If you are a Canadian working aboard, whether permanently or temporarily, there are many tax implications involved. Find out what tax consequences you should consider if you are permanently or temporarily working aboard or overseas outside of Canada.
Canadians Working Abroad, Overseas, Outside Canada – Permanently:
A Canadian who is permanently working overseas must determine their residency status. You must determine if you are a resident of Canada, or a non-resident of Canada. The CRA (Canadian Revenue Agency) looks at three primary factors when determining your Canadian residency status.
- The first is where your permanent home is located;
- The second, is where your spouse and/or common law partner and children live; and
- The Third Factor is where you live.
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 John lives in the United States (number 3). 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
- Investments in Canada (e.g. RRSPs, TFSAs, Canadian pension, brokerage account, etc.)
- Health cards
- Social ties (e.g. membership in community club, professional organization, etc.)
- Personal possessions (e.g. furniture, household appliances, vehicles, clothing, etc.)
A single secondary tie, by itself, will not cause you to remain or become a non-resident. When examining the secondary ties and their impact on your Canadian residency status, you must evaluate the ties as a whole.
For example, assume that John Smith (in the example above) continues to maintain many secondary ties to Canada, including:
- Honda civic
- Drivers licence
- bank account at Royal Bank, and TD Bank
- Visa and Master Card
- Furniture, kitchen appliances, washer/dryer, and clothing
- Membership in Toronto Golf Premier Club
- Health card (not relinquished)
- 3 brokerage accounts for trading stock at Scotia Bank
- RRSPs, TFSAs
- $2 million life insurance policy with Sun Life Canada
Since John Smith has many secondary ties to Canada, he may be considered a resident of Canada for tax purposes, and would therefore be taxable in Canada on his worldwide income.
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 a Canadian living abroad, when or before you leave Canada.
1. File Departure Tax Return
You need to file a departure tax return (this is similar to a personal tax return due on April 30th, but 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, which 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 abroad you 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 guessing.
Some tax practitioners do not think the NR73 should not be completed, because by submitting the NR73, you are “inviting” the CRA to audit your situation. Since the NR73 is not mandatory, you could simply write the date of departure on your final Canadian tax return instead.
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 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 and penalties, once the CRA finds out.
4. Disclose All Assets
All Canadians working overseas must give the CRA a complete list of all Canadian and foreign assets they own immediately prior to departure. You must provide a description of your assets and the fair market value of those assets at the time that 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 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 Canada’s revenue base.
5. Pay Departure Tax
Canadians who leave Canada are required to pay departure tax. When you leave Canada and become a non-resident, you are deemed 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
Canadians working overseas need 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 RRSP, 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).
Tip: If you expect to have significant income and taxes (like departure tax) on your final Canadian tax return, then consider making a RRSP contribution to reduce your Canadian tax liability.
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.
- You earned employment income in Canada
- You carried on a business income in Canada
- 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.
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 a lot better than 25%.
Canadians Living Temporarily Abroad:
If you are briefly 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? As Canadians working abroad, you still have to:
- File a regular personal tax return which is due on April 30th
- Pay tax on your worldwide income (income earned inside as well as outside of Canada),
- Claim all deductions and tax credits just like all other Canadians
- 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 his 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.
Tip: John might also want to know if he can still contribute into his CPP while working overseas. If you are in this situation as well, check out this post on CPP contributions from overseas.
Foreign Tax Credits
Foreign tax credits for Canadians working abroad temporarily. You may be thinking that as a Canadian temporarily working abroad, you are subject to double taxation because you have to pay taxes in the country where you are working and you also have pay tax in Canada. Fortunately, the Canada Income Tax Act can 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 country.
The foreign tax credit is the lesser of two amounts:
- The income tax you paid on the foreign country
- The second is the Canadian tax payable on the foreign source of income.
So if you’re working in a country that has a very high tax rate, you will in most likely get all the foreign taxes credited back to you on your personal Canadian income tax return.
Tip: Check out this article on problems with the foreign tax credit for Canadians abroad.
Overseas Employment Tax Credit for Canadians Working Outside Canada
Canadians temporarily working abroad should consider the overseas employment tax credit. 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. 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
For more tips on how to save international taxes if you are a Canadian, check out this related article 6 tips for Non-Resident & International Taxes.
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.