Tax Rules for Canadians Abroad
Residence status is one of the main determinants of your tax obligations to Canada. For this reason, it's always advisable to check your residence status if you plan to live or work abroad. This is because, depending on your residence status, you may still need to pay income tax even if you live or work abroad.
The Canadian Revenue Agency determines your residency status based on whether you intend to leave the country permanently or temporarily.
There are two types of residency status in Canada:
If the CRA establishes your residence status as a Canadian resident, you'll pay income tax on income earned anywhere in the world. Even if you spend some time working outside Canada, you'll still be liable to pay federal and territorial tax. The amount of money you pay as a tax depends on what you earn.
As a Canadian resident, you'll need to file a T1 tax return covering your income and expenses from Jan 1 to Dec 31 each year. Note that the set deadline for filing tax returns and payment of income tax each year is 30th April.
If you're a resident, you need to declare your income earned outside of Canada when filing your tax returns. This is because the income will be taxed in Canada, but you can claim it as a foreign tax credit if you already paid tax outside Canada.
You would be considered a non-resident if you don’t maintain strong residential ties with Canada and are not a deemed resident
Even if you're a non-resident, you'll still be liable to pay withholding tax from net income sourced in Canada, e.g. company pension plans and investment income, Old Age Security and Canada pension payments, etc.
Non-residents leaving Canada permanently are likely to pay a departure tax calculated as the marginal rate on the taxable capital gains earned if they sold all their Canadian assets. In addition, they'll be required to file the T1243 or departure tax return form.
The form is for people who ceased to be a resident of Canada in the year and were deemed to have disposed of the property when they left Canada.
The form contains details of capital gains (or losses) for the properties non-residents were deemed to have disposed of. Note that paying a departure tax does not have any implications on your citizenship. But it is advisable to consult a professional tax lawyer before deciding whether or not to keep residential ties with Canada.
If you're a Canadian living abroad, taxes regulations require you to declare the net income earned outside of Canada when filing your tax returns to avail your non-refundable tax credits. So even though you won't be paying income tax, the amount of non-refundable tax credits you can claim in Canada will be affected.
Suppose you're a non-resident and 90% of your income was sourced in Canada and 10% from outside Canada. In that case, you're eligible for a tax-free income of up to $12,069. But you won't be eligible for the tax-free income if you sourced more than 10% of your total income from outside Canada.
If you're a non-resident and earn income from property, dividends, royalties and gross rents in Canada, the income is subject to 25% federal tax. However, the CRA can reduce the tax rate depending on Canada's applicable tax treaty with your country of residence.
Canadian residents fall into the following categories:
Deemed residents of Canada are individuals who sojourn in Canada for not less than 183 days and are not a resident of another country. They may not have significant residential ties but are still considered to be residents of Canada. Tie-breaker rule will apply if the individual is also a resident of another country with which Canada has a tax treaty.
Factual residents of Canada have significant residential ties with Canada even when they travel abroad. For instance, the CRA considers you a factual resident if you're among Canadians working overseas for four months and spending the rest of the year in Canada.
Note that members of the Canadian armed forces and government employees stationed abroad retain their resident status regardless of their time in Canada or their residential ties.
Factors Involved in Determining Residency Status
The CRA considers several factors when assessing an individual's residency status, they include:
● If you have a home in Canada
● If you have a Canadian spouse or common-law partner
● If you have Canadian dependents
● If you have personal property in Canada
● If you have a Canadian passport, bank account, driver's license, and health insurance
● The amount of time spent in Canada
● Your travel intentions
● Your preferred permanent location
Below are a few Canadian tax tips that you should know to meet your tax obligations:
Foreign Tax Relief
Generally, any tax you pay as foreign tax in Canada is allowed as credits. This is to reduce double taxation if you've already paid foreign tax. However, the foreign tax credit varies depending on the foreign country you're residing in.
Provincial Foreign Tax Credit Relief
This type of tax credit is limited to any foreign tax paid that exceeds the amount of tax allowed for non-business foreign income taxes.
Double Tax Treaties
Many developed and developing countries have negotiated a tax treaty with Canada. The treaties adhere to the Organization for Economic Cooperation and Development (OECD) model treaty except those signed before 1971. Currently, there are approximately 95 countries that have negotiated a double tax treaty with Canada.
How To File Canadian Taxes Abroad
For a Canadian working abroad, tax obligations such as filing returns remain the same. However, there are various ways to file your Canadian tax returns abroad. They include:
● Using the CRA-certified tax software to file your tax returns electronically.
● Filing the paper forms found on the official CRA website and mailing them to a tax office near you.
● If you're a low or fixed-income earner, you can use 'File My Return' to file your taxes by phone or visit a community tax clinic to file your taxes.
Remember to provide your personal information and report all untaxed income when filing your tax returns. You can also claim deductions and credits to reduce your tax bill.
Canadians Living in the US
If you're a Canadian working in the USA, tax obligations may differ depending on the time spent in the country. Here's how to calculate the amount of taxes owed, assuming you began working in the US three years ago.
● Each day you spent in the US. for the first year counts as 1/6 of a day.
● Each day you spent in the US for the second year counts as 1/3 of a day.
● Each you spent in the US for the third or current year counts as one day.
Suppose the total number of days is 183 or more, and you've spent not less than 31 days in the current calendar year. In that case, you'll be considered a US resident for tax purposes and liable to pay US taxes.
Are you a resident of Canada living or working abroad and are unsure how to file your taxes? Get in touch with Prasad & Company LLP, a professional accounting firm based in Toronto, for all your tax and accounting needs!