Everyone has different reasons for living abroad, whether for work, study, retirement, or simply to travel. Canadians have mixed feelings about taxes – while no one wants to see their hard-earned money go away, we also take pride in having healthcare and social programs that care for our neighbors and community members. But what if you’re not a Canadian citizen but live or work in the country? Do you have to pay provincial or federal taxes? The answer is maybe.
Because your tax obligations in Canada are based on your residency status, which is determined by the Canada Revenue Agency, your first task is to determine which category you fall into, so here are some quick and easy definitions:
| Factual Resident | You have significant ties to Canada, such as a home, a spouse or child in Canada. |
| Deemed resident | You lived outside Canada during the tax year, you are not considered to be a factual resident of Canada because you did not have significant residential ties, and you are a government employee, a member of the Canadian Forces including their overseas school staff, or working under a Global Affairs Canada assistance program.
OR You stayed in Canada for 183 days or more in the tax year, do not have significant residential ties with Canada, and are not considered a resident of another country under the terms of a tax treaty between Canada and that country. |
| Dual Resident | Typically someone who has a home in more than one country and is considered a resident for two countries. In this case, you will likely be required to file a tax return in Canada and the other country you are a resident in, which could lead to double taxation.
To avoid this, the Canadian government has entered tax treaties to determine which country should tax dual residents and if you are required to pay tax in one country, how you can receive tax credits in another. |
| Non-resident | You normally, customarily, or routinely reside in another country and are not considered a resident of Canada; or do not have significant residential ties in Canada; and you lived outside Canada throughout the tax year; or you stayed in Canada for less than 183 days in the tax year. |
| Deemed Non-Resident | You have some residential ties to Canada, but are considered to be a resident of another country by virtue of a tax treaty which Canada has with that country.
This rule trumps the rule for deemed residents, so it’ll apply even though you may have spent 183 days in Canada. |
If you’re a resident, this blog is probably not for you. Let’s explore the other options.
Deemed Resident
We have the 183-day rule, which states that if you stay in Canada for 183 days or more in a tax year, you are considered a resident and must pay taxes. If you lived outside the country for the tax year but still have a house, a spouse, or a child in Canada, you’re not a factual resident, but you’re not completely out of our hearts (or country), and some taxes still apply.
If you are a deemed resident, you must report your worldwide income from all sources, both inside and outside Canada, for the entire tax year, and you are entitled to all applicable deductions and non-refundable tax credits. You are subject to federal tax in this case, and instead of paying provincial or territorial tax, you will pay a federal surtax. You can claim all federal tax credits in this case, but no provincial or territorial tax credits. You may also qualify for certain credits and benefits, such as the GST/HST credit or the Canada Child Benefit.
Non-resident and Deemed Non-Residents
Unless a tax treaty with your country of residence specifies a lower rate, most types of income are subject to non-resident tax withholding at a rate of 25%. This includes the vast majority of pensions and investment income. For example, if you are a UK resident receiving a pension from Canada, the treaty withholding rate is zero.
If you’re unsure how much tax should be withheld based on your type of income and country of residence, the CRA has a non-resident tax calculator on their website.
You are not required to file a Canadian tax return if your income is subject to non-resident tax withholding (also known as Part XIII tax by the CRA). If your income is subject to Part 1 tax, you must file a Canadian tax return. This includes income from a Canadian employer, profits from a Canadian business, and capital gains from taxable Canadian property. It excludes mutual funds and publicly traded Canadian securities.
But don’t fret! People who receive income but are subject to non-resident tax withholding can file a return to their advantage. For example, if you are a non-resident with rental income, you must pay a non-resident tax withholding of 25% on the gross amount; however, you can file a return reporting only your net rental income and have it taxed at the usual graduated rates under Section 216, and similarly, with pension income under Section 217. That should save you a couple of Canadian dollars, but your country of origin may tax that income as well. C’est la vie.
Digital nomads from another country working in Canada
Here’s a popular scenario: your company allows you to work from anywhere – be it your home, your cottage, or a hotel – as long as you get your work done – and you’ve chosen Canada. You’re a digital nomad, and you may owe taxes in Canada… but it depends.
Most countries have tax treaties with Canada that include a clause stating that if you follow the 183-day rule, work for an employer from your country of residence, and your employer does not have a permanent establishment in Canada, you will be exempt from paying taxes in Canada. However, if you work for a Canadian employer, you must file a tax return. However, keep your Notice of Assessment because your country may allow you to claim a foreign tax credit.
Getting your biggest possible tax refund has never been easier. Talk to IDM tax experts now.
