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Managing Paying Income Taxes Abroad

Managing Paying Income Taxes Abroad

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.  

Tax Treaties.

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:

  • Income from United States pensions and annuities

  • Income of a Canadian that is earned via a U.S. based business, or

  • Income earned in the U.S.

Residency Status Implications for Canadians Working, Living or Traveling Abroad.

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:

  • Dependents who live in Canada

  • A spouse or partner living in Canada

  • Ownership of a home or other real property in Canada

  • A current Canadian passport and driving license

  • Financial ties such as credit cards or banks accounts

  • Active membership in Canadian organizations—religious, social, etc.

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:

  1. Factual Resident
  2. Deemed Resident
  3. Non-resident
  4. Deemed non-resident

Each of the foregoing tax statuses will determine how much and at what percentage Canadians living overseas must pay for income taxes.

  1. Factual Resident

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:

  • On a vacation outside Canada
  • Commuting regularly from Canada to your employer in the U.S.
  • Attending school or teaching overseas 
  • Working temporarily abroad
  • Residing in the U.S. for health reasons, but maintaining residential ties

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.

  1. Deemed Resident

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.

  1. Non-Resident

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: 

  • They are not considered a resident of Canada and normally live abroad 
  • They have no significant residential ties to Canada 
  • Their stay in Canada is less than 183 days, or
  • They live in another country for the entire year

Non-residents must pay tax only on a specific income from Canadian sources. The types of income include the following:

  • Annuity payments
  • Management fees
  • Registered retirement income and savings plan payments
  • Retiring allowances
  • Rental income and dividends
  • Royalty income
  • Canada and Quebec pension plan benefits

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.

  1. Deemed Non-Resident

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. 

Federal Foreign Tax Credits.

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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