Determining your tax obligations to Canada is primarily based on your residence status. It is essential to verify your residence status if you plan to live or work abroad, as you may still be required to pay income tax depending on your situation.
The Canadian Revenue Agency (CRA) classifies residency status into two categories: Resident and Non-resident.
Resident Status: If the CRA designates you as a Canadian resident, you will be subject to income tax on worldwide earnings. Even if you work outside Canada, you will still be responsible for federal and territorial taxes, the amount of which will depend on your income.
As a resident, you must file a T1 tax return covering your income and expenses for the calendar year from January 1st to December 31st. The deadline for filing tax returns and paying income tax is typically April 30th each year.
Residents must declare income earned outside of Canada when filing tax returns. Although this income will be taxed in Canada, you can claim it as a foreign tax credit if you have already paid taxes in another country.
Non-Resident Status: If you do not maintain significant residential ties with Canada and are not a deemed resident, you will be considered a non-resident.
Even as a non-resident, you may still be required to pay withholding tax on income sourced in Canada, such as company pension plans, investment income, and certain government payments.
Non-residents leaving Canada permanently may be subject to a departure tax calculated on taxable capital gains from selling Canadian assets. Additionally, they will need to file the T1243 or departure tax return form, which provides details on the capital gains (or losses) for the properties deemed to have been disposed of upon leaving Canada.
It is worth noting that paying a departure tax does not affect your citizenship, but it is advisable to consult a professional tax lawyer to understand the implications before severing residential ties with Canada.
For Canadians residing abroad, tax regulations require you to report net income earned outside of Canada when filing tax returns to determine your non-refundable tax credits.
While you may not be liable for income tax, the amount of non-refundable tax credits you can claim in Canada may be affected. If more than 10% of your total income is sourced from outside Canada, you may not be eligible for certain tax-free income benefits.
If you earn income from property, dividends, royalties, or gross rents in Canada as a non-resident, the income will be subject to a 25% federal tax. However, the CRA may reduce this tax rate based on Canada's applicable tax treaty with your country of residence.
Residency Categories: The CRA recognizes two residency categories for Canadian residents:
Deemed Resident: Individuals who spend at least 183 days in Canada and are not residents of another country are considered deemed residents. If they are also residents of another country with which Canada has a tax treaty, the tie-breaker rule applies.
Factual Resident: Factual residents maintain significant residential ties with Canada even when traveling abroad. For example, Canadians working overseas for four months and spending the remainder of the year in Canada are considered factual residents.
Members of the Canadian armed forces and government employees stationed abroad retain their resident status regardless of their time spent in Canada or their residential ties.
Factors in Determining Residency Status: The CRA considers various factors to determine an individual's residency status, including the presence of a home in Canada, Canadian spouse or dependents, personal property, Canadian identification documents, time spent in Canada, travel intentions, and the preferred permanent location.
Important Canadian Tax Tips:
Foreign Tax Relief: You can claim foreign tax paid as a credit to reduce double taxation, although the specific foreign tax credit will vary depending on your country of residence.
Provincial Foreign Tax Credit Relief: This 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: Canada has negotiated tax treaties with many countries, adhering to the OECD model treaty. These treaties aim to prevent double taxation and currently cover around 95 countries.
Filing Canadian Taxes Abroad: For Canadians working abroad, the process of filing tax returns remains the same. You have several options for filing:
Use CRA-certified tax software to file your tax returns electronically.
Fill out paper forms from the official CRA website and mail them to a tax office.
Use "File My Return" if you have a low or fixed income, file your taxes by phone, or visit a community tax clinic.
Ensure that you provide accurate personal information, report all untaxed income, and claim applicable deductions and credits to minimize your tax liability. Tax Obligations for Canadians in the US: If you are a Canadian working in the US, your tax obligations may vary depending on your time spent in the country. Calculating the amount of taxes owed follows a specific formula based on the duration of your stay. Suppose you have been working in the US for three years. In that case, each day spent during the first year counts as 1/6 of a day, each day during the second year counts as 1/3 of a day, and each day during the third or current year counts as one full day. If your total number of days is 183 or more, with at least 31 days in the current calendar year, you will be considered a US resident for tax purposes and subject to US taxes.