Canadian Expat Taxes: A Guide

Living abroad often comes with complications, and Canadian expat taxes are one of them.

Should you still pay them? How much should you pay? What happens if you don’t?

If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or WhatsApp (+44-7393-450-837).

This includes if you are looking for a second opinion or alternative investments.

Some of the facts might change from the time of writing, and nothing written here is formal tax advice.

For Canadians abroad, understanding tax residency is the first step to fully grasping the complex world of expat taxes.

Do Canadian expats pay taxes? How do you determine Canadian expat tax residency?

Tax residency determines whether a Canadian expat must pay taxes to Canada. The Canada Revenue Agency (CRA) uses specific criteria to establish residency status, divided into primary and secondary ties.

• Primary ties include maintaining a home in Canada, having a spouse or common-law partner residing in Canada, or supporting dependents in the country. If any of these apply, you are likely considered a resident for tax purposes.
• Secondary ties include factors like maintaining Canadian bank accounts, memberships, driver’s licenses, or healthcare coverage. While less definitive than primary ties, these are used to assess residency in borderline cases.

Residency can also be deemed under specific circumstances. For example, individuals who spend 183 days or more in Canada in a calendar year are deemed residents, if they do not establish residency in any other country.

Conversely, you may sever residency ties to become a non-resident by cutting primary ties and demonstrating that your life is primarily based outside Canada.

What is Canadian Departure Tax or Emigration Tax?

The Canadian departure tax applies when a taxpayer ceases to be a resident of Canada, triggering a deemed disposition of certain assets as if they were sold at fair market value. This tax ensures unrealized capital gains are taxed before a resident exits the Canadian tax system.

Assets subject to the departure tax include stocks, mutual funds, and personal property like artwork or collectibles. Certain exemptions apply, such as Canadian real estate and retirement savings accounts (e.g., RRSPs and TFSAs).

Taxpayers can defer the payment of departure tax by providing the CRA with security (e.g., a bond or cash).

What is Worldwide Income? What are Canadian Foreign Tax Obligations?

Canadian residents must report their worldwide income to the CRA, regardless of where it is earned. This includes income from employment, rental properties, business ventures, pensions, and investments held abroad. Failing to declare foreign income can result in significant penalties.

Non-residents, by contrast, are only required to pay Canadian taxes on income sourced from within Canada, such as rental income or employment in Canada.

What are the filing requirements for Canadian expat taxes?

Canadian expat taxes have specific filing obligations, depending on their residency status.

Residents and deemed residents must file a T1 General Income Tax Return to report their worldwide income. Non-residents file a Section 216 Return if they earn Canadian rental income or a Section 217 Return for pension income.

Expats must also file the T1135 – Foreign Income Verification Statement if they own foreign property valued at over CAD 100,000. This includes bank accounts, stocks, and real estate outside Canada. Non-compliance can result in penalties of up to CAD 2,500 per year.

Filing deadlines for expats are typically April 30, but those earning self-employment income have until June 15. However, taxes owed must still be paid by April 30 to avoid interest.

What happens to RRSPs, TFSAs, and other Canadian accounts when you move abroad? Is Canadian pension taxable?

Registered Retirement Savings Plans (RRSPs) retain their tax-deferred status even if you live abroad.

You can continue to contribute to your retirement plan if you have available contribution room, but withdrawals are subject to withholding tax, with rates depending on your country of residence and applicable tax treaties. Withdrawals must also be reported as income in your resident country.

Tax-Free Savings Accounts (TFSAs) do not enjoy the same treatment internationally.

In some countries, such as the United States, TFSA earnings may be taxable. It’s important to verify how your TFSA will be treated under the tax laws of your new country of residence to avoid unexpected liabilities.

Other accounts, such as Registered Education Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs), may have unique considerations.

Contributions, withdrawals, and grants should be carefully managed to avoid penalties and ensure compliance with foreign and Canadian tax rules.

Do Canadians living abroad pay taxes? Common Residency Scenarios

• Employment Income Earned Abroad: If you remain a Canadian resident, your foreign employment income is taxable in Canada. A foreign tax credit may offset taxes paid in your host country.
• Rental Income from Canadian Property: Non-residents earning rental income from Canadian property must remit 25% of the gross income as withholding tax. Filing an NR6 form allows non-residents to pay tax on net rental income instead.
• Sale of Canadian Assets: If you sell Canadian property as a non-resident, you must notify the CRA and obtain a Certificate of Compliance (Form T2062) to settle capital gains taxes. Failure to do so can result in penalties.
• Repatriation to Canada: Upon returning, you are subject to Canadian tax on your worldwide income and must reinstate ties to Canada. This may include reactivating healthcare coverage, updating tax information, and declaring previously exempt foreign assets.

Do I get tax relief or foreign tax credits as an expat?

Canadian expats can claim several tax relief measures to reduce their tax burden.

The Foreign Tax Credit (FTC) allows residents to offset taxes paid to other countries. This credit ensures you do not pay double tax on the same income, up to the amount of Canadian expat taxes that would otherwise apply.

Tax treaties between Canada and other countries provide relief by specifying which country has primary taxation rights on different types of income (e.g., pensions, employment income).

Tax treaty benefits are claimed by filing Form NR301 for non-residents or noting treaty-exempt income on your return.

Other relief options include:

• GST/HST Rebates: Available for non-residents who purchase certain goods or services in Canada.
• Overseas Employment Tax Credit (OETC): For Canadian residents working abroad under specific conditions.

Common mistakes when filing Canadian expat taxes

• Failing to Sever Ties Properly: Those who do not adequately sever their Canadian residency ties may remain taxable on worldwide income, despite living abroad. Maintaining primary ties like a home or spouse in Canada can lead to being deemed a resident unintentionally.
• Misreporting Foreign Income or Investments: Many expats overlook their obligation to report worldwide income or fail to file Form T1135 for foreign investments valued over CAD 100,000. Penalties for non-compliance can be steep, even if no tax is owed.
• Overlooking Tax Treaty Benefits: Expats often miss opportunities to reduce taxes through tax treaties. For example, certain pensions or income sources may be tax-exempt under treaty provisions if correctly applied.
• Unpaid Departure Tax: Those leaving Canada may not realize they are subject to a deemed disposition of assets, leading to unexpected capital gains taxes. Failure to pay or defer this tax can result in penalties and interest.
• Not Updating CRA on Residency Status: Failing to inform the CRA of residency changes can result in continued taxation as a Canadian resident or delays in adjusting your tax obligations.

Canadian expat tax advice: Strategies for Tax Optimization

Canadian expats can reduce their tax burden with a few strategic decisions:

• Timing Departure or Repatriation: Leaving Canada partway through a tax year allows for split-year reporting, potentially reducing taxable income. Similarly, timing repatriation to align with tax-efficient income years can minimize liabilities.
• Optimizing Investments: Consider liquidating or restructuring taxable Canadian assets before leaving to avoid departure tax. Similarly, investments in tax-advantaged accounts like RRSPs or avoiding heavily taxed foreign accounts like TFSAs in the US can be beneficial.
• Leveraging Tax Treaties: Understand applicable treaties to reduce withholding taxes on foreign income, exempt certain pensions, or claim relief on other income types.
• Proactively Managing Rental Income: Non-residents renting out Canadian property can elect to pay tax on net income instead of gross income by filing Form NR6.
• Professional Advice: Engaging a tax advisor or financial planner experienced in cross-border taxation ensures compliance and helps identify all available credits, deductions, and treaty benefits.

FAQs

1. What happens if i don’t pay my taxes in Canada as an expat?

Failing to file can result in significant penalties, especially for undeclared worldwide income or foreign property. Non-compliance with departure tax or investment reporting can trigger audits and fines.

2. Can I keep my TFSA if I leave Canada? What about RRSP?

Yes. TFSAs, however, may lose their tax-free status in your country of residence, depending on local laws. RRSPs remain tax-deferred, but withdrawals may be subject to withholding tax.

3. How do I report foreign rental income in Canada?

Rental income from foreign properties is included in worldwide income for residents and must be converted to Canadian dollars. Related expenses may be deducted to determine net income.

4. How does Canada’s departure tax affect me if I plan to return later?

Departure tax applies when you cease residency, but returning to Canada in the future does not erase previously owed taxes. You can defer the tax by providing security to the CRA.

5. What if I live in a country without a tax treaty with Canada?

You may face double taxation on certain types of income. Tax planning becomes crucial in these situations to structure income and assets in the most tax-efficient way.

For complex situations, consulting a expat financial advisor with cross-border expertise is highly recommended.