Overseas Canadian Residents and Tax Returns
This is a column by regular contributor Clark
Recently, a friend went overseas (the US) on a temporary assignment. He is a perennial last-minute income tax filer and so, I joked that the tax deadline in the US is two weeks before the Canadian one and that he might want to advance his last-minute rush to April 15. After his departure, I started to wonder about how Canadians working or living overseas are treated for income tax purposes and the curiosity has resulted in this post.
The term “residency” is not defined in the Canadian Income Tax Act but the Canada Revenue Agency publishes an interpretation bulletin that provides guidelines to help taxpayers determine their residency. In Canada, all residents are required to pay tax on their yearly worldwide income, whether they are citizens or landed immigrants. When a person goes overseas for study, job, vacation, or on part-vacation, part-work arrangement, they will have to determine their residency status based on their residential ties before filing their tax return.
Residential ties include having a home in Canada, other property such as car, boat, furniture, lake-side cabin or cottage, a spouse or common law partner who lives in Canada, driver’s license, bank accounts, brokerage accounts, credit cards, health insurance with any province/territory and social ties in Canada. Based on these criteria, there are four types of “overseas Canadian residents”.
1) Factual Resident. If a person maintains significant residential ties to Canada while overseas for any reason, then they are considered as a Canadian resident for income tax purposes. However, if the person establishes residential ties in another country with which Canada has a tax treaty, then the person is considered as resident of that country and a deemed non-resident of Canada. As a factual resident, the tax-filer is treated as if they never left Canada and all the rules that apply to someone who lives in Canada all year are employed.
2) Deemed Resident. Members of the Canadian Forces, members of the Canadian Forces overseas school staff, government employees who are posted overseas, people working under a Canadian International Development Agency assistance program, dependent children of any of the first four categories, or persons exempt from tax on atleast 90% of their world income in the other country under an agreement or convention are considered as deemed residents. A deemed resident would report their worldwide income, claim all deductions and federal tax credits, and can apply for GST/HST credits. They would pay surtax instead of provincial/territorial tax and cannot claim any provincial/territorial tax credits. If they have business income from Canada, then they would pay provincial/territorial tax and can claim any related provincial/territorial credits.
3) Non-resident. If a person establishes permanent residence overseas and breaks their residential ties with Canada, then they become a non-resident. They are considered as an emigrant in the year they leave Canada and a non-resident in subsequent years. A non-resident would only have to report Canadian employment income, Canadian business income, taxable Canadian scholarships, grants and bursaries, and taxable capital gains from sale of Canadian property. If a non-resident has Canadian investment income, the tax payable is withheld before payment (to the non-resident) and this is usually the final tax obligation to Canada for that income. If the tax is not withheld, then the banking/brokerage institution should be informed that they are dealing with a non-resident account (investor’s responsibility).
4) Deemed Non-resident. A person who has residential ties with another country is considered a deemed non-resident of Canada if their ties with the other country have become such that they are considered a resident of that country under the tax treaty. Deemed non-residents fall under the same category as non-residents for income tax purposes.
Special Tax Credits
This post is just an overview and there are other scenarios/issues such as people working as missionaries, people who lived in Quebec before leaving Canada, eligibility for Canada Child Tax Benefit and Universal Child Tax Benefit based on the residency status, etc. Please refer to this Foreign Affairs and International Trade Canada page and browse the several links included there to know more.
Have any of you been (or are) overseas Canadian residents? What other pointers can you provide to fellow readers?
About the Author: Clark is a twenty-something Saskatchewan resident employed in the manufacturing sector. He repaid around $20,000 in student loans and has been working to build his investment portfolio as a DIY investor (not trader) while nurturing plans to retire early. He loves reading (and using the lessons learned) about personal finance, technology and minimalism.