Relocation from Israel to Canada

Canada provides a wide range of opportunities for Israelis contemplating relocation abroad, whether for employment, investment, education, retirement, or to enhance their quality of life. Advantages such as a high standard of living, a stable economy,  excellent healthcare, relatively large Jewish communities, and great career opportunities attract many Israelis.

However, relocation from Israel to Canada requires thorough planning and a comprehensive understanding of the legal, financial, and tax implications associated with the move. This article outlines the key considerations to address before making the move.

The 5-Step process for relocating from Israel to Canada

1. Assess employment opportunities and living costs.
2. Consider terminating Israeli tax residency, taking into account matters such as exit tax.
3. Obtain an appropriate visa or residency.
4. Review your tax obligations under both Israeli and Argentine law, including potential double taxation and available reliefs.
5. Plan fund transfers and banking.

 The following sections explain the main tax, legal, and financial considerations for Israelis relocating to Canada.

Key Considerations When Relocating from Israel to Canada

 The relocation process consists of several essential steps. 

First, conduct a thorough review of employment opportunities in Canada, the cost of living (which varies between cities and regions), the local tax system, educational options for children, available healthcare services, and other important factors.

Second, consider whether you wish to terminate your Israeli tax residency and the numerous implications that come with it. It is important to plan how you will manage your finances and assets, as well as arrange for private health insurance. In Canada, permanent residents and citizens are eligible for public health insurance. Foreigners such as temporary residents or visitors must obtain private health insurance.

In addition, you must arrange your legal status in Canada by obtaining the appropriate work permit, residency, citizenship, or visa, as applicable.

In this regard, one of the main challenges in relocating to Canada is obtaining the appropriate residence visa. Each visa type has different requirements, such as age, education, income, minimum investment, employment contract, health insurance, and more. It is essential to select the visa that best suits your circumstances and to arrange it in advance.

Additionally, it should be noted that, as of January 1, 2023, a law prohibits non-Canadian residents from purchasing residential property, particularly in densely populated areas. The law applies to specific regions, while in other areas, non-Canadian residents are permitted to purchase residential property. Furthermore, there are certain exceptions that allow the purchase of residential property under specific circumstances. As of now, this prohibition remains in effect until January 1, 2027.

Tax Aspects of Relocation to Canada  

When moving to a foreign country, the question of post-move tax obligations in Israel arises.   The answer usually depends on whether you have terminated your Israeli tax residency.

Termination of Tax Residency

One of the main issues in the relocation process is determining your residency for tax purposes. In Israel, Israeli residents are taxed on their worldwide income, while non-residents are taxed only on income sourced in Israel.

If you intend to settle in Canada for the long term, it may be preferable to sever your residency from Israel (for both income tax and National Insurance). Note that Israelis who sever their residency are required to pay an “exit tax” on certain assets.

According to Section 1 of the Israeli Income Tax Ordinance, residency is determined based on the center of life test, and a rebuttable presumption based on the number of days you stayed in Israel, as follows:

• The center of life test – This is a substantive test, in which all personal, family, economic, and social ties are examined. These include a permanent place of residence, a place of economic activity, a location of economic interests, and more.
• Days test – An individual is considered an Israeli resident if they spent 183 days or more in Israel during a single tax year. A person may also be considered a resident if they spent 30 days or more in Israel during the current tax year. This applies when their total stay in Israel is 425 days or more over the current and two preceding years. This presumption can be rebutted if the individual proves that, despite their stay in Israel, their center of life is not in Israel.

Anyone who meets the days test, i.e., is considered an Israeli resident under this test, must file Form 1348 – “Declaration of Residency”. This form is attached an annex to the individual’s tax report. Its purpose is to declare the termination of Israeli tax residency and to describe the circumstances demonstrating that the individual’s center of life is no longer in Israel.

It is important to note that terminating tax residency is usually not a one-time event but an ongoing process. The Israeli Tax Authority (ITA) may review your residency status even years after leaving. Therefore, it is recommended to keep detailed documentation of all actions indicating the transfer of your center of life to Canada, and to avoid creating new ties to Israel.

These days, a dramatic bill to amend the Income Tax Ordinance regarding the definition of Israeli residency for tax purposes has been submitted to the Knesset.

According to the proposal, there will be absolute presumptions that determine the number of days defining an individual as an Israeli resident. These presumptions cannot be rebutted. The “center of life” test will serve only as a secondary tool in cases not covered by these presumptions.

As a result, there may be situations where an individual who has terminated their residency in Israel will still be considered an Israeli resident for tax purposes. This can happen when the number of days spent in Israel in subsequent years is high enough to meet the residency threshold.

To view the draft bill, click here.

Exit Tax

 Israelis leaving Israel may be required to pay an “exit tax” on certain assets. This tax is intended to capture the unrealized capital gains of  assets held by Israeli residents.

According to Section 100A of the Income Tax Ordinance, an individual who ceases to be an Israeli resident is deemed to have sold their assets on the day before terminating the tax residency (“Exit Day”). The tax is calculated on the notional gain between the original purchase price and the value on the exit day. Note that some assets, such as real estate, may be exempt from this tax.

There are various methods for calculating and paying exit tax liability, each with different implications for the taxpayer. The timing and structure of these payments can significantly impact the overall tax burden. It is highly recommended to consult with an international tax expert before departing Israel to develop a tax strategy that best aligns with your specific circumstances and financial goals.

Double Taxation Treaty between Israel and Canada 

Israel and Canada have a double taxation treaty. This treaty is intended, among other things, to prevent a situation where a person pays double tax on the same income. The treaty regulates issues such as determining residency in cases of dual residency, withholding tax rates on passive income (dividends, interest, royalties), and taxation of employment income.

Under the treaty, employment income earned by an Israeli resident in Canada will be taxed in Israel. This is because employment income is generally taxable only in the country where the individual is a resident. However, if work is performed in Canada for more than 183 days in 12 months as an Israeli resident, then employment income would be taxed in Canada as well.

In addition, the treaty also addresses dual residency. In cases where an individual is considered a resident for tax purposes in both countries, the treaty offers equalization rules for determining residency, as follows:

The individual shall be deemed to be a resident only of the State in which a permanent home is available to that individual; if a permanent home is available in both States, that individual shall be deemed to be a resident only of the State with which the individual’s personal and economic relations are closer (centre of vital interests);

b) If the State in which the centre of vital interests is situated cannot be determined, or if a permanent home is not available to the individual in either State, the individual shall be deemed to be a resident only of the State in which that individual has a habitual abode;

c) If the individual has a habitual abode in both States or in neither of them, the individual shall be deemed to be a resident only of the State of which the individual is a national;

d) If the individual is a national of both States or of neither of them, the competent authorities of the Contracting States shall endeavour to resolve the question by mutual agreement.

To read the Double Taxation Treaty between Israel and Canada in English – click here.

How will Terminating Tax Residency Affect Income Taxation?

If the move to Canada is temporary, you remain an Israeli tax resident and cannot terminate your residency status. This means you are liable for Israeli tax on your worldwide income and must report all income, including income earned in Canada, to the ITA.

If tax residency is not terminated, you may still be able to claim a tax credit in Israel for taxes paid  in Canada.

If the move to Canada is permanent and you have terminated your Israeli tax residency, you will only be liable for Israeli tax on income sourced in Israel, while all other income will be subject to tax in Canada.

For more information on the termination of residency, click here.

National Insurance

An Israeli resident living abroad is required to pay National Insurance (Bituach Leumi) contributions. However, once tax residency is terminated, there is no obligation to pay National Insurance, and the individual is no longer entitled to health or social security benefits in Israel.

There is a social security treaty between Israel and Canada (except for the province of Quebec). The arrangement in the treaty with Canada is intended to prevent situations where an Israeli resident would be subject to social security obligations in both countries simultaneously or would not be eligible for insurance in either country.

Tax System in Canada

In Canada, an individual is considered a tax resident if their place of residence is in Canada (meaning they have a home, family, and social or economic ties in Canada) or if they stay in Canada for 183 days or more during a single tax year.

The Canadian tax system consists of both federal and provincial taxation. A Canadian resident pays federal tax and, depending on the province or territory where they reside or earn income, they also pay provincial or territorial tax. Provincial and territorial taxes are calculated based on the federal tax return and are collected by the federal government (except Quebec). Tax rates vary between provinces.

The tax brackets in Canada are:

• Those who earn $57,375 or less must pay a 14.5% percent federal income tax.
• Those who make more than $57,375 and up to  $114,750 must pay a 20.5 percent federal income tax.
• Anyone making more than $114,750 up to $177,882 must pay a 26 percent federal income tax.
• If you earn more than $177,882 and up to $253,414, you must pay a federal income tax of 29 percent.
• Lastly, anyone making over $253,414 must pay a federal income tax of 33 percent.

Capital gains tax in Canada is subject to marginal tax rates (according to tax brackets). However, for Canadian residents, only 50% of capital gains are included in taxable income. Non-residents are liable for capital gains tax only when selling Canadian assets (such as real estate in Canada).

The basic federal corporate tax rate begins at 38 percent, but then reduces by a general tax rate of 13 percent and a provincial tax abatement of 10 percent, resulting in a net federal tax rate of 15 percent. It is also important to note that corporate tax rates vary among provinces

Canada does not impose an inheritance, gift or estate tax. However, the Canadian tax system uses an alternative mechanism. Upon the death of the testator, his or her assets are treated as if they had been sold at market value at the time of death. As a result, the estate becomes liable to capital gains tax on any increase in value that occurred up to the time of death. This effectively creates a significant tax liability on the deceased’s estate.

Transferring Funds from Israel to Canada

You should review the different options for transferring funds abroad, such as bank transfers, international credit cards. Each option has its own advantages and disadvantages regarding fees, transfer times, exchange rates, amount limits, and regulations Pay close attention to reporting requirements for authorities and banks, in accordance with anti‑money‑laundering laws and international regulations (FATCA, CRS). It is also advisable to open a bank account in Canada in advance.

According to Section 170(a) of the Ordinance, when a payment from Israel to a foreign resident constitutes taxable income, withholding tax applies. Therefore, transfers of funds that do not constitute taxable income may not be subject to tax but could still require prior approval from the ITA.

For more information, see the article “Transferring Funds from Israel Abroad.”

Opening a Bank Account in Canada

Opening a bank account in Canada is possible for foreigners, but the process varies from bank to bank and usually requires a valid passport, visa or residence permit, and sometimes additional documents. In Canada, most major banks will also request a Social Insurance Number (SIN) if you plan to work and earn income.

Returning to Israel

When returning to Israel, it is important to carefully assess the potential implications. If you have terminated your tax residency, you may qualify for benefits as a regular  or veteran returning resident, depending on the duration of your stay abroad. These benefits can include tax exemptions on income and capital earned outside Israel.

You should also take into account the waiting period of up to six months for the renewal of National Insurance (Bituach Leumi) health coverage, as well as possible benefits available through the Ministry of Aliyah and Integration.

In short, relocation to Canada offers many opportunities, but it is a complex process that requires professional planning, personal guidance, and a thorough understanding of all legal and tax aspects. We recommend consulting with international tax experts to ensure early and comprehensive planning for a smooth and successful transition to your new life in Canada.

The firm of Nimrod Yaron & Co. has extensive experience advising on international relocation and Israeli tax residency termination. For an initial consultation, click here.

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