Expatriate tax ebook - Canada Raymond Chabot

Basis of taxation

Charge to tax
Residence
Income from employment
Source of employment
Benefits (in kind)
Expatriate concessions
Relief for foreign taxes
Deductions against income

Charge to tax
The taxation of individuals is determined by their residency status. A resident of Canada is taxed on his/her worldwide income for the period of residency.

A non-resident is taxed on Canadian source income only. Canadian source employment income is taxed at graduated rates similar to a resident. Income from a business operated in Canada and income from the disposition of a Canadian Taxable Property is also subject to graduated rates.

Passive source income, like interests, dividends, pensions and rental real estate income earned by non-residents, is subject to a non-resident withholding tax at source. The basic rate is 25% and can be reduced if a tax treaty exists with the country of residence.

Some elections are available for Canadian source rental income earned by non-residents to be taxed at graduated rates instead of being subject to the withholding tax.

Residence
The Canadian Income Tax Act does not contain a formal definition of residence. Each case must be determined on its own facts and circumstances. The Canada Revenue Agency (CRA) looks at a number of factors in making a determination. These factors includes the acquisition of a dwelling place, moving one’s family and establishing social and economic ties (i.e., acquiring provincial health coverage, a driver’s licence, opening bank accounts etc.)

Residence can also be established if an individual “sojourns’” in Canada for more than 183 days in a particular calendar year. The expatriate would then be deemed to be a Canadian resident for the entire calendar year and as such, is taxable on his/her worldwide income for the entire year. It is possible, however, that a treaty “tie-breaker” rule may override this provision if the expatriate has closer connections to another country.

The province of Quebec applies similar concepts when making a residency determination. In some cases an expatriate can be a non- resident of Canada but be a resident of Quebec. This will happen when a non-factual resident of Quebec is present in the province on December 31 and has spent more that 183 days in Quebec during the year.

Income from employment
Income from an office or employment includes all amounts received as salary, wages, commissions, director’s fees, bonuses, honoraria and taxable benefits. In addition to amounts received while an employee, amounts received in contemplation or on termination of employment are also taxed as employment income. Canadian Federal and Provincial tax withholdings are required on all wages earned in Canada and Quebec.

Unless a tax treaty applies, income from an office or employment earned by an expatriate in Canada/Quebec is taxable. In addition to income tax withholdings, social security contributions are also required unless a social security agreement exists.

For the 2011 calendar year, income earned under the personal allowance of $10 527 ($10 640 in the province of Quebec) will not be subject to tax.

Source of employment
All remuneration received in Canada/Quebec is taxed including items relating to a pre-Canadian period of employment. As such, it may be prudent to ensure that all pre-assignment remuneration is received prior to commencing Canadian residency.

Benefits (in kind)
Many benefits are subject to tax and many exceptions exist. Generally, any benefit that refers to personal living expenses or can be related to “disguise” additional remuneration is taxable.

In some cases, board and lodging allowances can be received tax free by a Canadian/Quebec resident assigned in a special work site.

Expatriate concessions
A federal Overseas employment tax credit (OETC) is available to Canadian residents if they meet specific requirements. The credit exempts the tax on the first $C80 000 of employment income.

A Foreign employment deduction (FED) is available in the province of Quebec if the assigned employee meets specific requirements. If the assignment covers the whole calendar year, then all income earned from that employment can be deducted, resulting in a Quebec tax free salary.

Specific Quebec provisions apply to certain foreign experts and specialists. Many conditions and obligations apply.

Relief for foreign taxes
A foreign tax credit is granted by both Canada and Quebec for foreign taxes paid by a Canadian/Quebec resident on income not subject to the OETC and FED.

The foreign tax credit is first applied against federal income tax. Any unused amount is then applied against Quebec income tax.

Deductions against income
There are no standard deductions against employment income.

A few employment deductions are allowed, for example: business-related car expenses, trade union dues and professional membership dues.

In Quebec, trade union and professional membership dues are not allowed as a deduction; rather they give rise to a personal tax credit.

Deductions for contributions made to a Registered Pension Plan or a Registered Retirement Savings Plan (RRSP) are allowed within defined limits.

Contributions made to a RRSP may be made in the calendar year or within 60 days after the end of the year. The annual deduction is limited to the lesser of: 18% of the employee’s previous earned income (as defined in the Act) or the RRSP limit for the year. For the 2011 calendar year, the limit is $C 22,450.

Employee contributions to a foreign pension plan are not deductible. Some exceptions exist for contributions to specific US pension plan.

The federal and provincial governments each provide personal exemptions and tax credits. Federally, the credit is 15% of specified personal amounts. The Quebec credit is 20% of specified amounts.

Selected federal and Quebec personal amounts for 2011 are as follow:

Information about Canada: