Canadians have mixed feelings about taxes – while no one likes to see their hard-earned money go away, we also take pride in having healthcare and social programs that take care of our neighbours and members of our communities. But what if you’re not actually a resident of Canada but you’re living or working here? Do you need to contribute to provincial or federal taxes? The answer is maybe.
Are you a resident, non-resident or a deemed resident?
Your first job is to figure out what category you fall into, so here are some quick and easy definitions.
Resident | You have significant ties to Canada, such as a home, a spouse or child in Canada. |
Deemed resident | You lived outside Canada during the tax year, you are not considered to be a factual resident of Canada because you did not have significant residential ties, and you are a government employee, a member of the Canadian Forces including their overseas school staff, or working under a Global Affairs Canada assistance program. OR You stayed in Canada for 183 days or more in the tax year, do not have significant residential ties with Canada, and are not considered a resident of another country under the terms of a tax treaty between Canada and that country. |
Non-resident | You normally, customarily, or routinely live in another country and are not considered a resident of Canada. |
Deemed Non-Resident | You have some residential ties to Canada, but are considered to be a resident of another country by virtue of a tax treaty which Canada has with that country. This rule trumps the rule for deemed residents, so it’ll apply even though you may have spent 183 days in Canada. |
If you’re a resident, this blog is probably not for you. Let’s explore the other two options.
Deemed resident
We have this 183 days rule that simply means if you stay in Canada for 183 days or more in one tax year, you’re deemed a resident and have to pay taxes. If you lived outside the country for the tax year, but still have a house, a spouse or child in Canada, you’re not a factual resident but you’re still not all the way out of our hearts (and country), and some taxes apply.
If you’re a deemed resident, you have to report your world income from all sources, both inside and outside Canada for the entire tax year, and you can claim all deductions and non-refundable tax credits that apply to you. In this case, you’re subject to federal tax, and instead of paying provincial or territorial tax, you'll pay a federal surtax. In this, you can claim all federal tax credits, but you can’t claim provincial or territorial tax credits. Note that this might be different if before you left Canada you were living in Quebec. You might also be eligible to get some credits and benefits, such as the GST/HST credit or the Canada Child Benefit.
Non-resident and Deemed Non-Residents
Most types of income are subject to non-resident tax withholding at the rate of 25%, unless a tax treaty with your country of residence specifies a lower rate. This includes most types of pensions and investment income. For example, if you’re a resident of the UK getting a pension from Canada, the withholding rate under the treaty is zero.
If you’re not sure how much tax should be withheld based on the type of income you’re receiving and your country of residence, you’re in luck – the CRA has a non-resident tax calculator on their website.
If your income is subject to non-resident tax withholding (which the CRA calls Part XIII tax), you aren’t required to file a Canadian tax return. You’re only required to file a Canadian tax return if your income is subject to Part 1 tax. This includes income from a Canadian employer, having a business in Canada, or capital gains from taxable Canadian property. It doesn’t include publicly traded Canadian securities or mutual funds.
But don’t fret! There are ways for people who are receiving income but are subject to non-resident tax withholding to file a return to their benefit. For example, if you’re a non-resident with rental income, you are subject to non-resident tax withholding of 25% on the gross amount – however – you can file a return to report only your net rental income and have it taxed at the usual graduated rates under something called Section 216, and similarly, with pension income under Section 217. That should save you a couple Canadian dollars, but your country of origin might also have a tax on that income. C’est la vie.
Digital nomads from another country working in Canada
Here’s a scenario that has massively gained in popularity: your company allows you to work from wherever – be it your home, your cottage or a hotel – anywhere as long as you get your work done – and you’ve chosen Canada. You’re what is called a digital nomad, and you may owe taxes in Canada… but it depends.
Canada has tax treaties with most countries which contain a clause stating that if you’re abiding by the 183 days rule, you’re working for an employer from your country of residence, and your employer doesn’t have a permanent establishment in Canada, you’ll be exempt from paying taxes in Canada. But, if you’re working for a Canadian employer, you will need to file a tax return. Save your Notice of Assessment though – your country might allow you to claim a foreign tax credit.
There is no one-size-fits-all approach to taxes. Whether you’re a newcomer to Canada, or a U.S. expat living in the great white north, or not surewhere you fall, H&R Block is here to help. Choose from one of four convenient ways to file: File in an Office, Drop-off at an Office, Remote Tax Expert, or Do It Yourself Tax Software.
As an expert in taxation and residency status for individuals in Canada, I bring a wealth of knowledge and experience to guide you through the complexities of the Canadian tax system. With a deep understanding of the rules and regulations, I can demystify the intricate concepts surrounding residency classifications, tax obligations, and the implications for individuals living or working in Canada.
Let's break down the key concepts discussed in the article:
-
Resident:
- Definition: Individuals with significant ties to Canada, such as a home, a spouse, or a child in Canada.
- Tax Obligation: Subject to federal and provincial/territorial taxes.
-
Deemed Resident:
- Definition: Individuals who either lived outside Canada during the tax year without significant residential ties or stayed in Canada for 183 days or more without significant ties to Canada.
- Tax Obligation: Report world income, subject to federal tax and federal surtax. Eligible for federal tax credits but not provincial or territorial tax credits.
-
Non-Resident:
- Definition: Individuals who normally, customarily, or routinely live in another country and are not considered a resident of Canada.
- Tax Obligation: Most types of income subject to non-resident tax withholding at 25%, unless a tax treaty specifies a lower rate.
-
Deemed Non-Resident:
- Definition: Individuals with some residential ties to Canada but considered a resident of another country by virtue of a tax treaty.
- Tax Obligation: Subject to non-resident tax withholding unless a tax treaty specifies a lower rate.
-
Non-Resident Tax Withholding:
- Rate: 25% on most types of income.
- Exceptions: Tax treaties may specify a lower withholding rate.
-
Filing Requirements:
- Part XIII Tax: Applicable to non-resident tax withholding (25% rate).
- Part 1 Tax: Required for income from a Canadian employer, having a business in Canada, or capital gains from taxable Canadian property.
-
Special Cases:
- Digital Nomads: Tax obligations depend on factors such as adherence to the 183 days rule, working for a foreign employer, and the presence of a permanent establishment in Canada.
-
Filing Strategies:
- Non-Residents with Rental or Pension Income: Can file a return to report net income and benefit from graduated tax rates under Sections 216 and 217.
In conclusion, navigating the Canadian tax landscape requires a clear understanding of residency classifications and corresponding tax implications. Whether you're a resident, deemed resident, non-resident, or deemed non-resident, it's essential to be aware of your tax obligations and potential benefits. If you find yourself in a unique situation, such as being a digital nomad, seeking professional assistance from tax experts like H&R Block can ensure accurate and compliant tax filings.
