If you are a Canadian who is working either permanently or temporarily abroad, there are many tax implications that you need to be aware of. Tax implications are important things to consider for Canadian citizens who are working outside of Canada.
Canadians Working Abroad Permanently
A Canadian who is permanently working abroad must determine their residency status. The CRA looks at three primary factors when determining residency status:
- The first is where your permanent home is located.
- The second, is where your partner and children live.
- The third is where you live.
Let’s take the example of Alex, who left Canada to work and live in the United States. His permanent home is in the United States. His wife and child are in the United States and Alex himself lives in the United States. In this case, Alex is clearly a non-resident of Canada.
The secondary factors that the CRA considers when determining residency status include:
- Bank accounts.
- Credit cards.
- Social ties.
- Personal possessions.
A single secondary tie, by itself, will not cause you to become or remain a resident. When examining the secondary ties and their impact on your Canadian residency status, you must evaluate the ties as a whole.
6 Things to Do Before You Leave Canada
- File Departure Tax Return
On your departure tax return, it is important that you indicate the date that you emigrated from Canada.
- Submit Form NR73
You could file form NR73 (determination of resident status upon leaving Canada). It’s not mandatory to file this form with the CRA, but you may want to complete this because then the CRA will give you a determination in writing as to whether you are a resident of Canada or a non-resident of Canada.
- Stop Receiving Tax Credits
Canadians working abroad must tell the CRA that they no longer want to receive any payments or tax credits, such as for GST, the Canada child benefit, and more. If they continue to work abroad and receive these payments, they will end up having to pay all of that money back, plus interest and penalties, once the CRA finds out.
- Disclose All Assets
Canadians working abroad must give the CRA a complete list of all Canadian and foreign assets they own as of their departure date. On this form, you must provide a description of your assets and their fair market when you leave. However, you are not required to file this form if the total value of all your assets is less than $25,000 when you leave Canada. If you don’t file this form the CRA will impose a significant penalty on you.
- Pay Departure Tax
When you leave Canada and become a non-resident, you are deemed to have sold all of your assets at their fair market value and you must pay tax on the accrued gains. Certain assets are exempt from departure tax, like your principal residence, RSPs, and TFSAs.
- Talk to Your Financial Adviser
You should tell your financial advisor that you have become a non-resident, the date you became a non-resident, and that you would like to receive non-resident tax slips from any financial institutions that you deal with. You should also tell your financial advisor that you no longer wish to contribute to your RRSP and the Tax-Free Savings Account, as you are no longer permitted to do so once you become a non-resident of Canada. There is a 1% per month penalty for contributions made to a TFSA after you become a non-resident.
Filing Tax Returns in Canada
As a Canadian permanently working abroad, you only have to file a tax return in three specific circumstances:
- You earned employment income in Canada.
- You carried on a business in Canada.
- You disposed of taxable Canadian property such as real estate property.
Withholding Tax for Canadians Living Abroad
After you leave Canada, you will be subject to withholding tax. Withholding tax is applied at a rate of 25% on the Canadian sourced income that you receive. This includes interest, dividends, CPP, old age security and pension, RSP income and rents from real estate property in Canada.
Let’s take an example: George has $10,000 in Canadian savings bonds that pay him 10% interest, or $1,000 per year. In this case, George’s Canadian Bank would be required to hold back 25% in taxes, or $250 from the 10% interest payment that he receives. This is known as a withholding tax.
You should look at the tax treaty that Canada has with the country you’re living in to see if you can get any kind of tax relief from withholding tax. For example, if you live in the United States, the withholding tax imposed on dividends is just 0%. Furthermore, the withholding tax on interest received from Canadian financial institutions is zero. You can receive Canada pension plan payments and the withholding tax rate is zero.
Canadians Living Temporarily Abroad
If you are temporarily living abroad, you are considered a factual resident of Canada so long as your residential and personal ties remain with Canada. You could also be a factual resident of Canada under the following circumstances:
- You worked temporarily outside of Canada.
- You teach or attend a school outside of Canada.
- You commute daily or weekly to work in the United States.
- You regularly vacation outside of Canada.
Tax Filing Obligations for Canadians Living Temporarily Outside of Canada.
As a Canadian working abroad, you still have to:
- File a regular personal tax return, which is due on April 30thof the following year.
- Pay tax on your worldwide income, which is income earned inside as well as outside of Canada.
- Claim all deductions and tax credits.
- Pay both Federal and Provincial tax to the CRA.
Let’s look at an example. George’s employer transfers him to Hong Kong for 18 months. He is leaving his spouse and child behind in Canada and he is still maintaining his permanent home in Canada. He is temporarily renting accommodations in Hong Kong, provided to him by his employer. In this case, George is clearly a factual resident of Canada, and he is, therefore, subject to income tax on his worldwide income: the income earned in both Hong Kong and Canada.
Foreign Tax Credits
As a Canadian who is temporarily working abroad, you might be worried about double taxation: having to pay taxes in the country where you are currently working, as well as having to pay taxes in Canada. Fortunately, the Canadian Income Tax Act can provide tax relief through a foreign tax credit. You can claim a foreign tax credit for the taxes that you paid in a foreign country.
The foreign tax credit is the lesser of two amounts:
The income tax you paid to the foreign country, or:
The Canadian tax is payable on the foreign source of income. So if you’re working in a country that has a very low tax rate, you will most likely get all the foreign taxes credited back to you on your Canadian personal income tax return.
Overseas Employment Tax Credit for Canadians Working Outside Canada
Canadians temporarily working abroad should consider the overseas employment tax credit. To qualify for this credit you must be working for a Canadian employer, and you must be working overseas for a period of more than six months. In order to qualify, you must be working in one of the following industries.
- Exploring for petroleum, natural gas, minerals, or similar resources
- Construction, installation, agriculture, or engineering work
- Working for the United Nations.
It is important to note that this credit is being phased out, so please take advantage of it while you can.
Remember that when you leave Canada to work abroad, your tax obligations come with you.