurance and health insurance payments.
The taxation of trusts is determined based on the residence of the grantor and the beneficiaries, as well as the location of assets. If the grantor and the beneficiaries are all new immigrants entitled to the exemption as individuals, and the trust does not hold any assets in Israel, the trust will receive the same exemption benefits. Once the exemption period ends, generally, the trustee opens a tax file for the trust which is taxed based on the criteria of the residence of the grantor, beneficiaries, and location of assets. The tax rates relevant to trust income/gains are the same as the rates applicable to individuals.
The Income Tax Ordinance of Israel defines five trust categories:
The following two categories are most relevant to this article:
There are two additional criteria required for the trust to be classified as an Israeli resident beneficiary trust. First, the settlor and the beneficiaries must belong to the same immediate family circle (i.e., the settlor is a spouse, parent, grandparent, child, or grandchild of the beneficiary (“family trust”). Second, the settlor must then be alive. If neither of these additional criteria are met, the trust is not a family trust. It is classified and taxed as an Israeli resident trust, i.e., worldwide trust income will be subject to taxes in Israel and not only the share of income allocated to an Israeli resident beneficiary.
An Israeli resident beneficiary trust that meets the family trust requirements is subject to two potential modes of taxation:
Care is therefore required to ensure that a new immigrant does not inadvertently cause problems for a Canadian resident trust prior to emigration to ensure there are no surprises that a trust is now subject to Israeli taxation, or if it is that the parties are well aware of the impact that has now resulted from that change.
Making Aliyah from Canada to Israel is a lifelong goal for some Jewish Canadians. There are many considerations that need to go into making the final decision to emigrate from Canada, not least of which are Canadian and Israeli tax implications. This article is intended as an introduction to these tax implications and should not be relied upon as tax advice. Proper tax professionals in both countries should be consulted to advise on each individual’s situation before taking steps to make Aliyah.
About the Authors
Brian Cohen is a partner and lawyer in Gowling WLG's global Private Client Services Group, where he assists clients in the areas of estate planning, trusts, and personal taxation. Brian also advises donors, charitable organizations, public and private foundations, and not-for-profit organizations regarding the tax implications of formation, registration, governance, and planned giving strategies. Brian is a past recipient of the Ontario Bar Association's Hoffstein Book Prize in Trusts and Estates. He is listed as a leading lawyer in Chambers HNW, Best Lawyers in Canada, Acritas Stars, and the Canadian Legal Lexpert Directory.
Lyat Eyal is a partner at Aronson, Ronkin-Noor, Eyal Law Firm and Notary, where she manages the firm's private client practice with a focus on international families, multi-jurisdictional cross border estate planning issues including trusts, wills, taxation of trusts, and pre-immigration planning. Lyat also provides services in connection with probate and estate administration matters.
Lyat was admitted to the New York State Bar in 1998 and to the Israel Bar in 2005. She is a member of the Society of Trust and Estate Practitioners (STEP) and the New York State Bar Association Trusts and Estates Law and International Sections. Lyat is a Fellow at the American College of Trust and Estate Counsel (ACTEC) and an Academician at the International Academy of Estate and Trust Law (TIAETL). Lyat publishes regularly in distinguished professional publications and speaks at seminars and conferences internationally in her areas of expertise.
i Another category of residency is “ordinarily resident”, which is not applicable for the topic of this article.
ii This criteria is included in Form NR73 which may be filed, but is not a requirement.
iii If the dwelling is leased to a third-party, the CRA may consider the dwelling not a significant residential tie on a case-by-case basis.
iv Contribution room to RRSPs is based on employment income claimed by residents, so emigrants will no longer accrue contribution room.
v Contributions by emigrants to RESPs and non-resident beneficiaries can create tax complexity, so seek further tax advice.
vi Emigrants can continue to hold funds in an established TFSA, but will not be eligible for future contribution room.
vii See full list here.
viii See Form T1161 for property that does not need to be listed.
ix Tax cannot be deferred for employee benefit plans.
x The reporting exemption is expected to be abolished over the upcoming months.