What You Need to Know About Foreign Income Tax in Canada

Michael Pignatelli
Feb 07, 2022

Disclaimer: Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.

Do you earn income from sources outside of Canada? If so, it's important to understand how Canadian income tax applies to those earnings. 

This blog post will discuss the basics of Canadian foreign income tax, including who needs to pay it and how. We will also provide tips on minimizing your foreign income tax payable.

Frequently Asked Questions on Canadian Income Tax 

If you're confused about how your taxes work, we've compiled some of the frequently asked questions about filing for your taxes. Take note of these so that you can handle your taxes with ease. 

How Does Foreign Income Tax in Canada Work? 

Declaring your foreign income tax depends on the tax treaty between the source of your foreign income and Canada. 

Canada has over 100 tax treaties with different countries. Tax treaties help you avoid tax evasion cases and double taxation. They also help you determine residency and eligibility. In addition, tax treaties between two countries cover many tax-related laws, from pensions, taxable incomes, and even tax exemptions. 

Make sure to familiarize yourself with these treaties before heading over to the Canada Revenue Agency (CRA) to avoid filing difficulties.

Who Needs to File Foreign Income Tax Returns? 

According to Canadian taxation laws, all residents of Canada must declare their incomes. Canadian residents include people with residential ties to the country. They also include newly immigrated individuals, who must declare their taxes from the date they entered the country. 

Another category of individuals who need to declare their taxes is the deemed residents. They may not have been in the country for more than a year but must still pay their taxes to the Canadian government. These include individuals sent by the Canadian government overseas, like military personnel or government officials. 

People who are not official residents of the country but have stayed in Canada for more than 183 days also qualify as deemed residents and must declare their income tax return

Who Does Not Need to File Their Taxes in Canada?

Non-residents do not need to declare their taxes to the CRA. Non-resident individuals do not have residential ties to the country or have spent not more than 183 days in the country. However, if you earn income such as pensions or property sales from Canada, you should file them with the CRA. 

A non-deemed resident is also not required to declare a foreign income tax return in Canada. People who travel back and forth between countries can refer to a tax treaty or a tiebreaker law to determine to which country you owe taxes.  

man calculating tax and stacking coins

Am I Eligible for a Foreign Income Tax Credit? 

Before you know your tax credit eligibility, you must first disclose all your sources of income to the CRA. Sources of income include salary and pension earnings. Additionally, you'll need a separate application for foreign income, and only then can you determine if you're eligible for a tax credit. 

According to regulations, you are eligible for credits or foreign income tax deduction in Canada if your total foreign income tax is less than or equal to your Canadian tax payable. You can claim this credit or use this as a deduction for your taxable income or property taxes. 

How Do I Pay My Foreign Taxes?

Filing and paying foreign taxes follow the same schedule as Canadian taxes. You must make all declarations and payments before April 30 of the taxation year. Failure to do so will incur penalties; the longer you delay your payment, the larger the penalty. 

All foreign taxes should be in Canadian dollars based on the day's exchange rate. 

Who Is Eligible for Tax Exemptions?

You can base foreign tax exemptions on the tax treaty with the country where your income is from. In addition, some countries may exempt all or a portion of your foreign tax, depending on the amount you claim. 

If you have incomes from the US social services, a portion of your taxes are eligible for exemption. For example, if you declare over $10,000 in pensions, you are eligible for a 15% exemption. However, if you have been receiving these pensions since 1996, you are entitled to a 50% tax exemption. Furthermore, pensions worth $5,000 and below are tax-free. 

Can I Have Someone Take Care of My Taxes? 

If you are not an expert on taxation, you may misinterpret many unfamiliar terms and procedures. Instead of encountering difficulties and making mistakes, hire a professional who can file your taxes. 

Unloop is the solution to all your taxation needs. We help ecommerce business owners with their finances. Our partner tax experts can handle anything, from sales tax to income tax. 

All you need to do is book an appointment, and our partners will take care of your taxes for you. Stop getting tangled with your messy finances. Instead, let us handle it so that you can focus more on growing your business. 

Just remember: when hiring professionals, go to individuals or firms trusted by many to avoid scams and loss of money. 

business owner on a consultation with a tax expert

The Takeaway 

It is your responsibility as a citizen to declare and pay your taxes. Without it, your home country cannot support itself, so you have to do your part. 

Taxes can be messy, particularly Canada’s foreign income tax regulations. Still, you don’t have to get overwhelmed; the CRA provides detailed information, and you can hire professionals for help. 

We hope this FAQ article has helped you understand foreign taxes better. For more e-commerce accounting services, contact us at 877-421-7270!

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