Welcome to Canada's Tax System
Tax season can be especially confusing for international students who are unfamiliar with Canada's taxation laws. One central question for international students is whether they need to file a Canadian tax return. The rule of thumb in Canada is an individual must file a Canadian tax return where they earn Canadian source income or are a Canadian resident. Students should be aware being a tax resident of Canada is not directly tied to their immigration status
Residents of Canada must file a Canadian tax return. These returns report the individual's world-wide income for the year. A person is considered resident of Canada where they maintain certain connections to Canada known as residential ties. The central residential ties are a home in Canada, spouse or common-law partner in Canada, or dependents in Canada. International students who complete more than one academic term in Canada during a calendar year will most likely be resident of Canada. This is because regardless of residential ties to Canada, any individual who spends 183 days or more in Canada in a calendar year is deemed a Canadian resident.
Many international students may find they are a tax resident of both Canada and their country of origin. These students should check if Canada has a tax treaty with their country of origin. Tax treaties often contain what is known as "tie breaker rules". These rules allow the countries party to the treaty to determine which country the taxpayer is more strongly associated with. The country the taxpayer is more strongly associated with will be considered his or her country of residence for tax purposes.
Non-residents of Canada who earn Canadian source income, such as the taxable portion of Canadian scholarships, fellowships, bursaries, and research grants, must report this income on a non-resident return. These students will pay Canadian tax on their Canadian source income. However, they may be able to claim foreign tax credits to offset the potential double taxation from paying tax on these amounts in their home country and in Canada. Tax treaties between Canada and the student's country of origin may also dictate which country will tax a particular type of income.
Students in Canada may be able to claim the tuition tax credit on their tax return to offset the tax payable on their income. For students who are not tax resident in Canada, the tuition credit amounts can only offset their Canadian taxes payable on Canadian source income. In implementing the tuition tax credit, lawmakers realized many students would not be incurring sufficient tax liability to make use of the tuition tax credit in the year they earned it. To prevent the tuition tax credit becoming a useless credit for these students, students are permitted to assign and carry forward unused tuition tax credits. A tax return must be filed in the year the tuition tax credit is earned in order to carry forward or assign the unused amount.
A carry forward is where a taxpayer can use tax credits or losses earned in one taxation year to decrease his or her income or tax owing in future years. A student can carry forward his or her tuition tax credit where prior to claiming any other tax credits, his or her tuition tax credit for the year exceeds his or her taxation owing in the same year. There is no limit to how many years a taxpayer can carry forward the unused tuition tax credit. However, the carry forward amount must be used in the first year the taxpayer has Canadian tax payable. The exact amount of the carry forward is calculated pursuant to subsection 118.61(1) of the Income Tax Act. Pursuant to section 118 of the Income Tax Act, a student can also transfer or assign his or her tuition tax credit to a spouse or common law partner or with some limitations, to a parent or grandparent to offset his or her tax payable. The tuition tax credit must be transferred in the year it is incurred.
Tax Tips: Not sure if you need to file a return...
Once a student files his or her tax return, the Canada Revenue Agency will issue an assessment. The issuance of this assessment starts the limitation periods, which could prevent the Canada Revenue Agency from disagreeing with the student's declared residence status and reassessing the student. International students, or former international students, should also be aware they can correct errors in their previous filings. The assessment can be objected to within 90 days of its issuance. The Canada Revenue Agency also operates a Voluntary Disclosure Program which allows taxpayers to correct their filings with reduced penalties and interest. The most effective way to avoid penalties and interest on incorrect filing though is to understand your filing position before filing your tax return by consulting with one of our expert Canadian Tax Lawyers.