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Canadians working overseas or who have made an investment abroad, are likely to be subject to foreign income taxes. Some countries exempt foreign income from taxation, but residents still might have to pay tax on the sale of an asset, even if the asset is in their home country.
Canada has tax treaties in force with over 90 countries. The purpose of this is to prevent tax evasion of foreign earned income as well as avoid double taxation. These treaties define criteria on how to charge tax, outline eligibility criteria, as well as clarify residency status for foreigners earning income in the respective countries.
These tax treaties provide specifics on taxes for self-employment, salary, pension, and other income, and define who is exempted from tax. For example, in the case of the tax treaty between the United States and Canada, a tax credit may apply to the following:
Regardless of treaty arrangements or country of residence, Canadians working, living, or traveling abroad, are subject to paying their provincial or territorial and Canadian income tax. However, residency status has significant tax implications. Whether the taxpayer is considered a resident, non-resident, or a combination of both, depends on residential ties.
Residential ties should also be taken into consideration and include:
Therefore, to identify the residency status, all the above factors will be considered. Those factors will determine one of the following tax-paying statuses, with implications described below:
Each of the foregoing tax statuses will determine how much and at what percentage Canadians living overseas must pay for income taxes.
A factual resident of Canada maintains significant residential ties in Canada while working, traveling, or living abroad. Factual residency is maintained when the taxpayer is:
For factual residents, the income tax is charged as if the taxpayer never left Canada. Factual residents must continue to report all income earned both in Canada and abroad. Likewise, the taxpayer can continue to claim applicable deductions and credits on provincial and federal returns.
A deemed resident is a taxpayer who lived outside Canada during the tax year, and who did not have significant residential ties. Canadian government employees, members of the Canadian Forces and their overseas school staff, and those working under a Canadian International Development Agency assistance program are deemed, residents.
Likewise, a deemed resident is a foreign resident who sojourned in Canada for 183 days or more and does not have significant residential ties with Canada. This category of deemed resident is not considered a resident of another country is covered by the terms of a tax treaty between Canada and that country.
The deemed resident will be required to provide income details on earnings within Canada or abroad during the tax year. Deemed residents are subject to federal tax, but instead of paying a territorial or provincial tax, they pay a federal surtax.
Canadian expatriates become non-residents for tax purposes when they emigrate and become permanent residents of a foreign country. Non-resident tax status occurs when:
Non-residents must pay tax only on a specific income from Canadian sources. The types of income include the following:
Note: Non-residents who received old age security pensions received during the tax year must submit the old age security return of income each year.
A taxpayer may be a deemed non-resident of Canada for tax purposes when living abroad in a country that has a tax treaty with Canada. The taxpayer can be deemed a factual resident of Canada but can avoid paying double taxes while permanently living abroad. Being a deemed non-resident, the taxpayer is required to abide by the same rules as a non-resident of Canada.
Canadians must pay tax on income they earn anywhere in the world. It can be an investment income, salary from employment, or business income. However, in most cases, tax liability accrues in the country where the income was earned. To avoid double taxation, Canada applies foreign income tax credits that decrease the overall tax liability.
Territorial or Provincial Tax Credit
This tax credit may be applicable to non-business income earned abroad in a country that has a tax treaty with Canada. For example, a Canadian living abroad discovers that the foreign income tax paid on non-business income exceeds the Canadian federal income tax credit normally allowed.
The taxpayer can, under those circumstances, claim a tax credit from his or her home province or territory. However, the non-business taxes must exceed $200, and separate claim forms must be submitted for each country where the income was earned.
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