If you are a Canadian planning to work abroad, you need to find
out whether your residency will change, because if it does, it may
affect your Canadian tax burden. Will you remain a Canadian
resident during the period of your assignment or will you break
Canadian residency? When you cease to be a Canadian resident, you
normally aren't subject to Canadian tax anymore. However, if
you remain a Canadian resident during your assignment, you still
have to file a Canadian tax return and will be subject to taxation
on your worldwide income.
Here are some of the key issues to keep in mind when making
plans to work outside Canada.
To file or not to file
If you remain a Canadian resident, it's simple; you still
have to file a Canadian tax return reporting your worldwide income.
If you can successfully show that you ceased to be a Canadian
resident, you would file a final tax return in the year of
departure and thereafter you would no longer have to file a
Canadian tax return. U.S. citizens aren't so lucky – they
have to file a U.S. tax return whether or not they're resident
in the U.S.
Giving up Canadian residency
In order to give up Canadian residency you need to show (a) a
factual breaking of residential ties and (b) an intent to be out of
the country on a long-term basis. Generally speaking, an absence of
a year is NOT enough to support the conclusion that you've
stopped being a Canadian resident for tax purposes. In the case of
short-term assignments where you're gone for a year or two,
you'll only cease being a Canadian resident if you have very
few ties to Canada. Instead, you'll be treated as an ongoing
Canadian resident filing tax returns and claiming foreign tax
credits. Also, Canada has income tax treaties with many countries
that can affect your residency status for tax purposes.
Maintaining Canadian residency
If you are employed outside of Canada but maintain Canadian
residency, you must report all of your income, including the income
from your assignment abroad. However, the Canadian tax rules offer
a credit for foreign taxes paid on the same income. In most cases,
the foreign country will have the first right to tax your
employment income and Canada will grant a credit to reduce the
Canadian tax on the same income – unless the Canadian tax
rate is higher than the foreign tax rate. If the Canadian tax is
higher, you pay the difference between the foreign country's
rate and the Canadian rate. For example, if you move to the U.S.
and the tax rate is 30%, but your Canadian tax rate is 40%,
you'd have to pay the 10% tax differential to Canada after
claiming the 30% foreign tax credit.
If you are able to make the argument that you are no longer a
Canadian resident, there can be significant tax implications. For
example, we have something known as a departure tax. This is a
final taxation when you stop being a resident of Canada, and it can
be very costly. Once you've filed your final return and dealt
with any departure tax issues — unless you still have a
Canadian income source – you would no longer file any
Canadian tax returns.
Returning to Canada
If you have given up residency in Canada for tax purposes and
you plan to return, there's good news: returning is normally
less confusing because Canada welcomes you back into the tax system
with open arms. You are then subject to tax on your worldwide
income from the date that you resume your Canadian residency and
you file a tax return for the part of the year that you were
considered a resident. If you were subject to departure tax when
you left, there may also be a way to undo the departure tax, making
it as if the departure tax never applied.
Before you go
It's extremely important that you have a tax orientation
meeting before agreeing to take an assignment in another country.
Understanding the tax implications in both jurisdictions —
your home country and the host country — is vital and
it's much easier to deal with this beforehand than when filing
your tax return. It's important that you get the planning done
in advance while it's still possible to make adjustments.
It's also important that you get your employer involved and
ensure they fully understand your tax requirements.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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