If you are a Canadian resident, you must declare all your income sources, including the money earned abroad, when filing your tax returns. Income earned from outside the country can complicate your taxes more. So, it’s vital to know and understand the rules.
When it comes to foreign income declaration, the rules vary slightly for Canadian non-residents. For that reason, it’s essential to determine your residency status to know your tax obligations. It will help you avoid the penalties that come with tax non-compliance.
This guide explores several aspects of foreign income taxation, including the obligations for Canadian residents and non-residents. You will also learn how to use W-8BEN Canada to claim tax reductions on foreign income from the United States.
With that being said, let’s get started!
Foreign Income Declaration By Canadian Residents
When filing tax returns every year, all Canadian residents with significant residential ties to Canada have to report their income sources, including domestic and foreign income.
Notably, the Canada Revenue Agency (CRA) considers new immigrants as residents for taxation from the date they entered the country. That means you will only pay tax for the income you earned after becoming a resident. You would still declare any amount you earned before becoming a resident, but the CRA won’t tax it.
When declaring your foreign income as you file your Canadian tax returns, you have to:
- Indicate the countries where you earned the money
- Declare the total amount of your income before the foreign taxes got withheld
The CRA may determine the foreign income exempt from taxation depending on the nature of your income, country of origin, and other significant factors. And that is usually as a result of tax treaties between Canada and the countries where you earned income.
Foreign Income Tax Credits for Canadian Residents
So far, you already know that all Canadian residents must report all their income earned in Canada and foreign countries. Whether it’s a business or an investment property that you run outside Canada, you have to declare the foreign income to the CRA.
The good news is, you can claim credit for the foreign income taxes you already paid. It can also be a credit for the Canadian income tax you would pay on the foreign income. Generally, the tax credit is meant for the resident living in Canada during the tax year.
The primary advantage of foreign income tax credits is that they protect you from paying the taxes twice (double-taxation). As a result, it decreases the amount of tax payable in Canada, mainly when a tax treaty exists between Canada and another country.
When declaring the foreign income for more than one country, ensure that you submit separate tax credit forms for each country. Also, if you earn foreign income from business and non-business sources, you must use separate tax credit forms.
Most importantly, the CRA requires you to convert your foreign income to its equivalent in Canadian currency using the exchange rate applicable on the date you earned your income. You can obtain the past exchange rates from the Bank of Canada.
Foreign Income Declaration by Canadian Non-Residents
The CRA considers any person living in a foreign country and doesn’t have residential ties to Canada as a non-resident (that is, for tax purposes). So, if you visit Canada as a tourist, you become a non-resident, provided you spend 183 days in Canada yearly.
Your home country’s tax department may require you to report the income you earned while in Canada. But why should you report your income to the CRA?
Well, most non-residents often declare their income earned outside Canada to take advantage of Canada’s non-refundable tax credits. As a result, their non-Canadian income won’t get taxed in Canada. However, it affects their non-refundable tax credits.
First, it would be best to file your Canadian tax returns to establish your net Canadian income and the tax payable. Once you do that, proceed to file your country’s tax return as a resident. But first, consider if a treaty exists between Canada and your country.
However, you don’t need to report your foreign income to the Canada Revenue Agency if you are a non-resident in Canada. Instead, you only report what you earned during your stay in Canada, like pension payments and capital gains from property disposal.
Tax Treaties Between Canada and Other Countries
Canada has many tax treaties or agreements with many foreign countries, including the United States. The primary objective of the tax treaties is to help citizens of the involved countries avoid paying double taxes. It also prevents tax evasion for foreign income.
Here are the other purposes of a tax treaty between Canada and other countries.
- Provides resolutions for tax issues arising between involved parties
- Defines residency outline eligibility criteria to solve disputes over foreign income
- Covers exemptions for specific people and organizations
- Highlights how taxes work on pensions, salaries, and other taxable incomes
The Canada/U.S. Tax Treaty
In Canada, most people use the Canada/U.S. treaty to claim income tax credits for:
- Income earned in the United States
- Income from pensions and annuities in the U.S.
- Self-employed income from U.S. businesses owned by Canadians
So, where does the W-8BEN form come into this?
Well, the form certifies that your country of residence is outside the United States for tax purposes. It’s a requirement due to the inter-federal agreement between the United States and Canada. The W-8BEN confirms that:
- You are not a U.S. resident
- You own the income indicated in the form
- You qualify for a reduced withholding tax rate since you reside in a foreign country with which the United States has an income tax treaty
So, if you are a certified Canadian resident, you can use the W-8BEN form to claim a reduction on the tax withheld from your U.S. income you may receive in your account.
As a Canadian resident, you must declare your foreign income to the Canada Revenue Agency (CRA) when filing your annual tax returns. In addition, you have to specify the countries where the income originated from and the total amount of income you earned. Thankfully, you now understand the requirements for foreign income declaration.