This article looks at taxes for Canadian non-residents and answers some common questions related to taxes in Canada.
The goal is to answer some of the questions you might have about Canadian taxes as a non-resident.
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Who Is a Non-Resident of Canada for Tax Purposes?
You are considered a resident of Canada by the Canada Revenue Agency (CRA) if you have residential ties with Canada. Significant residential ties include owning a home in Canada or having a spouse, as opposed to a common-law partner, continuing to live in the country. Physical presence is the most important.
Secondary residential ties consist of owning a Canadian Passport, having Canadian credit cards, and continuing your coverage under a provincial health plan.
So, a tax non-resident is a person who doesn’t have these ties or cut them with Canada.
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Tax Obligations
You are subject to Canadian tax on all income accrued worldwide up to the date you cease to be a Canadian resident.
In addition to self-employment income, income, like taxable capital gains, interest, dividends, and rental income, are all subject to inclusion as taxable income, regardless of whether the income comes from a source in Canada.
You may be entitled to claim foreign tax credits to the extent income included in your worldwide income is from foreign sources.
You will be considered a non‐resident of Canada by the CRA if you can demonstrate evidence of intention to permanently sever residential ties to Canada and show a degree of permanence to your stay abroad by:
- reducing the regularity and length of your visits to Canada
- securing regular and continuous employment outside of Canada
- moving your personal property from Canada
- just letting your financial institution know about your non-resident status
- canceling your Canadian credit cards
- discontinuing your coverage under a provincial health plan
- obtaining non-resident membership for professional organizations
- ensuring your spouse, this does not apply to a common-law partner, and children live with you rather than remain in Canada
- sell your immovable properties in Canada
The claim for non-resident status for tax purposes, as well as the reporting of the date when you ended your Canadian tax residency, is made on the Canadian tax returns for the year of departure.
If the CRA does question your residence, they will ask you to complete Form NR73.
Residence determined by tax treaty
Canada has entered into tax treaties with many countries. In order to resolve situations where both Canada and another country (treaty country) determine you are a resident in both countries for tax purposes under domestic law, the treaties contain “tie-breaker” rules. In effect, these rules override each country’s domestic laws to ensure you’re not subject to taxation as a resident by more than one country.
The tie-breaker rules generally determine residence by reference to the location of your permanent home, personal and economic relations, habitual abode, and citizenship. Deemed residents then only pay taxes in their country of residence.
By depending on the tax regime of a second country, Canadian double taxation treaties can be used to reduce your tax liability, especially on Canadian assets. In most cases, you can still hold on to Canadian financial assets as a tax non-resident.
However, withholding taxes may apply.
This is where Canadian double taxation agreements can prove to be very valuable and can drastically reduce your tax liability and withholding taxes.
While it can be greatly beneficial, treaties need to be used carefully and with proper planning. If you are moving to a place that has the most preferential tax treaty with Canada, this can be considered treaty shopping and be subject to penalties. In this case, it might be better to leave it to the professionals.
If you are considering moving to another country from Canada and you are trying to figure out how to create a proper structure and maximize your tax benefits, our team can help you with that.
Does a Non-Resident Have to Pay Tax in Canada?
Yes. Canada taxes non-residents if they have a Canadian source of income.
Above all, determining whether you have ceased being a Canadian resident is important (as is the date on which you are considered to have severed your significant residential ties and secondary residential ties with Canada).
There is no simple, clear-cut rule for determining when an individual ceases residency, as it is not clearly defined within the Income Tax Act.
It is the interpretation of the taxpayer’s facts and circumstances by the tax authority that is the determinant of the individual’s residence status.
Non-residents of Canada are subject to tax in Canada only on income earned in Canada or from Canadian sources.
The most common types of income subject to Canadian tax are:
- Canadian workdays portion of compensation
- Canadian source dividends
- rental income
- pension and retirement income
- payments out of Registered Retirement Savings Plans (RSSPs)
- the taxable part of Canadian scholarships, fellowships, bursaries, and research grants
The non-resident tax rate is a general 25% applicable for most types of Canadian income.
Foreign exchange gains or losses from capital transactions of foreign currencies are not taxable in Canada as a non-resident.
Tax-Free Savings Accounts (TFSAs)
As a non-resident of Canada, you can keep your TFSA, and you will not be taxed in Canada for income generated within the account. However, you will not generate any contribution room and must not make any contributions as non-residents. Any contribution made as a non-resident will be subject to a 1% penalty tax for each month the contribution remains in the account.
You can make a withdrawal from a TFSA as a non-resident of Canada with no Canadian tax implications. Amounts withdrawn are added back to your contribution room which you can use if you re-establish Canadian tax residency.
Real or Immovable Properties
When you sell a property in Canada or start renting it out, you need to report it. If you sell your home after ceasing residence in Canada, a portion of the gain could be subject to tax.
If you are not a Canadian resident and you sell real estate in Canada, the certifier must keep 25% of the total sales amount. This is done to comply with Canadian tax laws. There is a process where certification from the Canada Revenue Agency to make sure everything is done correctly.
There is an alternative certification and withholding method (clearance certificate) where you can apply to CRA to have the withholding tax reduced to 25% of the taxable gain. To qualify under this alternative method, you must apply no later than 10 days after the disposition.
Any withholding over the reduced amount would be held in escrow by the real estate lawyers pending receipt of the certificate from CRA. Once you obtain a clearance certificate from CRA, the escrow will be released.
If the home was always your principal residence, Form T2091 has to be filed with your tax return on which you designate the property as your principal residence.
Canadian Tax Return on Property
If your property is repurposed from a principal residence to a business property, there is a usage change. To avoid this, you can fill out a form called a 45(2) election.
But if you do this, when you sell your house, you’ll have to pay taxes on any profit you make from the sale. Your house will be considered a taxable property by the Canadian government.
And if you didn’t live in Canada during any part of the year, you won’t be able to use the principal residence exemption for those years. If you don’t fill out the 45(2) election form, the government will assume you sold the property, and you’ll have to report it on your Canadian tax return for that year.
As you are not a resident of Canada, you can choose to file a separate Canadian income tax return to report your Canadian rental income.
Provincial or Territorial Tax
If you were a Quebec resident and earned income, such as employment income, outside Quebec during the tax year, tax may have been deducted for a province or territory other than Quebec.
Report on line 438 of your federal tax return and the transfer amount on line 454 of your provincial income tax return for Quebec. No transfer is necessary if the taxable income on your provincial income tax return for Quebec is zero.
Conclusion
As you can see from our guide, Canadian income tax can be complicated and confusing, but our team is here to assist and guide you toward the best taxation outcome possible based on your unique circumstances.
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Non-Residents of Canada Tax FAQ
When Canadian residents become non-residents, they are subject to the so-called departure tax. This is otherwise known as deemed disposition.
When you leave Canada, the government considers you to have sold certain types of assets (even if you have not sold them) at their fair market value (FMV) and immediately reacquired them for the same amount. This is called a deemed disposition, and you may have to report any capital gain arising from that disposition.
When departing Canada, you must provide a list of all of your assets at the time of emigrating from Canada with a total fair market value of over $25,000, except for cash and any RRSPs you may have.
If the total FMV of all properties owned at the time of departure exceeds $25,000, you are subject to this exit tax.
If you are ceasing your Canadian tax residency and have investment portfolios and other investment assets held outside of registered accounts, you are deemed to have disposed of any such non-registered assets (excluding Canadian real property) at their fair market value as of the date of departure meaning that you need to recognize accrued gain on such assets as taxable when you file a tax return, even if no actual disposition occurred. 50% of the total gain is considered taxable in Canada, taxed at marginal tax rate that will vary from one to other individual based on income and location within Canada.
Certain Canadian pension income is taxable. Those no longer residing in Canada can continue to hold old age security after leaving Canada. However, many Canadian non-residents have issues with their financial institutions not working with non-residents. Or they are limited in terms of the investments they can buy within their RRSP.
The general rule is that when a non-resident makes a withdrawal from their old age security, the Canadian government has a withholding tax of 25% at source. However, the 25% figure is based on one time or lump sum withdrawals. If you begin taking out regular periodic withdrawals (for example, monthly), then the withholding tax is reduced to 15%.
Common sources of income, such as the Canada Pension Plan and Quebec Pension Plan benefits, are subject to Part XIII tax. This is not refundable. You can also file a tax return on income from which Part XIII tax was deducted if you receive any timber royalties.
Timber royalties refer to rental income from a timber resource property. Contact the CRA if you believe an incorrect amount of Part XIII tax has been deducted from your income.
