The Canadian tax system is based on residency and not on citizenship, unlike its neighbor to the South. That means the main element of the tax system in Canada is your residency. It leads to the laws that those who are residents of Canada should declare their worldwide income. However, non-residents are only taxed on Canadian-sourced income. Hence you need to correctly determine your residency status to be aware of your Canadian tax liability.
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Canadian Non-resident vs. Resident for tax purposes
To find out if you are non-resident or resident for tax purposes, you need to take into consideration a few factors. Do you know what matters when you ascertain your residency status? That would be the following: reason and duration of your stay inside and outside Canada, the ties you form in another country, how frequently you visit Canada and residential ties you have with Canada. Based on these circumstances you can determine your residency status for tax purposes.
There are over 1,5 million Americans residing in Canada, either full-time or part-time. If you are one of them, you better be aware of Tax traps for U.S. citizens living and working in Canada. And besides a large number of Americans living in Canada, every year there are 300,000 new immigrants moving to Canada. We want to help each of you to understand the topic of Canadian tax residency and your tax obligations.
Canadian Tax Fact #1: As a non-resident of Canada, you have to pay tax on income received from within Canada. If you are considered a resident, then you have to report and pay tax on your worldwide income.
One of the most important factors which impact your residential status in Canada is your residential ties with the country. Home, spouse or common-law partner or dependants in Canada are considered to be significant residential ties to the country.
Following secondary residential ties are applicable to determining your residency: personal property (i.e. car, furniture), social ties and economic ties (i.e. membership in Canadian recreational organisations, bank accounts in Canada), Canadian passport, driver’s license and health insurance with a Canadian province or territory. Also your residential status in another country may also impact your Canadian status.
Am I a tax resident of Canada?
There are 4 different types of resident and non-resident statuses for Canadian income tax purposes. You will be considered either a factual resident, deemed resident, a non-resident or a deemed non-resident. Let’s find out if you are a tax resident of Canada.
You are a factual resident for tax purposes if you:
- Keep significant residential ties in Canada while you live and travel outside the country
- Working temporarily outside Canada
- Teaching or attending school in a foreign country
- Commuting from Canada to US workplace
- Vacationing outside Canada
Just leaving Canada isn’t enough to not be considered a resident for income tax purposes. However, you may be considered a deemed non-resident if you established ties in a country which has a tax treaty with Canada and you are considered to be a resident there.
You are a non-resident for tax purposes if you:
- Routinely or generally live in another country and not considered a resident of Canada
- Live outside Canada throughout the tax year and do not have significant residential ties in Canada, or
- Stay in Canada for less than 183 days in the tax year
Canadian Tax Fact #2: 183-day rule applies when you calculate the number of days you spent in Canada during the tax year. They include days you worked in Canada, attended a university or college there, or days you stayed in Canada on vacation, including weekend trips. If you lived in the United States and commuted to work in Canada, do not include commuting days in the calculation.
Canadian Tax Fact #3: As non-residents, you have to pay taxes only on certain income from Canadian sources.
You are a deemed resident of Canada for tax purposes if:
- You are a federal, provincial or territorial government employee or a member of the Canadian Forces including their overseas school staff
- You temporarily stayed in Canada for 183 days or more in tax tax year and another country doesn’t consider you a resident under the terms of a tax treaty between Canada and that country.
Canadian Tax Fact #4: You may also be deemed resident if you are a person who is exempt from tax in other countries, which has a tax treaty with Canada or another convention, on 90% or more of their income from all sources because of their relationship to a resident (including deemed resident) of Canada.
You are a deemed non-resident of Canada for tax purposes if you are a factual resident, deemed resident of Canada and you are a resident of another country which has a tax treaty with Canada. As a deemed non-resident you need to declare income from Canadian sources and tax rules as for a non-resident of Canada will apply.
What are my Canadian tax obligations?
Depending on your tax residency status, you have different tax obligations. If you are a factual resident, then your income is taxed the same way as if you still live in Canada. You will need to report all worldwide income and you can claim all federal, provincial and territorial deductions and tax credits that apply to you. You will need to file your tax return on or before April 30th of the year after the tax year. If you, your common-in-law partner or your spouse carried on a business in Canada, then you can file your returns on or before June 15th the following year after the tax year.
As a non-resident of Canada, you will have to pay tax on Canadian-sourced income. Depending on the type of income you receive, you will have different requirements to pay tax and file an income tax return. In many cases you can deduct Canadian taxes at the source and escape being hit with a tax on your return. You will need to inform your employer or other payer of your Canadian income about your status of non-resident for tax purposes. And they can deduct the applicable tax from your income. As a non-resident, you will usually pay 25% on amount subject to Part XIII tax. They include dividends, rental and royalty payments, pension payments and CPP/QPP benefits, retiring allowances, RRSP/RRIF/annuity payments etc. Tax treaty between your home country and Canada may reduce the tax rate for this type of income.
If you are deemed resident, you must report income from all sources, both inside and outside Canada. You can also claim all deductions and non-refundable tax credits. However, you are limited to claim federal tax credits only and you are subject to federal tax.
Summary of Canadian tax residency and what to do next
It is possible to be a resident of Canada for income tax purposes and be a tax resident of another country at the same time. In this case, if the other country and Canada has a tax treaty between them, it may provide “tie-breaker” rule and you will be deemed to be a resident of only one of the countries. The rule will determine a permanent home based on a test of where your home is. The relevant factor here is a permanence of home and if it’s only in one country, then you will be considered a resident there. You can also avoid a double taxation by claiming foreign tax credits in Canada or other countries. It will help you to avoid paying double tax or at least minimise it.
Canadian tax system is quite complex and complicated. It requires a professional review of your tax situation and determination of your residency status. We recommend obtaining advice from a professional tax advisor.
Our CEO and founder of 1040 Abroad, Olivier Wagner, is an expert of Canadian Tax residency as a dual citizen (U.S. and France) living in Canada. We offer a private one-on-one consultations to discuss your Canadian tax situation and to customise tax solutions for you.
Contact us here if you want to book an appointment with Olivier Wagner.