Overseas Canadian Residents and Tax Returns

This is a column by regular contributor Clark

Recently, a friend went overseas (the US) on a temporary assignment. He is a perennial last-minute income tax filer and so, I joked that the tax deadline in the US is two weeks before the Canadian one and that he might want to advance his last-minute rush to April 15. After his departure, I started to wonder about how Canadians working or living overseas are treated for income tax purposes and the curiosity has resulted in this post.

The term “residency” is not defined in the Canadian Income Tax Act but the Canada Revenue Agency publishes an interpretation bulletin that provides guidelines to help taxpayers determine their residency. In Canada, all residents are required to pay tax on their yearly worldwide income, whether they are citizens or landed immigrants. When a person goes overseas for study, job, vacation, or on part-vacation, part-work arrangement, they will have to determine their residency status based on their residential ties before filing their tax return.

Residential Ties

Residential ties include having a home in Canada, other property such as car, boat, furniture, lake-side cabin or cottage, a spouse or common law partner who lives in Canada, driver’s license, bank accounts, brokerage accounts, credit cards, health insurance with any province/territory and social ties in Canada. Based on these criteria, there are four types of “overseas Canadian residents”.

1) Factual Resident. If a person maintains significant residential ties to Canada while overseas for any reason, then they are considered as a Canadian resident for income tax purposes. However, if the person establishes residential ties in another country with which Canada has a tax treaty, then the person is considered as resident of that country and a deemed non-resident of Canada. As a factual resident, the tax-filer is treated as if they never left Canada and all the rules that apply to someone who lives in Canada all year are employed.

2) Deemed Resident. Members of the Canadian Forces, members of the Canadian Forces overseas school staff, government employees who are posted overseas, people working under a Canadian International Development Agency assistance program, dependent children of any of the first four categories, or persons exempt from tax on atleast 90% of their world income in the other country under an agreement or convention are considered as deemed residents. A deemed resident would report their worldwide income, claim all deductions and federal tax credits, and can apply for GST/HST credits. They would pay surtax instead of provincial/territorial tax and cannot claim any provincial/territorial tax credits. If they have business income from Canada, then they would pay provincial/territorial tax and can claim any related provincial/territorial credits.

3) Non-resident. If a person establishes permanent residence overseas and breaks their residential ties with Canada, then they become a non-resident. They are considered as an emigrant in the year they leave Canada and a non-resident in subsequent years. A non-resident would only have to report Canadian employment income, Canadian business income, taxable Canadian scholarships, grants and bursaries, and taxable capital gains from sale of Canadian property. If a non-resident has Canadian investment income, the tax payable is withheld before payment (to the non-resident) and this is usually the final tax obligation to Canada for that income. If the tax is not withheld, then the banking/brokerage institution should be informed that they are dealing with a non-resident account (investor’s responsibility).

4) Deemed Non-resident. A person who has residential ties with another country is considered a deemed non-resident of Canada if their ties with the other country have become such that they are considered a resident of that country under the tax treaty. Deemed non-residents fall under the same category as non-residents for income tax purposes.

Special Tax Credits

Factual residents and deemed residents can apply for tax credits such as foreign tax credit and overseas employment tax credit to reduce their taxes payable.

This post is just an overview and there are other scenarios/issues such as people working as missionaries, people who lived in Quebec before leaving Canada, eligibility for Canada Child Tax Benefit and Universal Child Tax Benefit based on the residency status, etc. Please refer to this Foreign Affairs and International Trade Canada page and browse the several links included there to know more.

Have any of you been (or are) overseas Canadian residents? What other pointers can you provide to fellow readers?

About the Author: Clark is a twenty-something Saskatchewan resident employed in the manufacturing sector. He repaid around $20,000 in student loans and has been working to build his investment portfolio as a DIY investor (not trader) while nurturing plans to retire early. He loves reading (and using the lessons learned) about personal finance, technology and minimalism.

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Clark

Clark

Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.
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Ari
4 years ago

Hi,
maybe you can help me. I am working abroad on international waters I have no house, appartment, bank account, provincial insurance or drivers liscence in canada. Am I deemed non-resident? I live on the boat year round and go back to canada to meet relatives for two weeks a year.

mike
5 years ago

I am a retired Canadian (born in Canada) , I retired overseas about 12 years ago. CRA determined me a factual resident for tax purposes I married a local lady about 8yrs ago and adopted her two children (age 6 months and three years at the time) Several years ago I applied for Canada child tax benefits but was refused on the sole basis that my wife (not Canadian) would have to give up her right the benefits and that being that she has no rights to give up I can’t claim the right as the principle caregiver. We continue to reside overseas and I continue to pay all my taxes to Canada alone. I welcome comments on what I consider an unjust decision. Meeting with an CRA official several years ago in Canada he too was somewhat perplexed at the logic

eugene peters
6 years ago

I have been living in the USA and received permanent residence 1998. I receive the Canadian Pension and the Old Age Security, and have accumulated over $15K. Do I need to declare this amount plus the meager interest to the IRS? My accountant does not know, but suggested that the rules have changed and all US citizens plus permanent resident retirees are required to report their bank accounts

daniel fillion
6 years ago

hi my wife is from the philippine but is now a canadian citizen,my quetion is that she’s about to sell her house in the philippines will she be taxed here in canada for this sale.thank you and how can she avoid being taxed.

Mindi
8 years ago

I would also like to know the answer to Lauren’s question above, however we own rental properties in Canada. Would we need to sell these in order to be deemed non-residents?

Lauren
8 years ago

Hi, My husband and I are Canadian Citizens. We have decided to retire in Mexico. As per the typical process, currently working on “severing ties” in Canada (property; bank accounts; cars; etc.) to establish ourselves as non-residents for tax purposes.

We have a question that we hope someone can help with: after we establish residency in Mexico, if we do any investing in Mexico (say via real estate, equities, etc.) and we happen to have any capital gains (investment income), do we have to pay tax in Canada on those capital gains?

Would appreciate you advice and links to any other resources/forums/etc.!

Lauren

Kelly
9 years ago

My 21 year old daughter moved to England with her boyfriend 14 months ago and plans to stay 24 months). She comes home about 3 times a year for about 3 weeks each time. She works occasional jobs in the U.K. but has minimal income. She maintains her drivers license in Canada, has Canadian Bank accounts and a credit card and her mail is sent to our Canadian address. She had no Canadian income.
Is she a factual resident? Can I still claim hst/gst rebate for her? Also, do I have to file a return for 2011 since she had no income?

Rosie
9 years ago

My brother went overseas for 2 years, working and paying tax in China. He has his Canadian driver license valid and his siblings in Canada. Another thing is, he got married with a Chinese on the territory of China, and not change marital status in Canada yet. So, what kind of resident status he belongs to? And how can I file his tax return in Canada for him?

Chir
9 years ago

My husband is British and I am planning on moving to UK this summer and was wondering if its better to sever ties or maintain Residency ties? current physical property is a car. Then there’s the bank accounts, credit card. I do have a child who may wish to come back here in future and so do I. Is it better to sever ties and start all over when I decide to come back? Also I have RESP for child, what should I do? Can I get some help as to which way is the best approach with rationale. many thanks

Clark
9 years ago

@Sara: If you do not work in one of the fields that could classify you as a deemed resident, then you are likely to fall under the deemed non-resident category (due to the tax treaty with China). It is prudent to consult an expert or CRA directly for a proper evaluation.