Even if you are not a resident of Canada, you are required to pay tax on income, investments and capital gains earned from Canadian sources, and while you may consider yourself non-resident, the Canada Revenue Agency has generous residential ties provisions. Understanding residency requirements and how these affect taxation is the key to legally minimizing your tax obligation.
Often, the question of residency is not an issue. When you routinely live in another country where you are considered a resident, your tax status is probably that of a non-resident for Canadian income sources. However, the CRA considers significant residential ties when considering residency. Primary residential ties include owning a home in Canada, having a spouse or common-law partner or dependants who live in Canada. Secondary ties may play a factor as well, as the CRA considers residency status on a case-by-case basis. These factors include owning personal property, such as a car, in Canada; social ties through membership in recreational or religious groups; or Canadian documents, such as a passport, driver’s license or provincial health card. Your residential status in another country may also have bearing on your Canadian status.
2. Source Deductions for Canadian Income
“If you are a non-resident of Canada and you have income from Canadian sources, you are obligated to pay tax on those amounts. In many cases, Canadian taxes can be deducted at the source so you are not faced with a tax hit on your return,” says Wes Beharrell, certified financial planner and division director with Investors Group in London, Ontario. Inform the payer of your Canadian income that you are a non-resident of Canada for tax purposes as well as your country of residence, so that the correct amount is deducted for your income. Non-residents usually pay 25 percent on amounts subject to Part XIII tax. However, tax treaties and provisions within the Income Tax Act may allow lower rates.
3. Elective Filing for Non-Residents
If your Canadian income is subject to Part XIII tax deducted by the payer, your Canadian tax obligation is met, provided the correct amount for your earnings and country of residence is deducted, since tax treaties with your resident country may affect the taxation rate. In this case, you are not required to file a Canadian tax return. Part XIII is not refundable, so there is no reason to file a return unless you have rental income from property in Canada, timber royalties or some Canadian pension income. In these ,you can elect to file a return under section 216 for rental income and timber royalties and section 217 for pension income.
If you live outside of Canada but remain an employee for the government or approved agency, your status is usually either a factual or deemed resident, not a non-resident. The distinction between factual and deemed status comes down to residential ties. For example, a member of the Canadian Army who keeps a home in Canada while stationed overseas is a factual resident, while his platoon mate who sold his house in Canada may be considered a deemed resident. These distinctions have tax implications. While both factual and deemed residents must report income from all sources worldwide, deemed residents cannot claim provincial tax credits, while factual residents can.
An American citizen who lives in the U.S. and works in Canada would usually pay Canadian taxes on income from Canadian sources. The income tax treaty between Canada and the U.S. has some provisions that can affect this. If, under terms of the treaty, a U.S. citizen working in Canada is exempt from Canadian taxation, the worker can apply to have withheld taxes waived. As well, if an employee who works in Canada for an American company is paid directly by the American company, the employee is exempt from Canadian tax, as long as his residence is also American.
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References & Resources
- Canada Revenue Agency: Non-Residents of Canada
- Canada Revenue Agency: Determining Your Residency Status
- Wes Beharrell CFP, Division Director, Investors Group, London, Ontario