Canada is a highly desirable country to live for many people looking to move abroad with excellent quality of life and wonderful people. But as with relocation to any country, understanding the tax system is imperative for anybody planning to move to Canada or already living there.
This article provides a general overview of the tax situation in Canada with expats specifically in mind, however it should never be used in isolation or relied upon to make decisions about your Canadian tax obligations. You must always seek professional advice from a qualified Canada tax specialist.
Who pays tax in Canada?
The major determinant of Canadian income tax liability is an individual’s residence status. An individual resident in Canada is taxable on worldwide income. Non-residents are taxed on Canadian-source income only.
Tax returns are due by 30 April following the tax year-end, which is 31 December. There are no provisions for extensions to this deadline. Late-filing penalties and interest are generally based upon unpaid taxes, although penalties can also be assessed on certain late-filed information forms.
The Canadian tax system is a self-assessment system. Individuals are required to determine their own liability for income taxes and file the required returns for any taxation year in which taxes are payable. Individuals file their own tax returns; spouses do not file jointly.
A non-resident employee is required to file a Canadian income tax return by 30 April following the tax year to report compensation and compute the tax, or claim an exemption pursuant to an income tax treaty. The income taxes withheld are applied as a credit in calculating the final tax liability for the year. To facilitate filing a return, the employee must apply to the CRA for a Canadian Social Insurance Number or in the event that they are not eligible for a Social Insurance Number, an Individual Tax Number. A return is recommended even if the income is exempt from taxation pursuant to the provisions of an income tax treaty.
How is income taxed in Canada?
Expatriate tax advice on employment income – Income from employment includes salaries, wages, directors’ fees and most benefits received from employment. Some examples of taxable benefits are low-interest loans, the use of company-owned automobiles, subsidised or free personal living expenses and stock option benefits. Among the few non-taxable benefits are employers’ contributions to certain employer-sponsored retirement savings plans, including registered Canadian pension plans and deferred profit-sharing plans.
Investment income – Interest income may be reported by an individual using the cash basis (when received), the receivable basis (when due) or the accrual basis (as earned during the year) on investments if the investment is held for less than 12 months. Whichever method is selected, it must be applied to an investment consistently. However, for most investments held for a period of more than 12 months, accrued interest must be included in income annually. The bonus or premium paid on the maturity of certain investments, such as treasury bills, strip bonds or other discounted obligations, must be reported as interest income.
Dividends received by resident expats in resident in Canada from taxable Canadian corporations are given special treatment to recognise corporate taxes already paid on the accumulated income used as the source for the dividend distribution.
Non-residents with sources of income from Canada other than employment or business income generally are subject to a withholding tax of 25% of gross income received. Examples of income subject to withholding tax are rental income, royalties, dividends, trust income, pensions and alimony. The payer must withhold and remit the appropriate amount of tax and must file the required returns. For the recipient, withholding taxes generally are final taxes, and tax returns are not required for income subject to withholding. However, non-residents receiving real estate rentals or timber royalties may choose to file a tax return and be taxed in Canada on the net rental or timber royalty income at the same tax rates that apply to Canadian residents. Non-residents receiving certain pension and benefit income may elect to be taxed on such income at the same incremental tax rates as Canadian residents, rather than at the withholding tax rate.
Most arms’ length interest payments to non-residents are exempt from Canadian withholding tax.
Canada’s double tax treaties generally reduce withholding taxes to 15% or less on most types of passive income paid to non-residents.
If you are a Canadian resident age 18 or older, you can contribute up to $5,500 a year to a tax-free savings account (TFSA) – this is your annual contribution limit. This amount is indexed to inflation annually and rounded to the nearest $500. It is possible to have more than one TFSA, but total contributions cannot exceed your annual limit.
No tax deduction is allowed for the contributions, but the investment earnings are not subject to tax.
Canada income tax rates overview
|Taxable Income Band CAD||National Income Tax Rates|
|1 – 47,630||15%|
|47,630 – 95,259||20.5%|
|95,259 – 147,667||26%|
|147,667 – 210,371||29%|
Provinces and territories also impose income taxes on resident expats in addition to federal taxes.
The provinces (except Québec) use the taxable income calculated for federal tax purposes, but apply their own tax rates and tax brackets to that income figure. The provinces also set their own non-refundable and refundable tax credits.
The Canada Revenue Agency (CRA) administers both federal and provincial taxes (except Québec’s), so taxpayers calculate their federal and provincial taxes on one return (other than if the taxpayer is subject to Québec tax, which will require the taxpayer to file both a Federal return and a separate Québec tax return).
Provincial tax is computed in much the same way as federal tax, but applying the applicable province’s tax brackets, rates, and credits to taxable income.
Québec also has several differences in the treatment of some types of employment income and some types of deductions.
The provinces decide upon their own graduated rates and thresholds used in calculating the applicable provincial income tax. Currently, the rates range from 4 percent to 25.75 percent. In addition, two of the provinces (Ontario and Prince Edward Island) apply surtaxes.
The maximum combined federal and provincial rates range from a low of 44.50 percent for Nunavut to a high of 58.75 percent for New Brunswick.
Non-residents are subject to the same federal and provincial tax rates as residents. An additional tax of 48 percent of the federal rate is applicable, however, (in lieu of provincial tax) on income that may not be allocated, because of regulation, to a province.
The Government of Canada has full details of all province and territorial rates, as well as calculators to help you determine your annual liability.
Taxes for expats in Canada: Are there tax treaties and double tax relief?
Foreign tax relief – Foreign taxes paid are generally allowed as credits. If a resident expat receives foreign-source income that has been subject to foreign tax, foreign tax credit relief may be provided in Canada to reduce the effects of double taxation. The foreign tax credit is computed on a country-by-country basis and may be taken only to the extent of Canadian tax payable on the net foreign income from the country.
Provincial foreign tax credit relief for non-business foreign income taxes is also provided. The provincial tax credit is generally limited to the lesser of the provincial taxes payable on the income and any foreign tax paid exceeding the amount of tax allowed as a credit and deduction for federal income tax purposes.
Double tax treaties – Canada has negotiated double tax treaties with most major industrialised nations and many developing nations. All treaties negotiated after 1971 generally follow the provisions of the model treaty developed by the Organisation for Economic Cooperation and Development (OECD). Many treaties currently in force were negotiated prior to 1972 and may vary significantly from the OECD model treaty.
Double tax treaties have been entered into with circa 95 countries as of 2017.
What are the tax rules on residency?
The tax statutes do not contain a specific definition of “residence.” Accordingly, the residence of an individual is determined by such matters as the location of the following:
- dwelling places
- personal property
- economic interests
- social ties
However, a non-resident individual who stays temporarily in Canada for 183 days or longer in a calendar year is deemed to be a resident of Canada for the entire year, unless he or she is determined to have non-resident status under a tax treaty. This provision applies only to an individual who would otherwise be considered a non-resident, and not to an individual who purposely takes up residence in Canada or to an existing resident who ceases to be a resident after moving away from Canada. These latter individuals may be treated as part-year residents.
In the year that an individual becomes a Canadian resident, that individual is considered a part-year resident, and is subject to tax in Canada on worldwide income for the portion of the year he or she is resident in Canada. A part-year resident is also subject to Canadian tax on any Canadian-source income received during the non-residence period.
Do I have to pay estate and gift tax?
Canadian succession law does not include estate or gift tax. However, provincial probate fees may apply at rates that vary depending on the province.
Finally on this point, do not assume that just because you’ve expatriated to live in Canada that your estate will not be liable to inheritance tax (IHT) in your old home nation, or any nation where you hold assets. For example, those domiciled in Britain remain liable for IHT on their worldwide estate.
If you are concerned about mitigating your IHT liability, we can introduce you to a UK inheritance tax specialist who will be able to provide guidance about whether you can reduce your exposure to inheritance tax.
Do I have to pay capital gains tax?
Fifty percent of the year’s capital gains are included in taxable income, to the extent that the amount exceeds 50% of capital losses for the year. This includes capital gains on real estate and personal property, regardless of whether used in a trade or business, and on shares held for personal investment. Special rules apply, effecting expat taxes, determining the nature of the gain or loss on the sale of depreciable property.
The adjusted cost basis of identical shares must be averaged for the purpose of determining the capital gain or loss on a disposition of such shares if the individual has acquired shares of a particular corporation at different dates.
Capital gains derived from the sale of a principal residence are generally exempt from tax. Capital losses incurred on the sale of a principal residence may not be used to reduce income for the year. In general, capital losses from personal-use assets are not allowed.
Capital losses – Except for allowable business investment losses, capital losses not utilised in the year realised are deductible only against net capital gains realised in another year. Unused capital losses may be carried back to any of the three preceding years or may be carried forward indefinitely.
Do expats get a state pension?
Canada has an extensive social security system that confers benefits for disability, death, family allowances, medical care, old age, sickness, and unemployment. These programs are funded mainly through wage and salary deductions and employer contributions.
An employee’s responsibility is made up of two parts: Canada Pension Plan (CPP) and Employment Insurance (EI).
Fifteen percent of the contributions made by an employee to CPP or EI are creditable against that individual’s federal income tax liability. The contributions are also creditable for provincial tax purposes.
The Canada Pension Plan (CPP) provides contributors and their families with partial replacement of earnings in the case of retirement, disability or death.
Almost all individuals who work in Canada outside Quebec contribute to the CPP.
In Quebec the Québec Pension Plan (QPP) provides similar benefits to the CPP.
Canada Pension Plan (CPP) contributions –
CPP must be deducted from an individual’s remuneration if the individual is employed in Canada (other than in the province of Québec), between the ages of 18 and 70, and receiving pensionable earnings.
The employer is responsible for withholding and remitting the individual portion and remitting the matching employer portion to the tax authorities. The maximum employee and employer contribution for 2016 is CAD2,544 each.
Individuals working in Québec contribute to the Québec Pension Plan (QPP) instead of the CPP program.
The maximum employee and employer QPP contribution for 2016 is CAD2,737 each.
If the employee is transferred from a country that has a social security agreement with Québec and/or the rest of Canada, the employer may request a certificate of coverage from the other country to exempt the compensation from CPP and/or QPP.
Your CPP retirement pension does not start automatically. You must apply for it. Before you apply, you must:
- be at least a month past your 59th birthday;
- have worked in Canada and made at least one valid contribution to the CPP; and
- want your CPP retirement pension payments to begin within 12 months.