What Canadians abroad need to know about filing taxes?

Whether you are volunteering in a school in Cambodia, enjoying slow living in the wilderness of north America, or running a shack in India, living abroad is such an enriching experience. It opens up new avenues for you and gives you a whole new perspective to look at life. But not matter which corner of the world you are in, you cannot escape the Canadian taxes. For a lot of Canadians who are living abroad, it is a big challenge to navigate through the tax rules and to understand how can they file their taxes.

In this chapter we provide all the required information. For starters, here are three main things that you need to know –

• Tax responsibilities are determined by your residency status, assessed annually by the CRA.
• If you earn income while on a work visa, it should be reported on your Canadian tax return.
• Tax treaties with various countries prevent double taxation on your earnings.

Tax Implications of Temporary Departure from Canada

Leaving Canada temporarily can have an impact on your tax obligations, depending on various factors, including your residency status, the duration of your absence, and the purpose of your temporary departure. Here are some key considerations.

1. Residency Status

• If you are considered a Canadian resident for tax purposes, you are generally required to report your worldwide income to the Canada Revenue Agency (CRA) and pay Canadian income tax on that income.
• If you leave Canada temporarily but maintain residential ties to the country, such as a home, spouse or dependents in Canada, and significant social ties, you may still be considered a resident for tax purposes.

2. Non-Resident Status

• If you leave Canada and sever most of your residential ties, you may become a non-resident for tax purposes. Non-residents are only required to pay Canadian tax on income earned from Canadian sources.
• As a non-resident, you may also be subject to withholding taxes on certain types of income, such as rental income, dividends, or pension income received from Canadian sources.

3. Reporting Requirements

• Canadian residents are required to report their worldwide income on their Canadian tax return, regardless of where it was earned.
• Non-residents, on the other hand, only need to report income earned from Canadian sources on their Canadian tax return.

4. Tax Treaties

• Canada has tax treaties with many countries to avoid double taxation. These treaties often have provisions for determining residency and taxing rights for individuals who move temporarily between treaty countries. Tax treaties can affect the tax obligations of individuals who are temporarily leaving Canada or returning to Canada.

5. Filing Obligations

• Even if you are a non-resident for tax purposes, you may still have to file a Canadian tax return if you received income from Canadian sources that is subject to withholding tax, or if you wish to claim a refund of overpaid taxes.

6. Consult a Tax Professional

• Tax rules can be complex, and the specific implications of leaving Canada temporarily can vary based on individual circumstances. It's advisable to consult a tax professional or the CRA to ensure you understand your tax obligations and comply with the tax laws.

Will I have to pay tax twice if I move abroad from Canada?

If you move abroad from Canada, you generally won't have to pay taxes twice on the same income, thanks to tax treaties and foreign tax credits. Here's how it typically works –

• Tax Treaties: Canada has tax treaties with many countries to prevent double taxation. These treaties specify rules for allocating taxing rights between Canada and the other country. In general, tax treaties ensure that income is only taxed in one country or that you receive a credit for taxes paid in one country when calculating your tax liability in the other.
• Foreign Tax Credits: If you are a Canadian resident and earn income abroad that is subject to foreign income tax, you can usually claim a foreign tax credit on your Canadian tax return. This credit offsets the Canadian tax you owe on the same income, reducing the risk of double taxation.
• Non-Resident Status: If you become a non-resident for tax purposes in Canada after moving abroad, your Canadian tax obligations will typically be limited to income earned from Canadian sources. You would pay taxes in your new country of residence on income earned there.
• Tax Planning: It's important to engage in tax planning and seek professional advice when moving abroad to ensure you benefit from tax treaties and credits effectively. Proper planning can help you minimize your overall tax liability and avoid double taxation.

While the general principle is to avoid double taxation, the specific rules can vary depending on the tax treaty between Canada and your new country of residence and the types of income you earn. It's essential to consult with a tax professional or tax advisor who is knowledgeable about international tax matters to ensure that you comply with the tax laws in both countries and take advantage of any available tax relief provisions.

What if I work abroad temporarily?

Each year, numerous Canadians make the decision to relocate to a foreign nation to pursue employment opportunities and acquire new skills. If you wish to join them, obtaining a temporary work visa is a crucial step.

For those who aspire to explore the world while maintaining their employment history, a working holiday visa could be the perfect solution. Thanks to Canada's reciprocal agreements with multiple countries, Canadians aged 18 to 35 have the opportunity to work and reside abroad for periods ranging from 1 to 2 years.

Regardless of the type of visa you hold, it's important to note that the Canada Revenue Agency (CRA) still classifies you as a Canadian resident and applies taxation as if you never left. Therefore, you should file your taxes in the usual manner, ensuring that you declare all sources of income, regardless of where in the world it was earned.

What if I decide to move abroad permanently?

When you make the decision to relocate to another country on a permanent basis, the Canada Revenue Agency (CRA) classifies you as a non-resident for tax purposes. However, before you fully depart, there is one important tax obligation you must fulfil – filing one last Canadian tax return.

Once you have completed this final return and officially become a non-resident, your direct tax-related interactions with the CRA are generally concluded. However, there is a notable exception. If you continue to receive income from Canadian sources, such as pensions, investments, business interests, or the sale of Canadian property, the CRA expects you to maintain your filing obligations, regardless of your new global location.

As long as you have ongoing financial ties to Canada and continue to earn income from Canadian sources, you are required to file tax returns with the CRA, even if you reside in a different country. These filings are essential to ensure that you fulfil your Canadian tax responsibilities and adhere to any applicable tax treaties or regulations that may prevent double taxation on your Canadian income.

Becoming a non-resident for tax purposes when moving abroad does not necessarily free you from Canadian tax obligations. If you still have income generated from Canadian sources, the responsibility to file tax returns with the CRA persists, regardless of your international residence. It's crucial to remain compliant with these requirements and seek guidance from tax professionals to navigate any complexities associated with international taxation.

Factors that determine how you are taxed in Canada

Your taxation status is determined by your residency status, and the Canada Revenue Agency (CRA) classifies individuals into one of five distinct categories for tax purposes, applying the corresponding tax regulations accordingly.