Managing Paying Taxes Abroad
If you are working overseas or made an investment abroad, there are chances that you would be subject to foreign taxes. Therefore, it is wise to consult with a taxation expert to manage paying taxes abroad or avoid making payments at all.
Being an expatriate, you may have to pay income tax in a foreign country. There are certain countries that do not require their citizens to pay tax on their overseas income if they are living abroad. But they may still have to pay tax on the sale of an asset if the asset is in their home country. However, to manage paying taxes abroad, it is very important to know what your tax obligation is.
Tax Implications for Canadians Working, Living or Travelling Abroad
If you are a Canadian who is working, living or traveling abroad, you may still have to pay the provincial or territorial and Canadian income tax. Therefore, you must be aware of your residency status and the rules that may apply to you while your stay overseas.
Whether you are a resident for tax purposes or not depends on why you are living abroad and how long do you intend to stay over there. Your residential ties should also be taken into consideration for that matter and include:
- Your dependents who live in Canada
- Your common-law partner or spouse in Canada, and
- Your home in Canada
Other relevant factors to determine if you have residential ties with Canada may include a Canadian passport, Canadian driving license, Canadian credit cards or bank account, membership in any religious or recreational organization in Canada, or any personal property in Canada.
Therefore, to identify the residency status, all the factors, such as residential ties, intent, length of time, and continuity to live abroad and inside Canada will be considered. These factors will determine if you are a deemed non-resident, a non-resident, deemed resident, or a factual resident of Canada for tax purposes and how much should you be charged with. If you are unsure of your status, you can always fill a form NR73.
- Tax Implication for Factual Resident
If you maintain significant residential ties while working, traveling or living abroad, you will be considered a factual resident of Canada. Moreover, you will be a factual resident if:
- On a vacation outside Canada
- Commuting on a regular basis from Canada to your employer in the U.S.
- Getting education or teaching overseas, or
- Working on a temporary basis abroad
In addition to that, if you live in the U.S. for a certain period of time for health reasons or spending vacations while keeping residential ties, you will be considered a factual resident.
For factual residents, the income tax is charged as if you didn’t leave Canada. You will continue to submit a report of income earned abroad and within Canada and can also claim deductions applicable to you. Similarly, you can also claim provincial or territorial and federal nonrefundable tax credits applicable to you.
Apart from that, you will continue to pay territorial or provincial tax and federal tax in the territory or province where you have maintained residential ties. You can also claim the refundable tax credit if applicable. Lastly, you will also be eligible for the childcare benefit, Canada child tax benefit, and HST/GST credit.
- Tax Implication for Deemed Resident
You might be considered a deemed resident of Canada if more than 90 percent of your income from all sources is exempt from tax due to the tax treaty and agreement between Canada and that country. Moreover, if you are doing a job abroad under the assistance program of the Canada International Development Agency and was resident for any 3 months prior to joining work overseas.
Also, following persons will be considered deemed resident:
- Member of the Canadian force in the overseas school staff who wants to submit a tax return as a Canadian resident.
- Member of the Canadian force, or
- Territorial or provincial and federal employee who got representation allowance for the year or was a resident prior to moving abroad
In short, neither do you have residential ties with Canada nor are you a resident of another country with which Canada has a tax treaty. Furthermore, you were temporarily in Canada for a period of 183 days.
The deemed resident will be required to provide details of his or her entire income earned within Canada or abroad during the tax year. You will have to pay a federal tax, but instead of paying a territorial or provincial tax, you will be liable to a federal surtax.
Additionally, you can claim all the applicable deductions and non-refundable tax credits. You can also claim federal tax-credits, but not allowed to claim territorial or provincial tax-credits.
- Tax Implication for Non-Resident
You become a non-resident for tax purposes in Canada when you become an immigrant in another country and start living there. You will be a non-resident for tax purposes if
- There are no significant residential ties to Canada, and
- Your stay in Canada is less than 183 days, or
- You are living in another country for the whole year
- You are not considered a resident of Canada and normally live abroad
If you are a non-resident of Canada, you are liable to pay tax only on a specific income from Canadian sources. The types of income include management fee, annuity payments, registered retirement income fund payments, registered retirement savings plan payments, retiring allowances, Canada pension plan benefits, Quebec pension plan benefits, old age security pension, pension payments, royalty income, rental income, and dividends. As for old age security pension received during the tax year, you must submit the old age security return of income every year.
Non-resident will be subject to Part I tax or Part XIII tax. The normal Part XIII tax rate is 25 percent unless it is reduced by the tax treaty between Canada and the other country.
- Tax Implication for Deemed Non-Resident
You may be a deemed non-resident of Canada for tax purposes if you are deemed resident or factual resident and also a resident abroad with a country that has a tax treaty with Canada. Being a deemed non-resident, you are required to abide by the same rules that are applied to a non-resident of Canada and should declare the income from other sources.
In other words, Canadians are liable to pay tax on income they earn anywhere in the world. It can be an investment income, salary from employment, or a business income. However, in most cases, you are supposed to pay tax in a country where you earned the income. And to avoid paying tax twice, Canada has foreign income tax credits in place that decrease the overall tax liability.
- Federal Foreign Tax Credit
As discussed, if you have been a resident of Canada anytime during the year, you can claim the federal foreign tax credit. For that, you must show gains, losses, profits, and the income earned in that country.
Submit a separate foreign tax credit form if there is more than one country involved. Similarly, for non-business and business income, submit a separate form. You can only claim a tax credit equal to the lesser of
- The Canadian income tax charged on foreign income, or
- The foreign income/profit tax paid
You won’t be eligible for any tax credit if there is a tax treaty with another country.
- Territorial or Provincial Tax Credit
This tax credit may be applicable to non-business income that you earn abroad in a country that has a tax treaty with Canada. If you find out that the income tax you paid in another country on your non-business income is more than the federal income tax credit you are allowed, you are allowed to claim a tax credit from the territory or province where you currently reside. The non-business taxes should be over $200 and you are required to fill a form separately for each country where you earned the income.
The purpose of having tax treaties with different countries is to prevent tax-evasion of foreign earned income and avoid double taxation. In case of any dispute over foreign income, these treaties are very helpful as they have defined criteria on how to charge tax. They have laid out specific resolutions, eligibility criteria, and residency status. These treaties can also decrease the amount of tax liability on interest, royalty, dividend.
Not only do these tax treaties provide a detailed outline for tax on self-employment, salary, pension and other income, but also define who is exempted from tax.
In case of a tax treaty between the United States and Canada, a tax credit may apply to the following:
- Income from the United States pensions and annuities
- Income of a Canadian that is earned via the U.S. based business, or
- Income earned in the U.S.
All this information is very useful for you in order to manage paying taxes abroad. A thorough understanding of it will put you in a better position to not miss any crucial details and at the same time, submit your return on a timely basis.