Globalization has opened multitudinous opportunities for individuals across countries. A person in India can study in Canada, a Canadian can work in Dubai, and a UK resident can have property or business in Canada. The possibilities are endless. These possibilities have given rise to the complex non-resident tax structure. The Canada Revenue Agency (CRA) tackles this challenge by basing its tax system on the residency status and the source of income.

If you stay in Canada, you pay tax in Canada on your worldwide income. If you don’t stay in Canada, you only pay tax on the income you earn from Canada. This article will discuss the nuances of the second scenario, where one becomes a non-resident for tax purposes.

How Canadian Taxes Work for Non-Residents

Many have a misconception that you have no tax obligation to the CRA once you become a non-resident. In fact, their obligations to the CRA change dramatically. Non-residents need to understand residency status, departure tax rules, reporting obligations, non-resident withholding tax, and tax treaties.

Residency status: Beginning with residency status, just leaving Canada is not enough. If you moved out of Canada and have not severed significant residential ties, you may still be a resident and face an obligation to file and pay tax as a resident. Significant residential ties mean you have

• Primary: a home, spouse, or dependents in Canada or
• Secondary: a personal property (furniture, vehicle), social (memberships), economic (bank account, credit card, job or business), or a driver’s license or health insurance in Canada.

Jacob moved to the UK for a job but continued to use his Canadian credit card and driver’s licence. This complicated his residency status for income tax purposes. He did not file taxes in Canada, thinking he no longer had that obligation, until the CRA noticed.

Departure tax rules: When Jacob left Canada, he should have severed all ties (primary and secondary) to become a non-resident for tax purposes and must file a departure income tax return. In this return, the CRA deems that Jacob sold his worldwide assets, including investments, foreign shares, and certain properties, at fair market value. He pays the necessary tax on all his assets. Once his non-resident status begins, only income earned in Canada is taxable.

Non-resident withholding tax: Since Jacob worked in Canada for a long time, he has a Registered Retirement Savings Plan (RRSP), Canada Pension Plan (CPP), and other investments. All this Canada-sourced income is subject to a non-resident withholding tax of 25% unless reduced by treaty.

Tax Treaty: Globalization has led Canada to sign double tax avoidance treaties with several countries, under which the signing countries agree to reduced withholding taxes on non-residents. Non-residents can claim the tax they paid to Canada as a foreign tax credit in their resident country. If you have shifted to another country, you need to understand the rules of Canada’s tax treaty with your resident country and the necessary forms needed to claim the treaty benefits.

Many non-residents don’t know this. For instance, Anna worked all her life in Canada and moved to France after retirement. She was collecting CPP, withdrawing from her RRSP, and paying 25% withholding tax on it. This tax was eroding her retirement savings because she didn’t claim 15% reduced withholding tax under the Canada-France treaty.

Reporting obligations: Non-resident Canadians also have a reporting obligation to the CRA if they earn income from Canada. The CRA withholds a higher tax rate on income earned by non-residents, as they do not file returns. Non-residents can file certain forms in Canada and claim expense deductions to reduce their overall taxable income.

Non-Resident Tax Obligations on Certain Canadian Income

Rental Income: If you are a non-resident earning $20,000 in rental income in Canada, your tenant will withhold 25% tax ($5,000) and pay the balance rent to you. The tenant will remit this tax to the CRA on your behalf. You can elect to file a Section 216 return, wherein you can deduct allowable expenses like repairs and property management fees from your rent. You have to file the returns by April 30 of the following year, or you may lose eligibility to claim deductions. However, ensure you have the necessary receipts and invoices to prove the expense.

Canadian Pensions, Annuities, and RRSP Withdrawals: A 25% withholding tax applies to such passive retirement income earned by non-residents. You can file a tax return under Section 217 and pay the residential tax rate. However, you will be required to report your worldwide income. If 25% is higher than your effective tax rate, you might want to file returns in Canada as well.

Certain Business Income: A non-resident may provide certain services in Canada and get paid for it. For instance, a Canadian company hires an Indian design consultant to design its new office. The Canadian company will deduct a withholding tax on the payment. The non-resident consultant can check the rules under the India-Canada tax treaty and claim lower tax rates. The rules become more complicated when a non-resident business has a “permanent establishment” in Canada. Non-resident business income has a complicated tax structure, with several elements.

Each income type has a different tax form and guidelines. Non-residents should consider engaging a Canadian accountant to handle their Canadian tax filing to ensure compliance and take advantage of tax treaty benefits.

Contact Ford Keast LLP in London to Help You File Your Tax Returns in Canada

Talk to a professional accountant to help you understand tax treaties, residential status, and tax rules to stay compliant and lower your tax bills. At Ford Keast LLP, our accountants and tax advisors can provide services such as filing non-resident tax returns and claiming benefits of tax treaties. To learn more about how Ford Keast LLP can provide you with the best accounting and taxation services, contact us online or call us at 519-679-9330.