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.
Departure tax
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.
