Although many overseas contracts offer tax-free earnings, Canadian expats should beware. Lenient taxes may not necessarily apply unless residential ties are severed in Canada:
Formerly 2 years was the magic number of years to stay out of Canada, but this has been amended as long as documentation is kept. The key issue is severing ties which overshadows 1-2 years overseas employment. If not, Canadian citizens could be taxed in Canada on both their worldwide income and interest earned offshore.
Three ways to reduce taxes in Canada as a resident of Canada working overseas:
1. Canadian incorporated Company. This will offer tax benefits through income splitting and an average tax rate of less than 20%. Dividends paid to directors are less than taxes on salaries.
2. FTC: Foreign Tax Credit : Taxes paid elsewhere are deducted from Canadian taxes.
3. OETC: Overseas Employment Tax Credit , reduced taxes if employed by by a specified Canadian Company in the energy or engineering fields. The first Cdn $80,000. of income receive tax advantages whereby individuals OETC tax rate is 9.6% vs. average tax rate of 26.4% in Alberta. For Cdn.$150,000, OETC tax rate is 15.4% vs 31.8% in Alberta. For those on contract basis overseas, we can advise using a specified engineering payroll company to reduce taxes. Please call us. The OETC reduced tax rate is similar to US foreign exclusion tax rate of US$80,000
Tax Filing – don’t be late
Taxes filed late will be subject to a 5% penalty on taxes owing. If the tax return is done incorrectly and even if filed prior to 4/30, and an amount is owing, interest will be imposed by CCRA. Interest of 1%/monthly will be levied on unpaid taxes. We advise that alternate lines of credit be used through your Canadian bank to repay Canadian taxes owing. It is important that date of non-residency (arrival to new location) is noted on both husband and spousal tax returns. Even if the spouse has no income prior to departure from Canada, it is advisable that a nil, final departure tax return be filed. If done correctly this will be your final departure tax return.
If no taxes are owing, and CCRA owes you money, there is no penalty on taxes and we can file Canadian tax returns later in the year. It is advisable that any rebates be direct deposited to your Canadian Bank (see form T1-DD(1)E. Problems may occur the following year from Canadian T-3 slips (Canadian capital gains, interest and dividends). With our NR73 review, we advise clients on proper documentation to avoid later Canadian tax filing.
Increasingly, taxes will be levied in foreign jurisdictions. Russia and Indonesia have recently imposed taxes on non-residents. Please seek independent tax counsel in the new foreign jurisdiction. Ensure that your contract clearly stipulates that taxes will be paid by your company. We advise that you obtain a copy of tax return filed in foreign jurisdiction on your behalf or a tax stamped letter from the Company of amount paid by the company on your behalf.
Canadian expats who do not have an overseas residence for at least six months in the year but become a resident of a foreign jurisdiction for at least six to 12 months, will be considered a resident of Canada for Canadian taxation purposes. This is the view of the Canada Customs and Revenue Agency (CCRA). We advise that form NR73 (on our website www.Expat.ca ) be reviewed by us to verify non-residency issues. We advise not filing NR73, but it should be completed and kept on file with severing ties documentation letters. If the NR73 is filed and approved by CCRA, but severance of residential ties (as below) is not documented, CCRA has been known to revoke the NR73 approval for non-residency. Penalties and interest will accrue from several years previously. Recently we find that if documentation letters and addresses are incorrect, that CCRA will request individuals to file an NR73 for review. It currently takes 3-4 months for NR73 review by CCRA – International Taxation office in Ottawa. Tax returns for departing residents are not filed at the local Winnipeg taxation office, but at the International Taxation office in Ottawa. Beware!
Several years ago, a special rule was introduced for persons who are residents of countries with which Canada has an international tax treaty. If a person is resident in a treaty country, then that person will be deemed to be a non-resident of Canada. However please follow non-resident ties as noted below.
Major Residential Ties (Canada)
Availability of home ownership to return to at any time (not leased)
Spouse or child support in Canada (without legal separation)
Leasing your home to an immediate relative such as wife, child or grandparent. Your home should be leased at arm's length with a 3-month termination clause. See us for correct NR6, NR4 filing with rental returns
Maintaining principal ownership or directorship in your company.
Other minor ties need to be severed correctly e.g. banking, investments, driver's permit, credit cards etc. We can advise on correct documentation letters severing ties with Canada, how many ties can be kept and what ties to sever.
Banking/Credit Cards: Due to difficulty in obtaining credit overseas, we advise keeping at least one credit card and at least one bank account in Canada at least temporarily until new ones established. It is critical that correct documentation is noted in all severing ties documentation letters, especially for Banking information.
Major Residential Ties (Overseas)
Establishment of ties overseas is critical. What you give up in Canada try to re-establish overseas.
Residence address and lease/purchase.
Obtain a lease copy of overseas residence including a letter from your employer if supplied at no charge to you.
Income Taxes paid to foreign governments
Keep copies if paid by your company on your behalf or by yourself.
International Health Care
Please keep copy, whether paid by yourself or your company plus Auto license, Memberships to Professional Organizations, Video, Expat Clubs, Fitness clubs etc.
There are tax implications for investments and RRSP's depending on which country you move to. Canadians who do not sever residential ties are likely to be taxed in Canada on overseas income, especially if families continue to reside in Canada. Typically problems with CCRA do not occur upon departure, but upon return, sometimes 3-5 years later. It is urgent to keep all records and plan ahead. For example RRSP's in USA are treated as investments with any redemption being taxed as capital gains from initial RRSP purchase 10-20 years previously. Advance planning is necessary to avoid this problem. Some countries are considered as “closed” countries ie. UK, USA & Australia whereby no switches in RRSP or open investments are allowed unless redeemed. We strongly advise consolidation to managed portfolio accounts prior to moving overseas to reduce taxes and risk.
Obtaining competent tax and financial planning advice (with full disclosure of the job opportunity and future plans) is critical. If this is overlooked, Expats may find themselves paying taxes on offshore earnings several years after they assumed that ties had been severed. Remember that as every case is different, avoid generic advice by former well meaning expats. Tax laws change continuously. We offer more than tax and investment planning.
Working outside Canada does not necessarily mean taxes are not paid in Canada. Compared to Americans who are taxed on citizenship, Canadians are taxed on residency and often at a higher rate than UK or US residents. Both the UK and USA (in part) have more lenient and lower taxation for residents. For example only Federal US tax at 25% is payable in Texas and Florida.
Do not assume that you can apply UK or US tax laws in Canada. If tax is paid by the employee or employer in a foreign country, Canadian residents can claim a foreign tax credit from Canadian taxes and RRSP deduction on Canadian tax returns. However, proof of tax paid to the foreign country is required by CCRA on filing Canadian tax returns (preferably with US$ equivalent). Employer letters may not satisfy CCRA. Do not assume that non-reporting of overseas income will remain undetected by CCRA.
Although tax planning is initially considered the most important issue when working or moving overseas, there are other points of equal importance:
- Offshore banking and currency exchange
- Health and disability insurance
- Estate and will planning
- Financial and retirement investment planning
- Lifestyle and culture shock - including how your family will adapt
- Returning to Canada after the contract to reduce future taxes
- Contracts should be reviewed closely. It is unlikely that conditions or remuneration will be altered once you have signed the contract and arrive at your new job location.
“Our tax-smart investment philosophy is part of our mission statement to reduce Canadian taxes and to avoid future Canadian tax filing while overseas. Our goal is to reduce stress and offer peace of mind that tax returns are filed correctly, to avoid paying taxes overseas.”
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to seek professional tax advice based on your personal circumstances.
Information supplied by The Expatriate Group Inc in Canada.
For tax filing, visit their website www.Expat.ca