Non-residents of Canada are only taxed on their Canadian-sourced income. Please see our blog entitled “Planning a move to Canada? Understand Canadian tax residency rules” for a detailed analysis of whether you may be considered a resident or non-resident of Canada for tax purposes.
Assuming the conclusion is that you are a non-resident of Canada for tax purposes, below are the general answers to common questions we receive. Everyone’s situation is unique, so please contact Cardinal Point for more information and a detailed analysis of your situation.
What are my tax obligations to Canada if I am a non-resident of Canada?
As a non-resident of Canada, you only pay tax on income you receive from sources within Canada. The type of tax you pay and the requirement to file a Canadian tax return depend on the type of income you receive.
Generally, Canadian income received by a non-resident is subject to either Part XIII tax or Part I tax. If the income you receive is subject to Part XIII tax, you do not have to file an annual Canadian income tax return. However, if the income you receive is subject to Part I tax, you will file an annual Canadian income tax return.
Part XIII tax is generally charged as a flat 25% of the income received, but this rate is often reduced by a tax treaty between Canada and the foreign country. For example, Canada has a Tax Treaty with the U.S. to reduce Part XIII tax to 0% for interest income (dealing at non-arm’s length) and to 5% or 15% for dividend income (depending on your ownership % of the company paying the dividends).
Part I tax is the same progressive income tax that residents of Canada are subject to on their income. Your effective tax rate will depend on the amount of your Canadian-sourced income. Note that non-residents of Canada have few or limited credits available to them to reduce their tax liability and, as such, you may have a tax liability in Canada even if your Canadian-sourced income is nominal.
What types of income are subject to Part XIII tax?
Part XIII is usually deducted at source from the following Canadian-sourced income:
- Interest and dividends (certain sources of interest, including interest from Canada Savings Bonds and T-Bills are exempt from Part XIII tax)
- Rental and royalty payments
- Pension payments (OAS, CPP, QPP)
- RRSP, RRIF, and annuity payments
- Management fees
- Estate or trust income
To ensure the correct Part XIII tax is deducted at source, it is important to tell Canadian payers (eg. banks and financial custodians) that you are a non-resident of Canada, and also inform them of your country of residence. If a lower rate of withholding is permitted under the Income Tax Treaty in force with your country of residence, it is important to provide the payor with the appropriate paperwork.
If your Canadian payer has deducted the appropriate amount of Part XIII tax from your income, you have no obligation to file an annual Canadian income tax return. The tax properly withheld would be considered your final tax obligation to Canada on that income.
If Part XIII tax has not been withheld, you can choose to voluntarily disclose this information and make the necessary tax payment. Also, in certain situations (eg. Canadian rental income), it will likely be to your benefit to elect to file a special tax return, as you may be able to recover some of the Canadian tax withheld or to eliminate your Canadian tax liability altogether. See our blog about rental and sale of a Canadian home as a U.S. citizen for more information.
What types of income are subject to Part I tax?
The Canadian payer will usually deduct Part I tax from certain types of income, but you must also file a tax return to comply with statutory obligations or to determine your final tax obligation. Common types of income subject to Part I tax include:
- Employment income earned from a Canadian employer (if services are performed in Canada)
- Business income from activities carried out in Canada
- Employment income as a result of stock options from a Canadian or foreign employer based on the number of workdays in Canada during the vesting period of the options
- Taxable capital gains from disposing of certain Canadian property (eg. Canadian real property)
- Rental and other income from real property business in Canada, including timber and mineral rights and royalties, where you have elected to deduct expenses and report on a Canadian section 216 tax return
Will I owe Canadian provincial/territorial tax on Canadian-sourced employment income?
Based on Regulation 2602, you should be subject to Canadian provincial/territorial taxation on any Canadian-sourced employment income considered earned in a province/territory. The provincial/territorial taxation will be the province/territory in which the services were rendered. If you instead have income earned in Canada, but which is not considered to be earned in a province/territory, you will pay a special surtax (instead of provincial/territorial tax) in addition to the Canadian federal tax. This “non-resident surtax” is currently 48% of the basic federal tax for 2021/2022.
When do I have to file a Canadian income tax return?
You have to file a Canadian income tax return if you owe Part I tax for the year, or if you want to receive a refund for an overpayment of tax withheld at the source. The due date of the personal Canadian income tax return is generally April 30 of the year following the close of the taxation year.