You might live abroad to study, work, volunteer or for an extended vacation. In this world of globalization, there are plenty of opportunities. And the Canada Revenue Agency (CRA) understands that. Hence, Canada has tax treaties with over 100 countries to ensure the worldwide income of Canadian residents is taxed in only one country, saving you from double taxation. However, you must declare your worldwide income in your Canadian tax returns to avail of this benefit. This article is to help Canadians moving abroad, temporarily or permanently, know their tax obligations in Canada.
Canadian Tax System at a Glance
The Canadian tax system collects income tax from Canadian residents on income earned in Canada and abroad. It also collects income tax from non-residents on income earned in Canada. Your residency status and place of income play a crucial role in determining your Canadian tax obligation.
Tax Filing Based on Your Income Tax Residential Status
For income tax purposes, your residency status depends on the number of days you reside in Canada and your residential ties (a home, spouse and dependents) in Canada.
Resident Canadian: The CRA classifies Canadian residents into three categories:
- Permanent residents who live and/or work in Canada permanently.
- Deemed residents who live in Canada for 183 days or more during the tax year and are not considered residents of another country that has a tax treaty with Canada
- Factual residents who live in Canada for less than 183 days during the tax year but have significant residential ties in Canada.
The number of days rule doesn’t apply to Canadian government staff and Canadian Armed Forces employees stationed abroad. Canadians between 18 and 35 can work and live abroad for up to two years and still be considered Canadian residents for tax purposes.
All permanent, deemed, and factual Canadian residents should file T1 returns and pay tax on their worldwide income in Canada. They can avail of all tax credits the CRA offers Canadians.
Non-resident Canadian: The CRA classifies non-residents into two categories:
- Non-residents who have lived abroad for more than 183 days and have no significant residential ties with Canada
- Deemed non-residents who have lived abroad for more than 183 days but have significant residential ties with Canada.
Non-residents could earn income from Canadian pensions, rental payments, dividends, and annuity payments (Part XIII) or employment, business, capital gains on the sale of Canadian property, Canadian scholarships, bursaries, or research grants (Part I tax).
The payor deducts a flat 25% tax at source before paying non-residents. These Canadians can file tax returns in Canada and reduce their tax liability by claiming eligible tax deductions.
Why Canadians Living Abroad Should File Income Tax Returns in Canada?
Both residents and non-residents must file income tax returns in Canada before April 30 and declare their worldwide taxable income, even if they have no tax obligations in Canada. Because Canadian taxpayers enjoy the following benefits:
- Double-tax credit that deducts the tax you paid in a country that has a tax treaty with Canada
- You are eligible for tax deductions, credits, and expenses.
For instance, non-residents earning rent can deduct repair costs and commissions to real estate brokers from their rental income to reduce their tax liability and claim refunds.
If you owe taxes and fail to file your returns by April 30, the CRA will charge a late-filing penalty of 5% of the balance owed plus another 1% due for each entire month of non-filing, up to 12 months. Repeated delays will result in additional fines.
If you omit any income or give false statements, the CRA will impose a minimum fine of $100 and up to 50% of the understated tax/overstated credits. You can avoid this penalty by voluntarily declaring a false statement or omission to the CRA.
Tax Filing for Canadians Permanently Living Abroad
If you leave Canada permanently, you are still a non-resident and must file returns as long as you earn income (Part XIII) from Canada. However, if you are giving up all your sources of income in Canada, you must file a departure tax return (T1243) for the year you leave. In this case, all your capital assets (land, investments) will be deemed disposed of at fair market value, and the resulting capital gain/loss will be included in Form T1243 to arrive at a departure tax.
Remember, filing and paying departure tax does not affect your Canadian citizenship.
Contact Black and Gill LLP in Toronto to Help You File Canadian Tax Returns from Abroad
While you can file Canadian tax returns online while living abroad, consulting a professional accountant to help you navigate the various taxes and benefits and comply with all reporting requirements is better. At Black and Gill LLP, our accountants can provide tax filing and planning services. To learn more about how Black and Gill LLP can provide you with the best accounting expertise, contact us online or call us at 416-477-7681.