Expatriate tax - Canada

From an employer perspective, Canada has a very intricate and comprehensive payroll legislation with very time sensitive deadlines and requirements. Non-compliance can result in many negative implications such as the application of significant penalties and interest charges. It is best to obtain a thorough understanding of the Canadian payroll system and the possible options and relief that may be available.

For international employees performing services in Canada, be it temporary in nature or more long-term, proper planning is required to ensure that the employee’s exposure to Canadian taxation is either minimized or eliminated.

Work visas are required to undertake duties in Canada and serious penalties can apply for breach of visa conditions. There are several types of visas and therefore we recommend consultation with an immigration lawyer before the finalization of any assignment. Information on visas can be found at www.canada.ca/en/immigration-refugees-citizenship

The Canadian taxation year runs from 1 January to 31 December.

The filing date for an individual’s tax return is generally 30 April following the year-end. For self-employed individuals (or married to self-employed individuals), the tax filing deadline is 15 June although any balance due is still payable by 30 April.

There is no ability to request an extension of the due date to file a Canadian tax return.

There are potentially several foreign asset reporting disclosure forms that may need to be filed by the individual. The filing deadline of these forms varies. Late filing or non-compliance may result in significant penalties and interest.

Other than the province of Quebec, all the other provincial taxes are incorporated with their Canadian personal income tax return and filed with the CRA.

Individuals are taxed at progressive rates according to total taxable income. Rates for the 2021 income tax year are:

Resident Federal tax rates

1. Taxpayers need earned income from the prior year to make a Registered Retirement Savings Plan (RRSP) contribution – therefore, newcomers to Canada may have to wait one year to accumulate RRSP contribution room.
2. Full spousal credit assumes spouse has zero net income. Otherwise, credit is reduced for each dollar of the spouse’s net income.

Provincial tax

The following table outlines the combined federal and provincial tax by province for an individual with $98,000 taxable income (assuming the same fact situation noted above – ie, married employee, spouse has no income). Provincial tax includes all applicable surtaxes. Ontario tax includes the Ontario health premium tax.

Canadian tax residents are subject to Canadian taxation on their worldwide income, while non-residents are generally only subject to Canadian tax on Canadian source income.

These general rules may be modified by certain domestic concessions and tax treaty provisions depending on individual circumstances.

Based on Canadian domestic tax law, an individual’s Canadian tax residency is based on their ties to Canada. Generally, establishing a primary tie to Canada is a strong indicator that an individual would be considered a Canadian tax resident. Primary ties consists of:

• Location of spouse
• Location of dependent children
• Location of home

Secondary ties to Canada must also be considered especially when an individual is departing Canada or a non-resident. Generally, secondary ties to Canada are not strong indicators of an individual’s tax residency. Secondary ties to Canada may consist of the following:

• Location of personal effects
• Location of personal assets
• Location of social and economic ties
• Country’s passport and driver’s licences
• Access to provincial health insurance

It is also possible for an individual to be considered a tax resident of Canada if they are present in Canada for more than 183 days during any rolling 12-month period. However, it is possible to be deemed a non-resident of Canada despite the 183 days in Canada should the individual be resident in a country which has a tax treaty with Canada.

Taxable income from employment includes salaries, wages, bonuses, lump sum payments, allowances and benefits arising under employment-related share purchase/stock option programs.

Canada has very broad sourcing rules which need to be considered carefully in some cases. However, it is generally true that employment income is deemed to be sourced in the country in which the employment services are physically performed.

Certain benefits may be exempt from Canadian taxation. To qualify to exclude the benefits from taxation, timely forms/waivers may need to be filed with the CRA. Certain taxable benefits that may be exempt include:

• Accommodation (subject to qualification rules)
• Housing (subject to qualification rules)
• Per diems and certain allowances (subject to qualification rules)

Specific advice should be sought in advance to ensure planning opportunities are maximized and qualification criteria are met.

Canadian tax residents are eligible to claim a credit for foreign tax paid on foreign-source income (which may include foreign sourced employment, investment and rental income). In general terms the foreign tax credit will be limited to the lesser of the foreign tax paid or the Canadian tax applicable to the foreign income.

For Canadian purposes, deductions can be claimed to reduce an individual’s taxable income when such deductions were incurred to earn taxable income. Common deductions may include union or professional dues and investment fees incurred to generate investment income.

The most common deduction for Canadian purposes is the registered retirement savings plan (RRSP) deduction. The RRSP is an individual funded personal retirement plan. The individual’s contribution to the RRSP (subject to annual limitations) would be claimed against the individual’s income.

Common tax credits include donations, tuition and medical.

Based on domestic Canadian tax law, employees performing services in Canada are subject to Canadian payroll withholding, reporting and filing requirements. The employer withholds the source deductions from salary and wages and remits this amount to the CRA.

Please note that other than the province of Quebec, any provincial withholdings are remitted directly to the CRA.

The frequency of remittance of withholdings to the CRA is dependent on several factors which include whether the employer is a new employer in Canada, the average monthly remittances due to the CRA and the corporate structure of the employer (ie associated or related companies that also remit to the CRA).

An annual wage reporting form for each employee, Form T4, “Statement of Renumeration” and a Form T4 Summary “Summary of Renumeration Paid” which reports the employees’ and employer’s compensation and withholdings for the taxation year are to be filed with the CRA by February 28 of the following taxation year.

Based on current legislation, 50% of the realized capital gain is subject to Canadian taxation at marginal tax rates.

Realized capital losses may either be carried forward or back (up to three years) and be claimed to offset previous or future capital gains.

Should an individual sever their Canadian tax residency and no longer be considered a Canadian tax resident, the individual may be subject to deemed disposition/departure tax.

The CRA deems that an individual to have sold their assets (exceptions listed below) on the date they terminate their Canadian tax residency. This deemed disposition requires the individual to report any unrealized gains on their departure tax return. Any unrealized gains included as part of the deemed disposition will be subject to Canadian taxation which may result in a departure tax. Based on current Canadian tax rates, half of the unrealized gains will be subject to Canadian taxation at the individual’s marginal tax rates.

Departure tax is not applicable to the following assets:

• Canadian real estate
• Canadian business property and inventory
• Stock options
• Registered investments
• Assets held within a trust.

Please note that it may be possible to defer the resulting departure tax resulting from deemed dispositions. To defer the departure tax, an election must be timely filed with the CRA and security may be required to be provided with the CRA.

A number of provinces in Canada assess an additional payroll tax for the purposes of funding the provincial run health care systems, employee training programs and/or educational system.

Each of the provinces health tax/levy legislations differs from one another.

Currently, the following provinces assess the employer health tax/levy:

• Ontario
• Quebec
• Manitoba
• Newfoundland
• Northwest Territories
• Nunavut

The Canada Pension Plan (CPP) is Canada’s national social insurance plan that provides Canadians with funds during their retirement.

CPP is funded by both the employee and employer with matching contributions. For the 2021 taxation year, the maximum employee and employer CPP contribution is equal to $3,166.45.

All residents of Canada (except residents of Quebec) who earned pensionable earnings and are between the age of 18 and 70 are required to contribute into CPP.

For expatriates working in Canada on a temporary assignment, may opt out of paying into CPP if a Totalization Agreement has been entered into by the home country and Canada and if a Certificate of Coverage has been applied/approved.

For a list of countries that Canada has entered into a Totalization Agreement with, please refer to www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll.

The Employment Insurance (EI) is Canada’s national special benefits program which provides assistance to individuals who are not able to work due to specific life events (pregnancy, illness, etc).

EI is funded by both the employee and employer. For the 2021 taxation year, the maximum employee and employer EI premiums are $889.54 and $1,245.36 respectively.

All residents of Canada (except residents of Quebec) who earned insurable earnings are generally required to contribute into EI.

For expatriates entering Canada, if the expatriate continues to contribute into their home country’s equivalent of EI while in Canada then the expatriate and employer would be exempt from making EI premiums.

There were significant changes to the taxation of stock options in Canada which is beyond the scope of this summary.

To determine the impact of this new legislation, professional advice should be obtained.