Want to study, work or retire abroad? The opportunity to travel and immerse yourself in another culture is exciting. However, like any adventure, there are always logistics to consider. One thing you might be wondering is how such a big move will affect your tax situation? Where do you file your taxes when you relocate to another country? Do you still pay taxes in Canada, your new country, or both?
Well, like anything in life, it depends.
Your residency status determines how much tax you must pay and what tax credits and deductions you can claim. Tax treaties and foreign tax credits are also factors you need to investigate. Fortunately, a little prep goes a long way.
Here we break it all down and offer a few important tips to help get you rolling.
Residency Status
Generally speaking, there are two types of residency status: factual resident and non-resident.
Factual resident: You are a factual resident of Canada if you maintain significant residential ties while living or travelling outside the country. This means that you have a home, a spouse or common-law partner, or dependants in Canada, or maintain personal property, bank accounts, investments, social ties, health insurance, driver’s licence, etc. within the country.
As a factual resident, you must report your worldwide income on your Canadian tax return – which includes income earned both inside and outside Canada — and pay tax on all of it. You can also claim all the Canadian tax credits and deductions that apply to you as well.
Non-resident: You are a non-resident of Canada if you sever most or all your residential ties when you leave the country. This means that you do not have a home, a spouse or common-law partner, or dependants in Canada, or that you give up most of your personal property, bank accounts, investments, social ties, health insurance, driver’s licence, etc.
Non-residents only report and pay tax on income earned in Canada. You cannot claim most of the tax credits and deductions that apply to residents.
Identifying your residency status can sometimes be complex, depending on your specific situation. If you are not sure, you should contact the Canada Revenue Agency (CRA) for a determination of your residency status before leaving the country.
Tax Treaties
Canada has tax treaties with many countries to avoid double taxation of the same income. These treaties also define how certain types of income are taxed by each country.
For example, some treaties allow Canada to tax pensions paid to non-residents, while others exempt them from Canadian tax. If you are living in a country that has a tax treaty with Canada, you should check the terms of the treaty to see how it affects your tax obligations. You don’t want to be paying twice the tax if you don’t have to!
Foreign Tax Credit
If you are a factual resident of Canada who pays tax to another country on your foreign income, you may be able to claim a foreign tax credit on your Canadian tax return. This credit reduces your Canadian tax payable by the amount of foreign tax paid on the same income.
To claim this credit, you must report your foreign income and taxes paid in Canadian dollars and attach a copy of the foreign tax slip or receipt to your return.
Tax Tips
If you’ve been dreaming of studying, working, or retiring abroad, here is a summary of the most important tax tips to keep in mind:
- Inform the CRA before you leave Canada and if unsure, confirm your residency status.
- Keep records of your residential ties with Canada and the country where you live.
- File your Canadian tax return by the deadline – April 30 for most individuals – and pay any balance owing.
- Check the tax treaty between Canada and the country where you live to see how it affects your tax obligations.
- Claim the foreign tax credit if you pay tax to another country on your foreign income.
- Consult a tax professional if you need help with your tax situation.
Taxation for Canadians abroad can be complicated and vary depending on your circumstances. By following these tips and staying informed, you can avoid unpleasant surprises and make the most of your experience abroad.
Still feeling a bit uncertain? Please do not hesitate to contact us and we’ll work with you to ensure you have all the information you need before you go.
Wishing you the best of luck on your journey!
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