Declaring Foreign Income in Canada
Did you know that when you are filing your Canadian tax return you may also have to include income you have earned outside of Canada?
This blog will explain everything you need to know about declaring foreign income in Canada.
Before doing anything, you must determine your residency status as there are different rules for residents and non-residents.
Check out this blog post on the Working Holiday Canada’s website to determine your residency status for tax purposes in Canada.
It is important to note that the rules can differ slightly for non-residents and ‘newcomers’. This article will focus specifically on non-residents.
Non-Residents
In order to receive non-refundable tax credits in Canada, non-residents must include their net income earned outside of Canada on their tax return
· Income earned from outside of Canada will not be taxed in Canada but, it will affect the number of refundable tax credits you can claim. This is known as your personal tax credit or your tax-free threshold
· In Canada, you don’t pay tax on income earned below $13,229
· You can earn up to $13,229 without paying tax in the tax year only if you earned 90% or more of your income in Canada
· You will not be eligible to earn any tax-free income if you have earned more than 10% outside Canada.
In this situation, if the personal tax credit had been claimed, you would have underpaid tax, as a lesser amount of tax was deducted on your behalf.
It all comes back to your TD1 form
You will have to fill out a federal (TD1) and provincial (TD1BC, TD1AB, TD1ON, etc.) but we will focus on the federal tax form. Here is what it looks like.
The following is on the second page of the TD1 form
The above image is the section of the TD1 form that asks you if you have earned 90% of your income in Canada. You are eligible to claim the Credits on the first page of the form, only if the answer is yes.
If the answer is no, you are not eligible to claim the tax credits and you will be fully taxed.
It’s better to pay it rather than owe money when it’s time to file your tax return.
It is common for non-residents to not fully understand the 90% rule and in turn, they can end up owing money to the Canadian tax office.
It is important to note that you may have to report your Canadian income on your home country's tax return. The tax payable will be used in Canada as a credit on your tax return in your native country.
It is more beneficial to you to file your Canadian tax return first. This will allow you to determine the net Canadian income and tax payable.
You should then proceed with filing your home country's tax return.
Residents
· When filling out your Canadian tax return, residents must include any income they have earned outside of Canada.
· The income you have earned will be taxed in Canada. If you happened to pay tax on this income outside of Canada, you are eligible to claim it back as a foreign tax credit. This will reduce your tax payable in Canada, it is not a refundable credit.
Make sure to keep copies of your payment documents, income, and tax returns.
You will need them to report your non-Canadian income correctly. In order to determine the foreign tax credit you may be owed, we advise you to fill out your non-Canadian income tax return before completing your Canadian one.
Immigrants (Newcomers) in Canada
· If you arrive in Canada as an immigrant (i.e. move to Canada with the intention to live there) any non-Canadian income you have earned will only be taxed after you become a resident.
Anything you have earned up to this point will not be taxed but you should declare it anyway.
· Any income you earned outside of Canada before the Immigration date will be declared for proper determination of the non-refundable tax credits.
· For example, if you earned less than 10% of your income outside of Canada before your immigration date, you are eligible to claim the total credit for the tax year, which is $13,229.
If the income you earned before your immigration date is more than 10% of your total income the non-refundable tax credits will be allocated according to the number of days you have resided in Canada throughout the tax year.
Emigrants from Canada
· If you are a Canadian emigrant you should report and pay tax in Canada over any foreign income you may have earned before the date which you emigrated. You are considered an emigrant from Canada if you left with the intention to settle down in another country and do not keep any residential ties with Canada (i.e. home and/or spouse and/or children).
· After the date of emigration you shouldn’t pay tax on your non-Canadian income in Canada as you are no longer considered a resident of Canada.
· You may receive a tax refund from Canada even If you are considered a non-resident. For example, if you are renting out your home in Canada as a non-resident you should withhold 25% of tax from your rental income. You may be entitled to a tax refund for expenses incurred. In this case, you can file an income tax return under section 216.
Another example is if you receive pension income from the Canadian government after the date in which you have emigrated. In this case, you can file under section 217
You may be entitled to a tax refund for expenses incurred. In this case, you can file an income tax return under section 216. Another example is if you receive pension income from the Canadian government after the date in which you have emigrated. In this case, you can file under section 217
· Taxback.com can help sort out your taxes in any tax situation.
FAQ
Q: As a non-resident, if I earn money in my home country and move to Canada in the same year, do I need to put it on my Canadian tax return?
A: Yes, but you will not be taxed on your home country's income in Canada.
Q: Does paying tax on this income in my home country make a difference?
A: No. You cannot claim foreign tax credits in Canada as a non-resident. The reason for this is any income earned outside of Canada is not taxable in Canada.
Q: Will I have to pay tax on the income that I have earned at home, in Canada?
A: No, you will not have to pay tax on this income twice.
Q: Why does the Canadian tax office need to know what income I earned outside of Canada?
A: They use this information to calculate the non-refundable tax credits that you can claim in Canada.
Q: Will it make a difference to my tax refund if I include income earned outside of Canada in the same tax year on my tax return?
A: The majority of the time it will help in reducing your refund. It may sometimes mean that you have underpaid tax on your Canadian income after the non-refundable tax credits were calculated.
Q: Am I required to declare the net or gross income that I have earned in my home country?
A: You should declare your NET income (the amount you received in your bank account).
Q: Why do I owe money in Canada?
A: How much tax you owe all depends on your residency status.
Canadian non-residents with employment income may owe money to the Canadian government. This may be due to less tax being deducted at source.
You may not have any income from outside of Canada but you might have additional income such as self-employment or tips that have not been reported on your payslip.
Another reason why tax may be deducted is that you ticked that 90% of your total income will be from a Canadian source when filling in the TD1 form when in fact more than 10% of your income was earned outside of Canada.
If you are a Canadian resident you may owe money if you have earned income outside of Canada. You may also owe money if you claim non-refundable tax credits that you are not eligible for.
This can happen if you fill in your TD1 form incorrectly. For example, you ticked the box on the TD1 form to say you are going to claim tuition transferred from a dependent but at the end of the tax year, you did not claim the tuition on your income tax return.
In the long run, you may end up owing money to the tax office as less tax had been deducted at source.
Q: I’ve filed an income tax return in Canada before and received a refund, now I am back in Canada and while dealing with my 2020 income tax return I learned that I owe money to the tax office from a previous tax year. What is the reason for this?
A: The revenue agency has the power to review your file within six years of your Notice of assessment being issued.
If your file is being reviewed you should receive a letter from the tax office informing you of it. You will be asked about original documents and information regarding the amount of income you earned outside of Canada, the date you left Canada, documents that prove your residency status, and/or the expenses you may have claimed on your return.
The tax office may presume that you do not have the required documents and in turn consider you not eligible to claim the credits or expenses you claimed on the initial assessment if you don’t receive the letter or reply to it within the given timeframe.
You should receive a notice of reassessment with the actual amount you owe to the tax office. If you have the required information and didn’t report it on time you can file an amendment.
Q: What do I do with a notice of reassessment for a balance due because more income was reported on my T4 slip?
A: The income that was reported on the Notice of reassessment was more than likely different from the one you received from your employer. In this scenario, you should contact your employer and get an amended T4 detailing the correct income. Once that is done you should contact the tax office to make sure there wasn’t a mistake on the Notice of reassessment.
If the reassessment was correct, unfortunately, an amendment can’t be filed and you will have to pay the balance to the tax office.
Q: If the tax year in my home country is different from the Canadian one, how do I prove that the income I have earned is foreign income in Canada?
A: The Canadian tax year runs from 1 January to 31 December. If this differs from the tax year in your home country, there are measures you can take to ensure you can prove your foreign income in Canada.
These measures include keeping copies of your home country's payslips and payment documents that you received for income paid within the tax year. When filing a return in your home country, the same rules apply to your Canadian payment documents.
Q: Do I have to report the unemployment benefits I received from my home country on my Canadian income tax return?
A: The short answer is yes. The majority of your foreign income should be reported on your Canadian income tax return.
Some lottery winnings, inheritances, child care payments, most gifts, amounts that you may have received from a life insurance policy, strike pay you received from your union, school scholarships and bursaries are all exceptions.
Q: I am a citizen of two countries. How should I report my foreign income in Canada?
A: You do not need to be a citizen of Canada to report income in Canada. If you have citizenship in both Canada and another country but have stronger residential ties to the other country you are considered a non-resident in Canada.
You should report the income you earn worldwide in the country you are considered a resident.
For more information, you can contact the Canadian tax office or ask the tax agent at Taxback.com.
If you need help calculating your refund you can use the income tax refund calculator for Canada.
