How to Manage Canadian-Source Income as a Non-Resident

Navigating the complexities of international tax can be daunting, especially when transitioning to non-residency status from Canada. Many individuals choose to become non-residents for various personal and financial reasons, seeking opportunities and advantages beyond Canada’s borders. However, it’s crucial to understand that severing physical residency does not necessarily eliminate all Canadian tax obligations.

Even after establishing non-residency, you may find yourself with ongoing tax responsibilities related to income sourced from within Canada. This article aims to serve as a comprehensive guide, providing clarity and practical advice on effectively managing Canadian-source income as a non-resident. We will explore the various types of income that may still be taxable, the applicable tax regulations, and how to ensure compliance, ultimately empowering you to manage your financial affairs with confidence while living abroad.

Maintaining Non-Resident Status: Key Considerations

Maintaining your non-resident status with the Canada Revenue Agency (CRA) requires ongoing vigilance and adherence to specific guidelines. One of the primary considerations is the 183-day rule, which dictates that spending more than 183 days within Canada during a tax year could lead to you being deemed a resident for tax purposes. This rule is critical for those who frequently travel to Canada or maintain close ties to the country.

Beyond the 183-day rule, it’s essential to minimize your ties to Canada, both primary and secondary. Primary ties, such as owning a dwelling, having a spouse or dependents in Canada, carry significant weight in determining your residency status. Secondary ties, including bank accounts, memberships, and personal belongings, also play a role.

Furthermore, there’s the potential risk of inadvertently re-establishing Canadian residency through actions that demonstrate an intention to return and reintegrate into Canadian life. Understanding these key considerations is paramount to ensuring your non-resident status remains intact and your tax obligations are properly managed.

Understanding Canadian-Source Income for Non-Residents

When you become a non-resident of Canada for tax purposes, it doesn’t necessarily mean you’re entirely free from Canadian tax obligations. If you continue to receive income from sources within Canada, that income is generally still taxable by the Canada Revenue Agency (CRA).

Canadian-source income broadly refers to any income that originates from within Canada. This includes income generated by assets located in Canada, services performed in Canada, or payments made by Canadian entities. Even if you reside outside Canada, the origin of the income determines its taxability within Canada.

It’s crucial to understand that even as a non-resident, these income sources may trigger Canadian tax obligations. Therefore, it’s essential to manage these income streams carefully and seek professional advice to ensure compliance with Canadian tax laws.

Here’s a breakdown of the most common types of Canadian-source income relevant to non-residents, and who they typically impact.

Pensions (CPP, OAS, Private Pensions)

This category includes payments from the Canada Pension Plan (CPP), Old Age Security (OAS), and private pensions. The CPP is a government-administered benefit based on your contributions during your working years in Canada, whereas the OAS is a government pension paid to most Canadians aged 65 and older, regardless of their work history. Private pensions are payments from employer-sponsored pension plans or registered retirement income funds (RRIFs). These income sources are relevant to individuals who have worked in Canada and contributed to a pension plan and will continue to earn this income, even after they leave Canada.

Rental Income from Canadian Properties

This refers to income received from renting out real estate located within Canada. This income source is relevant to individuals who own rental properties in Canada while residing abroad.

Dividends from Canadian Corporations

These are payments received from shares held in Canadian companies. This is relevant to individuals who own shares in Canadian corporations.

Interest Income from Canadian Investments

This includes interest earned from investments held in Canadian financial institutions, such as bank accounts, bonds, or guaranteed investment certificates (GICs). This is relevant to individuals who maintain investments in Canadian financial institutions.

Employment Income Earned in Canada

This refers to wages, salaries, and other forms of compensation earned for services performed within Canada. This is relevant to individuals who work temporarily in Canada, even if they are non-residents.

Self-Employed Doing Business in Canada

This involves income earned from self-employment activities conducted in Canada, including income earned by artists, performers, consultants, and other self-employed professionals who provide services within Canada on a temporary basis.

Real Estate Sale After You Leave Canada

This pertains to capital gains realized from the sale of real estate located in Canada after you have established non-resident status. This is relevant to individuals who owned real estate in Canada and sell that real estate after they have established non-resident status.

Non-Resident Withholding Taxes: Rates and Applications

Each type of income listed above is subject to withholding taxes. These taxes are essentially amounts deducted at the source of the income before it is paid to you. The purpose of withholding taxes is to ensure that the Canadian government collects taxes on income earned within its borders, even if the recipient resides elsewhere.

Generally, the default withholding tax rate applied to most types of Canadian-source income paid to non-residents is 25%. However, specific income categories may have different rates, and tax treaties can significantly alter these rates, potentially reducing or even eliminating the withholding tax. We will clarify these specific rates and treaty implications in the following sections.

How to Minimize Your Taxes On Canadian Sourced Income

Even after becoming a non-resident, it is possible to significantly reduce your Canadian tax burden through careful planning and adherence to specific regulations.

Pensions

There are two options to reduce your taxes on income earned from Canadian pensions. The form NR5 is an Application by a Non-Resident of Canada for a Reduction in the Amount of Non-Resident Tax Required to be Withheld for Tax Year. This allows you to reduce the amount of taxes deducted at the source, for example from 25% to 15%, depending on the tax-treaty Canada has with your country of residence. Since this process takes the CRA time to approve it, you would have to file the NR5 form far in advance of receiving the payment from the pensioner.

The second option is electing under Section 217 of the Canadian Income Tax Act. Section 217 allows non-residents to elect to file a Canadian personal income tax return (T1) as if they were residents, but only for specific types of income such as OAS security, CPP benefits, RRSP payments and RIF payments. This election can be advantageous if the tax calculated under Section 217 is less than the withholding tax (usually 25%) that would otherwise apply. By making a section 217 election, you pay tax on your Canadian-source income and then receive a refund for all or part of the non-resident tax withheld if you are approved.

Rental Income from Canadian Properties

As a non-resident of Canada earning rental income from Canadian property, you are required to remit a 25% withholding tax on the gross rental income collected each month. This amount must be remitted to the Canada Revenue Agency (CRA) by the 15th day of the following month. However, there are options available to reduce or recover the tax withheld at source.

One option is to file a Section 216 return (Form T1159) after the end of the calendar year. This optional return allows you to report your rental income on a net basis, deducting eligible expenses such as mortgage interest, property taxes, insurance, utilities, maintenance, and management fees. The net rental income is then taxed at a rate of 22%. Any tax withheld in excess of the actual tax payable will be refunded to you upon assessment of your Section 216 return.

An alternative approach is to submit Form NR6 to the CRA before the start of each calendar year. If approved, this form permits a reduction of the monthly withholding tax from 25% of the gross rental income to 25% of the estimated net rental income after expenses. This improves your monthly cash flow by reducing the amount of tax withheld at source. However, to use this method, you must appoint a Canadian resident to act as your agent. The agent is responsible for filing an NR4 Summary and slips with the CRA by March 31 of the following year and for remitting the appropriate tax each month.

Regardless of whether Form NR6 is filed, you must still file a Section 216 return after year-end to calculate your actual tax liability based on the actual rental income and expenses. The CRA will issue a refund for any overpaid tax, or require payment of any shortfall.

Dividends from Canadian Corporations

The default withholding tax rate on dividends from Canadian corporations is 25%. However, if a tax treaty exists between Canada and the non-resident’s country of residence, this rate may be reduced. For example, under the Canada-U.S. Tax Treaty, the withholding rate may be reduced to 15%.

To claim a reduced rate, Form NR301, the Declaration of Eligibility for Benefits (Reduced Tax) under a Tax Treaty for a Non-Resident Person, must be completed and submitted to the brokerage or financial institution, such as Wealthsimple. It is essential to inform the brokerage or platform of the non-resident status when you leave Canada. This applies to dividends from both private and public corporations.

Interest Income from Canadian Investments

Interest income, such as GICs and bonds, may be exempt from withholding tax if the lender is a third party – meaning not a relative – and the non-resident reports the interest income in their home country without filing a Canadian tax return. If a reduction or exemption is desired, Form NR301 should be filed with the bank or financial institution.

Employment Income Earned in Canada

If a non-resident works temporarily in Canada, their foreign employer must comply with Canadian payroll regulations, including deducting Canadian income tax, CPP, and EI premiums from your paycheck. uHowever, this may be avoided if a Regulation 102 waiver is obtained from the CRA. To potentially claim a refund of income tax deducted, a T1 non-resident tax return must be filed.

For American employees, the Canada-U.S. Tax Treaty allows for income to potentially be exempt if the non-resident was in Canada for less than 183 days and their U.S. company does not have a permanent establishment or branch office in Canada. Consult with your employer to make sure your tax obligations are met.

Self-Employed Working in Canada

In the case where you are not a Canadian tax resident, but come to Canada to perform a service, you are obligated to pay a withholding tax. For example, the Canadian company that pays the self-employed individual will withhold 15% from the invoice under regulation 105 of the Canadian Income Tax Act. While 15% is the standard withholding tax rate for non-resident self-employed individuals, the tax rate for artists and athletes is 23%. Self-employed individuals can claim a refund of the tax withheld if they do not have a permanent establishment in Canada and they file a T1 non-resident tax return.

Real Estate Sale

When a non-resident sells Canadian real estate, the buyer’s attorney holds back 25% of the gross sales proceeds. To obtain a refund, the non-resident must apply for a Certificate of Compliance from the CRA, which can take up to a year to be issued. With this application, you will have to make a payment of capital gains tax based on the profit of 25%. Once you receive the Certificate of Compliance, you will send a copy to the buyer’s lawyer to get the holdback released.

Finally, you can file a Section 116 (Procedures concerning the disposition of taxable Canadian property by non‑residents of Canada) with your Canadian tax return. Most taxpayers receive a partial refund because they can claim selling expenses and because graduated tax rates apply. For example, if the capital gain on the sale is $50,000, then you would pay $12,500 (25% tax rate) with the Certificate of Compliance. Then under Section 116, the calculation of taxes looks like this:

By electing under Section 116, you would pay $5,500 in taxes rather than the original $12,500 paid with the application.

Owning a Canadian Corporation as a Non-Resident

For non-residents who choose to retain ownership of their Canadian corporation after leaving the country, it is strongly recommended to work with a local Canadian accountant to ensure ongoing compliance with all tax obligations.

Upon becoming a non-resident of Canada, the status of your corporation will change from a Canadian-Controlled Private Corporation (CCPC) to a non-CCPC as of the date your residency changes. This change has significant tax implications.

Firstly, the corporate income tax rate increases substantially—from 12% for CCPCs to approximately 26% for non-CCPCs—on active business income. Secondly, any dividends paid from the corporation to you as a non-resident shareholder will be subject to a 25% withholding tax, unless a lower rate applies under a tax treaty between Canada and your country of residence.

These combined tax increases can significantly reduce the after-tax profits of your corporation and the dividends you receive. Therefore, it is important to carefully consider whether maintaining a Canadian corporation is beneficial after becoming a non-resident, and to plan accordingly with professional guidance.

Conclusion

Becoming a non-resident of Canada doesn’t eliminate all Canadian tax obligations. Income from Canadian sources, like pensions, rentals, and dividends, remains taxable. Understanding withholding taxes, utilizing tax treaties, and properly filing forms can minimize these liabilities. Maintaining non-resident status requires adhering to the 183-day rule and minimizing ties to Canada. Given the complexities, seeking professional tax advice tailored to your situation is crucial for compliance and financial optimization.