Tax Credits for Canadians Working Abroad

Under the Canadian tax system, residents of Canada must declare their worldwide income from all sources and pay their taxes accordingly. However, the Overseas Employment Tax Credit and the Federal Foreign Tax Credit can both be used to lessen the taxes of people who have worked abroad and to ensure that there is no double taxation of the income earned in another country.

The OETC applies to Canadian residents who worked in foreign countries in specific fields, which are listed in the Income Tax Act. They are:

• The exploration for or exploitation of petroleum, natural gas, minerals, or other similar resources
• Any construction, installation, agricultural, or engineering activity
• Any activity performed under contract with the United Nations.

Additionally, the work period must have lasted more than 6 consecutive months and at least 90 percent of the work must have been performed outside of Canada.

If you meet these criteria, your income will be designated as Qualifying Foreign Employment Income (QFEI). For new QFEI, the OETC is being phased out and 2015 is the last year to claim the credit. For 2015, you can claim 20 percent of your QFEI to a maximum of $20,000.

However, the phase-out does not apply to QFEI earned through a contract that predates March 29, 2012. In this case, you can claim a credit of 80 percent of your QFEI up to a maximum of $100,000.

If you became or were deemed to be a resident of Canada during the year, your credit will also be limited to the proportionate number of days during which you were a resident.

To calculate and claim the OETC, use Form T626 Overseas Employment Tax Credit and submit it with your tax return.

The FTC provides relief to Canadians who earn income abroad and have to pay taxes in the foreign country where the income is earned. Canadian laws allow you to claim a credit on your federal taxes to avoid double taxation.

You must report the income earned and taxes paid abroad on your Canadian tax return. Convert any foreign currencies into Canadian dollars using the Bank of Canada official exchange rate that can be found on its website. You should use the rate for the day that you received the income unless you are receiving periodic payments, in which case you can use the average annual exchange rate.

The FTC can lower your federal taxes to zero if you have paid more in the foreign country than you owe in Canada. However, the FTC cannot be used to create or augment a tax refund. Any unused portion of the credit can be carried back up to three years and forward up to ten years.

To claim the credit, use Form T2209 Federal Foreign Tax Credit and submit it with your income tax return. You must also attach documents proving that you have paid taxes abroad.