These days more and more people are working internationally. From travelling to the US for a contract, to working overseas for a year or more, the options to travel and work abroad are vast, and with the online nature of the world these days, it’s almost as easy to stay connected from the other side of the planet as it is from the next city block. With international work comes international tax. This is a complex topic that people in this situation often run into. Each situation is unique, as are the possible outcomes.
Residency
In order to determine primarily where a person is supposed to be paying tax, they first have to determine their residency. This is generally the country (and province/state) you call home. Just because you’re not in Canada, even for a long time, doesn’t necessarily mean you have stopped being a resident of Canada for tax purposes.
A person might take a three year contract in Japan for example, but continue to be a resident of Canada if they’ve still got their place in Canada, most of their bank accounts are still here, and they continue to keep their mail going to Canada. The test for whether you are still a resident of Canada or not is not a straightforward one, and should be discussed with an accountant who understands international tax matters.
Foreign Tax Credit
If you are resident of Canada, you will be taxed on your worldwide income in Canada. This may result in you being taxed in two places at once. For example, if you work for three months in the US, you may be responsible for paying tax in the US on that income. You would then have to declare that income, and pay tax on it, in Canada as well. To ensure you don’t pay twice the tax you are supposed to be paying, you should be eligible to claim a foreign tax credit.
The goal of this credit is to ensure that if you’ve already paid tax in the US for example on income, you don’t pay tax full Canadian tax on that income as well.
Since the savings from claiming a foreign tax credit are usually significant, CRA regularly asks for support for this claim. You will have to be able to provide acceptable supporting documents to be able to claim your foreign taxes.
Concluding Thoughts
If you are considering working abroad, already are, or have in the past, ensure you understand the tax implications you may face, and what you need to do to minimize your tax liability. Make sure you are working with a professional who understands these matters and is familiar with what is commonly requested.
Ian Edmonds is a CPA, CA and CPA (NC) working in Toronto with individuals, small and medium sized businesses, and not-for-profit organizations in Canada and the US to provide personalized, approachable tax and accounting advice and services. He works with many individuals dealing with international tax matters from those working abroad to those emigrating from Canada.