Tax rules for Canadians abroad
What you need to know before earning income abroad
As more students and young adults take time out to indulge in longer-term international travel, income tax filing is probably the last thing they think about.
When weeks abroad stretch into months, however, picking up some extra income is often the best way to make ends meet. At that point, it pays to know the ins and outs of what types of income you need to report — and how — when filing tax returns.
If you don't pay attention, you could end up paying double taxes on income earned in foreign countries or simply end up mired in more paperwork than you need to be. Worse yet, you could get caught out for non-payment and be saddled with all the headaches that go with it.
How you manage your income reporting depends on the laws of the country you're working in, says Philippe Brideau, a spokesperson for the public affairs branch of the Canada Revenue Agency in Ottawa.
Ways to avoid double dipping
Scenarios can differ depending on your location, your tax status at home and the conditions of the treaty agreement, if any, the country has with Canada.
For example, your foreign income — even if it's a few hours a week serving coffee at a local café — may be taxed at source in that country. In all likelihood, you will also have to report that same income on your Canadian tax return because you are still a resident of Canada.
Tax filing for foreign income
Understanding your tax filing requirements for foreign income can save you a lot of administrative headaches during and after your travels. Below are some guidelines and resources from Revenue Canada to help you get started:
- A person leaving Canada temporarily is considered a "factual resident" of Canada, which means their income earned inside and outside the country is taxable.
- Individuals or students working or studying abroad may claim all deductions and credits that apply to them. For information, refer to pamphlet T4131, Canadian Residents Abroad, and P105, Students and Income Tax. Some useful links include:
- To prevent double taxation, check to see if the country in which you are working has a bilateral agreement with Canada. Canada has 86 tax treaties in force, each of which may have its own nuances, so it's important to do your research. These can be found on the Department of Finance website.
- Canadian residents who pay tax on income while in another country may be able to claim a foreign tax credit for taxes paid elsewhere when filing their Canadian return. Information about the foreign tax credit is available in the General Income Tax and Benefit Guide and in Interpretation Bulletin IT-270R3, Foreign Tax Credit.
"In such a circumstance, the individual could be subject to tax in both countries on the same income," Brideau said.
However, there are provisions to help you avoid paying tax twice on the same income if you are earning income in a country that has a tax treaty with Canada.
For example, there may be a provision that will restrict or exempt you from income taxation in a given country, but you will still be required to report that income on your personal income tax return in Canada under the foreign-sourced income section.
In other cases where both countries retain the right to tax your income, you may be able to deduct foreign tax paid on your Canadian income tax form. (See sidebar.)
To avoid the risk of double taxation, Brideau advises individuals to consult the provisions of the treaty in question before they go abroad to make sure they know what to expect and what paperwork needs to be filled out in advance.
No one-size-fits-all approach
Pramen Prasad, managing partner with Toronto CA Solutions Inc., a business advisory services firm, says that when it comes to reporting foreign income, there isn't a one-size-fits-all approach.
"It's important to be aware of the tax implications of earning income worldwide," Prasad said. "But there are also different scenarios depending on your work/education status, what type of work visa you have, the jurisdiction you're in, etc."
There are some general rules of thumb that can provide the baseline for making the right filing decisions, he said.
"The first thing to look at is your present filing position," says Prasad. "The key issue is that taxation is based on residency, not citizenship. If you are not severing your residency ties with Canada while abroad, you are still considered a resident for taxation purposes and must prepare and file a Canadian tax return reporting all income earned."
In some cases, a person will break ties with Canada. This may apply if you are spending extensive time abroad and perhaps working in a "tax friendly" jurisdiction. Ties can be reinstated on your return.
This can be a major undertaking, however, since you have to ensure you don't have Canadian bank accounts or residence and that you have cancelled your health coverage. Cancelling your driver's licence is optional.
While it all seems like a lot to take in when you're caught up in the excitement of planning an extended trip abroad, staying ahead of the game is not as complicated as it sounds. It just means a bit of homework ahead of time, Prasad says.
"If someone is looking to study or work abroad, it pays to get some tax advice or do some web research," he said. "There is plenty of information out there."
- A previous version of this story incorrectly stated that China's currency is known as the yen. In fact it is known as the yuan or Renminbi.Oct 11, 2013 1:50 AM ET