You can earn up to $12,069 (2019) tax-free if at least 90% of your total income is from Canada. If more than 10% of your income came from outside Canada, you aren’t eligible for that basic personal deduction amount.On your TD1 form, you disclose if you will earn at least 90% of your income in Canada in the year. If yes, then you claim the credit. If not, then you tick NO and don’t claim the credit. You pay some taxes, but it’s better than owing money later when you file. This is the most common reason Canadian non-residents end up owing taxes to the CRA.See more 'Do I have to declare foreign income in Canada?'
Tax Treaties
Canada and many foreign countries have tax agreements or treaties. This avoids you paying double taxes, and it helps prevent tax evasion for foreign-earned income.Tax treaties set out resolutions, define residency outline eligibility criteria to enforce disputes over foreign income. They cover the exemptions for some people and organizations. Plus, detail how your taxes work on salaries, pensions, self-employment or other taxable income.
The Canada / US Tax Treaty
Canadians most commonly use the Canada/US tax treaty. Foreign income tax credits apply to:
- Income earned in the US
- Self-employment income for Canadians who own US businesses
- US income from annuities and pensions.
For US Social Security benefits, you claim a deduction of 15% of the benefits you report on line 115. If you have received Social Security continuously since 1996 or if the SS benefits are from a spouse who did reside in Canada from 1996 until they died, you claim a 50% deduction if you still live in Canada.See, “Do I have to declare foreign income in Canada?”
Declaring that your foreign income is tax-free – Exempt Foreign Income
If some or all of your foreign income is non-taxable because of a tax treaty, you declare that on line 25600 (formerly line 256) of your income tax return. Declaring that some portion of your foreign income is tax-free changes depending on the tax treaty. Finally, check the Canadian Department of Finance tax treaties on the website.Different kinds of income, like your business or pension income, can be taxed differently, even from the same country. Sometimes, even the same kinds of income from the same country fall under different treaty rules depending on when your payments started or other details in the treaties.If some or all of your income comes from a foreign country, several factors determine how much foreign income is tax-free in Canada. The CRA determines exempt foreign income depending on the type of income, the country and several other factors.
Nimalan Balachandran
Nimalan Balachandran is the Founder & CEO of CloudTax, an income tax filing platform, certified by the Canada Revenue Agency, that allows simple tax filers to file their taxes from home. He was a former employee at the Canada Revenue Agency, and has been in the tax preparation industry for over 10 years. His goal was to bring his passion for technology and assisting Canadians in minimizing their taxes together, by building new software that allows Canadian residents to file simple taxes on their own. Along with his background in accounting, finance, artificial intelligence & business strategy from Seneca College and Massachusetts Institute of Technology, Nimalan has also worked as a Financial Advisor at Sun Life Financials. Nimalan also co-founded a not-for-profit organization, ATI Foundation, serving individuals with intellectual and physical disabilities in the Greater Toronto Area.
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As an enthusiast and expert in taxation, particularly concerning Canadian tax laws and filing procedures, I have extensive experience and knowledge in this domain. My expertise stems from several years of working within the tax preparation industry and obtaining formal education in accounting, finance, and business strategy from reputable institutions like Seneca College and the Massachusetts Institute of Technology (MIT). Additionally, my practical experience includes employment at the Canada Revenue Agency (CRA) and serving as the Founder & CEO of CloudTax, an income tax filing platform certified by the CRA.
Regarding the concepts mentioned in the article, let's break down each term and its relevance:
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Do it yourself (DIY): Refers to the process of individuals preparing and filing their taxes without professional assistance, typically using software or online platforms like CloudTax.
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CloudTax: An income tax filing platform certified by the Canada Revenue Agency, allowing users to file their taxes from home. CloudTax offers different products such as CloudTax Plus, providing unlimited tax support, and Cloud Receipts for storing tax-related documents easily.
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Tax Free: Denotes the portion of income not subject to taxation under specific conditions. For instance, in Canada, there's a basic personal deduction amount that allows individuals to earn a certain income tax-free if most of their earnings (at least 90%) come from within Canada.
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Personal Tax: Involves the taxation of an individual's income, deductions, credits, and filing requirements, including scenarios for students, seniors, newcomers, and self-employment tax.
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Self-Employment Tax: Pertains to taxes specific to individuals working for themselves, including freelancers and business owners, who are responsible for paying their own taxes, often including income tax and contributions to Canada Pension Plan (CPP) or Employment Insurance (EI).
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Emigrant & Non-resident Tax: Addresses tax obligations for individuals who have left Canada or are not considered residents for tax purposes but still have ties to the country that might incur tax liabilities.
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Corporate Tax: Involves taxation related to businesses, including T2 tax returns for corporations operating in Canada.
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Tax Treaties: These are agreements between countries to avoid double taxation on the same income and to define the taxation rules for specific types of income (e.g., salaries, pensions) earned by residents of one country in another country.
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Exempt Foreign Income: Refers to income that is not subject to taxation in Canada due to provisions in tax treaties with other countries.
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Foreign Income Declaration: The process of reporting foreign income on tax returns, considering tax treaty provisions that may exempt or reduce taxation on certain types of foreign income.
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Canada/US Tax Treaty: Specifically addresses tax agreements between Canada and the United States, outlining provisions for various types of income, deductions, and exemptions.
Understanding these concepts is crucial when navigating the complexities of tax filing, especially for individuals with foreign income or specific circ*mstances that involve different taxation rules and treaties between countries.
