Expatriate tax ebook - Canada

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 are also subject to tax at graduated rates.

Passive source income, like interest, 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 include the acquisition of a dwelling place, moving one’s family and establishing social and economical 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.

Income from employment

Income from an office or employment includes all amounts received as salary, wages, commissions, director’s fees, bonuses, honoria 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.

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

For the 2010 calendar year, every individual is entitled to a federal personal amount of $10 382 which will not be subject to tax. Each of the provinces also has a personal amount which is generally not the same as the federal personal amount (it varies from a low of $7,704 in PEI to a high of $16,830 in Alberta).

Personal amounts are generally pro-rated for the first year of residency based on the number of days the employee was resident in Canada for the year.

Source of employment
All income earned from employment in Canada is taxed based on the employee’s province of residence on December 31 of the year, regardless of where in Canada the income was earned. 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 relates to personal living expenses or that is disguised as additional remuneration is taxable.

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

Expatriate concessions
A federal Overseas employment tax credit (OETC) is available to Canadian residents if they meet specific requirements. In particular, the individual must be working abroad for six consecutive months or longer in connection with a resource, construction, installation, agricultural or engineering project. The credit exempts the tax on the first $C80, 000 of employment income.

Relief for foreign taxes
A foreign tax credit is available for foreign taxes paid by a Canadian resident on income not subject to the OETC.

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

Deductions against income
There are no standard deductions against employment income (although all employees are entitled to claim the Canada Employment Credit, which has a maximum value of $1,044 for 2009). A credit is not the same as a deduction. A tax deduction reduces taxable income, with the actual amount of tax saved based on the individual’s marginal rate of tax. A tax credit is a deduction from tax owing. Provided the credit can be used, each taxpayer receives the same tax relief with a tax credit regardless of his or her tax bracket.

Few employment deductions are allowed, although certain employees can claim business related car expenses and/or home office expenses. Trade union dues and professional membership dues are other deductions that may be claimed.

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 “earned income” (as defined in the Act) for the prior year or the RRSP limit for the year. For the 2010 calendar year, the limit is $C 22,000.

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

Amounts are deducted from gross income to arrive at taxable income. The taxable income for all of the provinces (except for Quebec) is based on federal taxable income. The provinces vary, however, in the amounts allowed for the various tax credits (which, as noted above, are a deduction from tax owing).

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

Selected federal personal amounts for 2010 are as follows:

	Federal C$
Basic personal amount	10,382
Spousal/common law partner	10,382
Amount for eligable dependants	10,382
Income threshold for spouses or eligable dependants	All income
Pension income amount	2,000
Age 65 and over amount	6,446
Income threshold	32,506
Disability amount	7,239
Amount for dependant child	2,101
under 18 years old
Amount for dependant child over 18 years and infirm	4,223
Income threshold	5,992
Adoption amount (maximum per child)	10,975

Information about Canada:

introduction

facts and figures

basis of taxation

what taxes?

tax planning opportunities