Frequently ranked as the number one desired destination for people looking to move abroad, Canada is home to millions of immigrants and expats from around the world. Some of the perks of living in Canada include health care, education, job opportunities, and general quality of life. Many foreigners also find the cost of living much lower than that in their home countries. Some of the top places to live are Vancouver, Toronto, Calgary, Montréal, and Ottawa.
For those planning to relocate to Canada, understanding the tax system is imperative. While the tax system may be fundamentally similar to your home country, there may still be notable differences. For instance, just like the United States system, Canada imposes taxes on its residents based on their worldwide income, or the income they earned within or outside the country. Unlike the US, however, it does not have citizenship-based taxation.
Tax Guide for Expats in Canada
The tax system in Canada is similar to that of many countries. If you are employed, your company will deduct taxes from the income they pay you. Meanwhile, people with business income usually pay taxes by installment. Since the country has a self-assessment system, under the law, you have the right and responsibility to determine your income tax status and pay the required amount of taxes each year.
If you are an expat planning to move or already living in Canada, you should know how the tax system works. The Canadian tax year runs from January 1 to December 31, just like in the United States. Taxpayers are required to file an income tax return annually, due date April 30, except for individuals with self-employment income. As long as you file and pay on or before the due date, you will not incur interest or penalties.
Your residence status is a major factor in determining your income tax liability. In Canada, the tax system uses different methods for residents and non-residents. Residents are taxable on worldwide income. Non-residents, on the other hand, are taxed on Canadian source income only. Hence, before you can accomplish your Canadian tax return, you must first determine your residency status.
If an expat has been working in Canada for less than 183 days, they will be considered a non-resident, taxable on the income they earned within Canada only. Meanwhile, if an expat has stayed longer than 183 days, they will be counted as a resident for that tax year. As a resident, they will be taxable on their worldwide income and gains, meaning the income they earned within and outside Canada.
Tax treaties are meant to protect taxpayers from being charged twice on certain money flows between two countries. They also help prevent tax evasion. If you have investments outside Canada and intend to bring the money earned from them into the country, treaties will be particularly useful. This also applies if you have build up investments in Canada and plan to leave them there when you leave.
Canada has signed tax treaties with over 90 countries across the globe. Through these tax treaties, any withholding taxes payable on interest, dividends, or royalties to non-residents can be notably reduced. They also dictate that the amount of withholding taxes charged by the originating country on money going into Canada is moderated. With tax treaties, the amount can often be reduced to between 10% and 15%.
Employment and Business Taxes
In Canada, income taxes deducted by employers follow the same system used by many countries, which is the Pay-As-You-Earn (PAYE) system. Both residents and non-residents in Canada have the same personal amount or the non-refundable tax credit that can be offset against your federal tax, subject to inflation. As of 2020, this has been adjusted to $13,229 for individuals who have a net income of $150,473 or less.
In addition to income tax, employers also deduct federal payroll taxes. A federal payroll tax is composed of a contribution to the Canada Pension Plan and employment insurance. The highest federal tax rate in 2021 is 33% for income over C$216,511. You may also be deducted provincial taxes depending on the area you are in. Except for Quebec, tax for all provinces and territories is calculated the same way as federal tax.
If you come to Canada to set up a business or start a company, you will be liable to corporate income tax. This will be based on the profits you will make from your trade or business. Effective January 1, 2019, the net tax rate for Canadian-controlled private corporations claiming the Small Business Deduction is 9%. For other types of corporations, the rate is 15% after the general tax reduction. Without the general tax reduction, the basic rate is 38%.
Expats in Canada are usually required to submit an annual tax return complete with payment of any tax due. This should be submitted to the relevant tax service office on April 30 of the succeeding financial year. For self-employed individuals, the deadline for filing is June 15. Payment, however, should still be forwarded by April 30. Married residents have to file their annual tax returns separately.
On a related note, if you own property as an expat in Canada, you may qualify for debt consolidation loans through home equity borrowing. Check out this page to learn how these loans work in cities like London, Ontario (which is popular among American expats given its proximity to the United States).
Investment income for residents in Canada is taxed as ordinary income. This may come in the form of interest, dividends, rental, and royalty income. Meanwhile, for non-residents, interest and dividend income is subject to a 25% withholding tax, which can be reduced if there is a suitable tax treaty. Rental income is also subject to a 25% withholding tax, but this can be calculated either on a gross or net basis, depending on the taxpayer’s preference.
Residents in Canada have to report their rental income with their tax returns. For non-residents, it will be deducted by their lessee, who will be the one to send a copy of the NR4 form to both the taxpayer and the Canada Revenue Agency (CRA). This form should detail the gross rent, as well as the tax withheld. Meanwhile, capital gains are taxed as ordinary income both for residents and non-residents. It must be noted that only 50% of the actual gain is taxable.