Introduction: Canada Welcoming Tech Worker Immigrants
On June 27, 2023, Immigration, Refugee and Citizenship Canada ("IRCC") launches Canada's first-ever Tech Talent Strategy, announcing aggressive attractions measures, including allowing H-1B visa holders in the United States to apply for a 3-year Canadian work permit, providing open work permits for up to five years for highly skilled workers in select in-demand occupations, promoting of Canada as a destination for digital nomads, and improving the Start-up Visa Program to attract tech companies. Since the end of COVID-19 Pandemic, Canada has attracted significant numbers of tech workers, especially from the United States where national policies for immigrants have been less friendly.
Despite the similarity between Canadian and US taxation systems, for newcomers working in the Canadian tech industry, it is important for new Canadian taxpayers to be aware of tax-related issues they may encounter in Canada. For those who intend to stay in Canada temporarily, they may also have extra tax filing obligations at the time of departure. This article is part two of the A Canadian Tax Lawyer's Guide for New Immigrants in Canada series, which discusses specific obligations that tech worker immigrants may have when filing their taxes.
Tax Planning for Digital Nomads
Digital nomads are skilled people who work remotely using technology regardless of their physical locations. They can choose to have several residences or simply to travel all year around. Although the concept of digital nomads has become more and more popular in different industries, tech workers are initially the first group of people who adopted the working style. Tech workers can enjoy maximum flexibility and minimum commute while being a digital nomad.
For digital nomads, there are a few ways that they may be required to deal with the Canadian taxation system.
First, if you have been filing taxes in Canada as a tax resident, once you decided that Canada is no longer your home but simply another spot to visit, you may be required to pay departure tax.
Second, if you receive income from Canadian employers, whether you are a tax resident in Canada or not, you will have to either file taxes in Canada or be subject to the default 25% withholding tax for non-residents.
Third, if you reside in Canada full-time and you receive income from foreign employers, you must report your income in your annual tax filing. You may also be able to claim foreign tax credits if you have paid taxes on the reported income elsewhere.
Thus, for tech workers who are Canadian immigrants, it is important to consult a tax professional prior to filing your first year or last year of taxes in Canada. Effective tax planning with a top Canadian tax lawyer can help you avoid possible penalties and minimize your tax obligations.
Employee Stock Options and Other Types of Compensation
Employee Stock Options are a form of equity compensation granted by corporations to motivate their employees, contractors, and investors, which is particularly popular in the tech industry. Essentially employee stock options provide recipients the right to purchase or to exercise a set number of shares of the corporation they work for at a preset price. As employee stock options usually vest in the future and can have significant value, it is necessary to understand the tax obligations for Canadian immigrants who are receiving such compensation. Our article on Employee Stock Options Tax Planning discusses in detail what this type of compensation entails.
Other common types of compensation that tech workers may receive include relocation allowance, year-end bonuses, and tuition credits/reimbursement. Whether these benefits are taxable in Canada largely depends on specific facts. For example, non-taxable benefits paid by the employer include costs of house hunting trips to the new location, costs to the employee of transporting household effects, fees to cancel leases, and legal fees and land transfer tax to buy the new residence. The CRA does not provide a list of relocation related benefits that are taxable. Instead, the CRA asks taxpayers to refer back to their list of moving expenses paid by employers that are not a taxable benefit. Anything that is not included in the list but is related to relocations is likely to be taxable. This example demonstrates the challenge in identifying your tax obligations with regards to the common benefits and compensation tech workers receive. Our experienced tax lawyers in Toronto will be able to help you identify and determine your tax obligations, before you encounter challenges from the CRA reviews.
Commuters Between Canada and The U.S.A.
Another common scenario that complicates a tech worker's tax filing in Canada is commute across the border on a regularly basis. Even though the Canada-US border was closed for a certain period of time during the COVID-19 pandemic, it is very common today and before the pandemic for people to travel across the border for work. A prime example is Windsor residents who drive every day across the bridge to work in Detroit. The main issue that commuters have to deal with in terms of their tax filing is how they are filing taxes in Canada and the US.
Whether you are living in Canada and work in the US, or working in the US and living in Canada, you have to decide where you are filing taxes as a resident. In addition to the need for filing two sets of tax returns for each taxation year, cross-border commuters also face the challenge of keeping up with the latest tax policies and regulations in both countries. Failure to file taxes correctly may result in significant penalties and interests that take years to resolve. Hence, it is important for commuters traveling across the Canada-US border on a regular basis to understand their tax filing obligations and requirements by consulting experienced tax lawyers in both Canada and the United States.
Pro Tax Tips – Remember To Maintain Your Tax-related Records
The Canada Revenue Agency is the government branch that is responsible for taxation. The burden of proof, whether it is for income, expenses, or losses, is on the taxpayers. In other words, the CRA has the right to ask taxpayers to provide proof in supporting of their tax filing records. For tech workers who work as digital nomads, who commute between Canada and the US, or who receive significant compensation in addition to their regular salaries, it is important for you to maintain all tax-related records. Such records include but are not limited to receipts, invoices, pay slips, and bank statements. If you are unsure about what records maybe necessary to keep, or if you need help locating tax-related records, please contact our experienced Canadian tax lawyers for more information.
Frequently Asked Questions
Do I Need To Report My Foreign Income In My Canadian Taxes?
Whether a taxpayer needs to report his or her foreign income in Canada depends on the taxpayer's tax residence. A Canadian tax resident is required to report his or her worldwide income, which include income earned outside Canada. A non-resident, in contrast, is only required to report his or her Canadian source income.
Will My Failure To File Taxes Or Pay My Tax Debts Affect My Life In Canada?
After taxpayers file taxes every year, the CRA reviews and audits the tax returns. If the CRA believes that a tax return is filed inaccurately, the CRA can issue a notice of reassessment, request additional information and documents, and/or audit or investigate the taxpayer. When all avenues have been exhausted and taxpayers fail to pay for the owed taxes in full, the debt will be pursued by the CRA Collection Department. CRA may be able to garnish your wages and put liens on your property. Employers are required to withhold and to remit part of your paycheck to the CRA to pay off your tax debt.
Furthermore, since the beginning of 2015, Part XVIII of the Income Tax Act authorized the CRA to exchange financial account information with the Internal Revenue Service (IRS). In a 2019 decision of Retfalvi v. United States, the United States Court of Appeals for the Fourth Circuit confirmed that the IRS was authorized by the Canada-US Tax Treaty to collect outstanding Canadian income taxes payable by a resident and citizen of the United States. Similarly, the CRA may assist the IRS to collect certain taxes. An exception to the Assistance in Collection rule in Article XXVI A of the Canada-US Tax Treaty is that CRA will not assist the IRS to collect if the taxpayer was a U.S. citizen during the period for which the taxes were assessed, and vice versa.
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.