Tax for Canadians Employed Overseas

Allan Madan, CA
 Dec 4, 2013
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Hi, my name in Allan Madan. I’m a chartered accountant and tax expert in the Toronto, Oakville, and Mississauga regions of Ontario, Canada. This article is about Canadians working abroad, overseas, outside of Canada and taxes. This article about Canadians working overseas is going to be broken down into two parts; Canadians permanently working abroad and taxes, and Canadians temporarily working abroad and taxes.

We’ll talk about those who are permanently working abroad first.

Canadians Working Abroad, Overseas, Outside Canada – Permanently:

The first thing that you need to do as a Canadian who is permanently working overseas is to determine your residency status. Are you a resident of Canada, or are you a non-resident of Canada? The CRA (Canadian Revenue Agency) looks at three primary factors when determining your Canadian residency status.

  1. The first is where your permanent home is located;
  2. The second, is where your spouse and/or common law partner and children live; and
  3. Lastly, where your personal material possessions are located.

Let’s take the example of John Smith who left Canada 13 years ago to work and live in the United States. His permanent home (number 1) is in the United States. His wife and two children (number 2) are in the United States; and his personal material possessions (number 3) are also in the United States. Material personal possessions for John are his car, his boat, his major household appliances, and so forth. In this case, John Smith is clearly a non-resident of Canada. The secondary factors that the CRA looks to in determining whether Canadians working outside Canada are residents of Canada are:

  • Canadian driver’s license
  • Bank account and credit cards
  • Health insurance cards

If you maintain all of the above you are likely going to be considered a resident for Canadian tax purposes.

Six Important Things to do Before You Leave Canada:

Now that we’ve talked about what the factors are for determining your residency status, what happens when you leave Canada? There are 6 things you need to do, as Canadians living abroad, when or before you leave Canada.

1. File Departure Tax Return

You need to file a departure tax return (this is like a personal tax return, due on April 30thbut has a few special forms attached to it). On your departure tax return it is really important that you indicate the date that you emigrated from Canada, that is, the date that you left Canada.

2. 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, however, as Canadians working abroadyou may want to complete this several page questionnaire and submit it to the CRA for processing. This is because once the CRA has processed it, they will give you a determination in writing as to whether you are a resident of Canada or a non-resident of Canada, and so you’re not left in limbo guessing.

3. Stop Receiving Tax Credits

Canadians working abroad, overseas, outside Canada must tell the CRA that they no longer want to receive payments or credits for GST, the Canada child tax benefit, and the universal child care benefit. If they continue to work abroad and receive these payments, they will end up having to pay all of that money back, plus interest, plus penalties, once the CRA finds out.

4. Disclose All Assets

All Canadians working overseasmust give the CRA a complete list of all the Canadian and foreign assets that they own immediately prior to departure. You have to provide a description of your assets and the fair market value of those assets at the time that you leave. 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 levy a significant penalty of $2,500. From practical experience, I have seen the CRA levy this penalty every chance they get. The reality is Canada is running deficits, and the CRA is looking at ways to increase the revenue base.

5. Pay Departure Tax

Next, Canadians working abroad are required to pay departure tax. Departure tax is payable on the disposition of assets. The explanation is that when you leave Canada and become a non-resident you are deemed to dispose to dispose of 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 home, RSPs, and RIFs.

6. Talk to Your Financial Adviser

The last thing Canadians working overseas need to do is to speak with their financial advisor. (a) You should tell your financial advisor that you have become a non-resident, the date you became a non-resident, and that you want to receive non-resident tax slips from all the financial institutions, mutual fund companies and stock brokerages that you do business with. There are special non-resident tax slips for investment income that will be given to you. (b) You should tell your financial advisor that you no longer wish to contribute to your RSP, and also that you want to stop contributing to the tax free savings account (because you’re no longer permitted to do so once you become a non-resident of Canada).

Filing Tax Returns in Canada for Canadians Working Abroad

Now that we’ve gone through the six things you need to do before you leave Canada, what are your filing options after you leave Canada? For example, do you have to file a tax return? You only have to file a tax return as a Canadian permanently working abroad in three specific circumstances.

  1. You earned employment income in Canada.
  2. You carried on a business income in Canada.
  3. You disposed of taxable Canadian property such as real estate property.

Other than these three specific circumstances you are generally not required to file Canadian tax return after you leave Canada and that’s the good news.

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 source income that you receive. These items include interest, dividends, CPP, old age security and pension, RSP income and rents from real estate property. Let’s take an example. You are a Canadian working abroad, and you have ten thousand dollars in Canadian savings bonds, that pay you 10% interest or $1,000 per year. In this case, your Canadian Bank would be required to withhold 25% in taxes or $250 from the interest payment that you receive. This is known as 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 meant for Canadians working outside Canada. For example, if you live in the United States the withholding tax imposed on dividends is just 15%. If you are living in the United States the withholding tax on interest received from Canadian banks and financial institutions is zero. If you are living in the United States and you receive Canada pension plan payments, the withholding tax rate is zero, which is far better than 25%.

Part 2 –

Canadians Living Temporarily Abroad:

The second part of this article will deal with Canadians who are temporarily living abroad. If you are temporarily living abroad you are considered a factual resident of Canada because of your residential and personal ties with Canada. As Canadians working abroad, you could 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 Canada:

What about tax filing obligations for someone who is temporarily living outside of Canada? Well, as Canadians working overseas, you still have to file a regular personal tax return which is due on April 30th, you still have to pay tax` on your worldwide income (income earned inside as well as outside of Canada), you have to claim all deductions and tax credits just like all other Canadians, and you have to pay, both, Federal and Provincial tax. Let’s look at an example. John Smith is transferred to Hong Kong for a period of 18 months by his employer. He is leaving his spouse and children behind in Canada and he is still maintaining his permanent home in Canada. He is temporarily renting accommodation which is provided to him by him employer in Hong Kong for the 18 month period. In this case John Smith is clearly is factual resident of Canada and he is subject to income tax on his worldwide income – that is, the income earned in Hong Kong and the income earned in Canada, if any.

Foreign Tax Credits

This brings us to the next point; foreign tax credits for Canadians working abroad temporarily. You may be thinking that as a Canadian temporarily working abroad you will are subject to double taxation because you have to pay taxes in the country where you’re working and you also have pay tax in Canada. Well, you’re right but fortunately the Canada Income Tax Act does provide tax relief by the way of a foreign tax credit. You can claim a foreign tax credit for the taxes that you paid in the foreign. The foreign tax credit is the lesser of two amounts. One is the actual tax you paid on the foreign country and the second is the Canadian tax payable on the foreign source income. So if you’re working in a country that has very high tax rate you will, in most likelihood, get all the foreign taxes credited back to you on your personal Canadian income tax return.

Overseas Employment Tax Credit for Canadians Working Outside Canada

The last point being addressed for Canadians who are temporarily working abroad is the overseas employment tax credit. This is a very lucrative tax credit that you might be able to get. To qualify for the overseas tax credit you must be working for a Canadian employer, and you must be working overseas for at least a period of six months, or more. Thirdly, in order to quality 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
  • You are working for the United Nations

I hope you found this article about Canadians working abroad and taxes to be informative, and please feel free to get in touch with me to get any of your tax related questions answered. You can also get free access to my free report ’20 Tax Secrets on How to Beat the Taxman’ by simply visiting my website.

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Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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