Terry Tang, Investment Advisor
November 15, 2019As Asia’s financial center, Hong Kong has one of the most attractive tax systems in the world. In fact, it is recognized by the global community as a tax haven, along with Singapore, Switzerland, and Bermuda. The city has low personal and corporate tax rates, no capital gains tax, no value added tax or sales tax, no withholding tax on dividends and interest or collection of social security benefits, no estate tax. Generally, only income sourced in Hong Kong will be taxed and overseas income is not taxable.
In contrast, Canada has one of the most complicated tax systems in the world. Residents in Canada are subject to Canadian income tax on their worldwide income, regardless of where it is earned or received. If you are a Canadian resident and hold investments in Hong Kong, you are responsible for reporting it to the Canada Revenue Agency (CRA) even if there is no income distribution from the investments. Failure to do so may be considered as tax evasion and it is a criminal offense.
Unlike Hong Kong, Canadians are required to pay tax on investment income. How much tax depends on the type of investment income - capital gain, interest income, and dividend income.
The tax rate is applied to marginal tax rate, which is the highest tax rate an individual pays based on personal income.
For example, if you bought shares of Royal Bank of Canada, the largest bank in Canada by asset value, at $100 and sold them at $120, you would have earned a capital gain of $20 per share. The capital gain tax rate is 50% of the gain, which is $10 per share. If your personal marginal tax rate is 30%, it means you pay $3 capital gain tax per share.
For interest income, if you earned $100 from a government bond, 100% of this income would be applied to your marginal tax rate. At 30%, you would pay $30 tax.
"If you are a Canadian resident and hold investments in Hong Kong, you are responsible for reporting it to the Canada Revenue Agency (CRA) even if there is no income distribution from the investments"
Since the beginning of time, Hong Kong investors have enjoyed zero tax treatment on investment income. Bad news is that this is no longer the case the moment you became a Canadian resident. The good news, however, is that Canadians have been using a type of investment vehicle to eliminate taxes - the Tax-Free Savings Account (TFSA).
In my opinion, TFSA is by far the best investment account any Canadians can have. As the name suggests, any investment income earned in the TFSA account is 100% tax free. But there is a catch, the amount you can invest in an TFSA is limited to an accumulated annual contribution limit that started in 2009. As of 2019, the accumulated contribution limit is $63,500 CAD, including the $6,000 CAD annual contribution limit for the year. Unlike an RRSP, contributions made to the TFSA are not tax deductible. TFSA can be invested in a wide variety of investment vehicles such as stocks, bonds, mutual funds, ETFs, GICs, among others.
If you are new to Canada, it is important to note that in order for you to qualify for the annual TFSA contribution, you have to be a resident in that particular year. For example, if you moved to Canada and became a resident last year, you would have earned two years of annual contribution limits (previous year and current year). As of 2019, it would be a total of $11,500 CAD ($5,500 for 2018 and $6,000 for 2019). The annual contribution amount is designed to increase annually as it is indexed to inflation.
The views and opinions expressed are those of the author and may not necessarily be those of Aligned Capital Partners Inc. The content is for informational purposes only and not meant to be personalized investment advice.