Taxation can be tricky at the best of times, and when you’re living and working abroad, things can get even more complicated. The Government of Canada will require you to continue paying taxes in Canada if you’re living or working abroad, as long as you maintain significant ties to Canada.
In this article, we will explore the circumstances under which you must pay taxes while living abroad, the circumstances under which you don’t, whether or not you can be double-taxed, and more.
Canadian Residents Living Abroad
Canadians living abroad can expect to pay taxes on any income—through work, pensions, or other sources—as long as they maintain residential ties to Canada.
While working in a foreign country, you may earn income from foreign companies, even in foreign currencies. But as long as you maintain residential ties to Canada, you must still file a tax return and pay taxes on this income.
Converting the value of foreign currency to Canadian dollars for tax purposes can be done in two ways:
- Using the Bank of Canada exchange rate on the day you were paid
- Using the Bank of Canada’s average annual exchange rate if you were paid several times over the year
Both of these methods are valid, but you must use them consistently throughout your tax return; you should not, for example, use the daily exchange rate sometimes and the annual exchange rate other times for the same income source.
Paying Taxes on Foreign Income – The Foreign Tax Credit
While living in a foreign country, you may be subject to taxation from that nation. The Government of Canada wants to ensure you are not double taxed; to help with this, it created a foreign tax credit.
In addition to the foreign tax credit, Canada has tax treaties with over 100 countries that could limit the amount of taxes you need to pay, either to Canada or the nation you’re living in. Verify whether or not there is a tax treaty with the country you’re staying in to avoid double taxation and reduce or eliminate the foreign taxes you have to pay.
Studying or Vacationing Abroad
When studying or vacationing abroad, you may still have to pay taxes on income earned while in a foreign country. This income may include pensions, profits from property that’s been sold (capital gains tax) and other forms of taxation.
Why Residents Living Abroad Still Pay Taxes
For several reasons, people with residential ties to Canada still need to pay Canadian income tax. They’re likely to return to Canada and use the infrastructure and social services available here; they may also need consular help, which taxes help pay. Tax obligations on foreign-earned income may seem unfair, but there’s good reason to pay Canadian tax if you’re still a resident!
Non-residents (former residents of Canada) will still have to file their federal income tax return and pay Canadian taxes on the tax year in which they became non-residents; they only need to pay income tax until the day they became non-residents.
In addition, non-residents may still have to pay taxes on certain Canadian sources of income, like pensions, sales of Canadian property, and Canadian investments.
Understanding Your Residency Status
Changes to your residency status can lead to changes in your tax status. The Government of Canada can help you determine your residency status.
Tax implications vary significantly depending on your residency status, tax treaties, etc. Need help with tax preparation while working or living abroad? Contact us today.