If you are considering working in a new country there are many things you need to learn to avoid unexpected surprises. This can include the work culture, the immigration requirements and the tax system. The Canadian government has several programs which facilitates entry for those individuals who have the skills that Canada is looking for making it a desirable place to work.
If you are interested in working temporarily in Canada, the following is a summary of the income tax consequences that individuals from United States and other countries may face.
Canadian Tax Compliance for Individuals Working in Canada
Individuals in Canada are subject to taxes based on their residency. Canadian residents are taxed on worldwide income while non-residents are taxed only on their Canadian source income. As a result, it is important to determine your residency status.
Residents include a person that is present in Canada for more than 183 days, or has significant residential ties with Canada. If you are in Canada for less than 183 days and have no significant ties you will be considered a non-resident. A person who is present in Canada for more than 183 days and does not have significant ties with Canada may also be considered a nonresident if he/she has closer ties to a country which has a tax treaty with Canada.
Non-residents with a Canadian work permit, working for an employer in Canada will receive a T4 Slip, Statement of Canadian Employment Earnings. This slip contains information regarding the income received, taxes withheld, and other deductions. It is used to determine the taxable income, and thereby calculate the tax liability. This could result in additional taxes owing or refund due after deducting the tax withheld.
Non-residents working as self-employed individuals will need to attach a Form T2125, Statement of Business or Professional Activities to their income tax return, then calculate their taxes from their sole proprietorship or partnership-based business.
These individuals need to file a Canadian Individual Annual Income Tax Return Form: T1 to report their Canada-sourced income. Canada uses a calendar year to calculate the income and taxes. Income tax returns are due by April 30 of the year following. If the individual carried on business in Canada, the return is due by June 15 however, any tax owing is due by April 30. If you receive only income from employment or business use the General Income Tax and Benefit Package for the province or territory where you earn the income.
If the taxpayer fulfills the 183 days requirement and has significant residential ties with Canada, he/she would be subject to Canadian taxes on their worldwide (Canadian and non-Canadian) income, although foreign tax credits (FTCs) may be claimed for any taxes paid on the income from sources outside Canada.
Tax Compliance in Country of Residence
As most countries, including the U.S. tax their residents on worldwide income, the income earned in Canada will be included in income on the income tax return of the country in which the individual resides. This causes the income to be taxed in both countries. To avoid double taxation, most countries have a mechanism that would allow the individual to claim a foreign tax credit for the taxes paid to Canada on the income included on the return. Other countries may exempt foreign-source income from tax or exempt foreign-source income from tax if tax had been paid on it in Canada.
Canada has also entered into tax treaties with many countries. These treaties set out rules to avoid double taxation.
Additional Information for U.S. Citizens & Green Card Holders Working in Canada
Due to the proximity, the North American Free Trade Agreement (NAFTA), U.S.-Canada Tax Treaty Benefits, U.S. citizens, and green card holders often consider working in Canada as an alternate option. For Americans it is easy to work in Canada as the U.S.-Canada Tax Treaty helps reduce the tax burden, but complying with the tax laws of both the countries could be an expensive process, with grave consequences if the individual fails to comply with certain filing requirements.
U.S. citizens and green card holders should be aware that their Canadian resident or non-resident status has no impact on their U.S. tax filing requirement since the U.S. Internal Revenue Service (IRS) taxes its citizen and residents on their worldwide income regardless of whether they were U.S. residents during that particular tax year or not.
Furthermore, U.S. individuals working in the U.S. are required to pay Social Security (SS) taxes which is directed towards their retirement SS benefit. When, the individual starts working in Canada, he/she may need to make a similar contribution toward the Canada Pension Plan. This could result in double taxation since the person ends up paying SS taxes in both Canada and U.S. To prevent double taxation, Canada and the U.S. have entered into an agreement which determines which country is entitled to the tax.
A U.S. person working in Canada will need to obtain a ‘Certificate of Coverage’ from the CRA. This results in the individual contributing only towards one program. Refer to the AG Tax LLP article on Social Security Totalization Agreement for more details.
If you are considering coming to Canada to work, it is highly recommended that taxpayers consult Canadian tax professionals regarding their resident status for tax purposes and assistance with complying with their Canadian tax filing requirement to avoid any tax issues.
AG TAX LLP CAN HELP
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.