Managing taxes in Canada as an expat
Canada is a great option for working abroad. To make the most of their overseas experience migrant workers must understand Canada’ distinctive tax regime. Here is a look at how to manage taxes effectively while living and working in Canada as a foreign worker.
Tax liability and eligibility
Foreign individuals living in Canada for 183 days or more per year are required to pay taxes in Canada. The tax system in Canada involves self-assessment. It requires each taxpayer to determine their taxable income and tax liability. Migrant workers and others are required to identify which tax heads are applicable to them, and file income tax returns accordingly.
Canadian citizens are taxed on their worldwide incomes in Canada. Expatriates only have to pay taxes on their Canada-sourced income. In other words salaried foreign professionals on work permits must pay taxes in Canada only on the income they earn in Canada. Most migrants in Canada work hard to send money online as remittances to their families back in their home countries. However, some migrants are fortunate enough to live in Canada with their families. For expat families where both spouses work, they must file taxes individually. Unlike some countries Canadian law does not allow couples to file their tax returns jointly. Furthermore, expats must have Canadian Social Insurance Numbers given by the Canada Revenue Agency (CRA) in order to file their income tax returns.
Federal income tax
The CRA is the government body which regulates federal and provincial taxes for all provinces except Québec. The CRA has established 5 taxable annual income bands:
- CAD 1 to 48,535 taxed at 15%
- CAD 48,536 to 97,069 taxed at 20.5%
- CAD 97,070 to 150,473 taxed at 26%
- CAD 150,474 to 214,638 taxed at 29%
- CAD 214,639 and above taxed at 33%
December 31 of every year is considered the year end for taxation purposes. Taxpayers must file returns by April 30 of the following year. The law does not allow for extension of the deadline. Late filing attracts penalties depending on the size of income and amount of delay.
Residents must also pay provincial taxes in Canada. As the name suggests, these taxes are defined by the provinces and territories. Each has different tax brackets. Provincial systems take into account the taxable income as reported to the CRA, and apply their own taxation rates. These can range between 4-21%. Expats can check provincial tax rates by visiting the official websites of CRA or the Government of Canada. For all provinces except Québec the CRA administers provincial as well as federal taxes. In case the source of income cannot be clearly allocated to any province, nonresidents are liable to pay an additional 48% federal tax.
Capital gains consist of profits from the sale of personal property and real estate investments. They also include profits earned from stock investments on Canadian Securities Exchanges. As per Canadian tax law 50% of a person’s capital gains earned during a tax year are included in the taxable income. Canada does not have a separate tax structure for capital gains. Federal and provincial tax rates apply to the entire taxable amount, including capital gains. At the other end of the equation Canadian law does not allow for capital losses to reduce the taxable income.
Double tax relief
The Government of Canada has double tax treaties with more than 90 countries. These treaties prevent foreigners working in Canada from paying taxes on the same income in both countries. Expats must check if Canada has a double taxation treaty with their home countries. This is one of the first things to do after migrating to Canada.
Deductions and tax benefits
The CRA allows for some deductions in the taxable incomes of foreign residents. Non-reimbursed business travel costs are exempt. Expenses of travelling salespersons are deductible. Any contributions to private retirement savings plans known as ‘Registered Retirement Savings Plans’ (RRSPs) are also deductible. The maximum annual deduction a foreigner can enjoy from contributions to RRSPs is 18% of the annual income or CAD 27,830, whichever is lower.
Expats can invest in Tax Free Savings Accounts (TFSAs). Earnings on TFSA investments are completely tax-free. The maximum annual contribution allowed in TFSAs is CAD 5,500. Investments in Canada Pension Plan and towards Employment Insurance are deductible too. 15% of the annual investments in these plans can be deducted from the federal and provincial income taxes.
About the author:
Hemant G is a contributing writer at Sparkwebs LLC, a Digital and Content Marketing Agency. When he’s not writing, he loves to travel, scuba dive, and watch documentaries.