Filing taxes is definitely one of the least fun parts of a working holiday in Canada but also one of the topics I receive the most emails about. The most common source of confusion is usually regarding residency status for tax returns. Offering advice on determining residency status is difficult as it is quite subjective and everyone’s situation is, of course, different. Having said that, here are some tips to help determine your own tax residency status.
Filing taxes: the basics
The Canadian tax year runs January-December. Tax is usually automatically deducted from payslips (alongside E.I and C.P.P) but annual tax returns are still mandatory to make sure the correct amount has been paid. The deadline for filing taxes is the end of April for the preceding tax year.
Most individuals in Canada are allowed to earn up to a certain amount without paying tax. This tax-free threshold is called the ‘basic personal amount’ and was $11, 474 in 2016. If you earn over this amount, you will need to pay tax.
How much tax you pay above the threshold depends on a number of factors. Residency status is one of the considerations. There are different rules for residents and non-residents when it comes to filing taxes so it is important to know your residency status.
Resident vs. non-resident
Here’s the tricky bit.
Generally, you are a non-resident for tax purposes if you:
– Normally, customarily, or routinely live in another country and are not considered a resident of Canada
– or don’t have significant residential ties in Canada and you lived outside Canada throughout the tax year
– or you stayed in Canada for less than 183 days in the tax year
Typically you’ll be considered a resident if:
– Canada is the place where you regularly, normally or customarily live. For example, I have always filed as a resident as I have a Canadian common law partner and have the intention to live in Canada for the foreseeable future.
The Canadian Revenue Agency, an accountant or professional tax preparer can help you determine your residency status.
Rules and regulations of residency statuses
Once you know what your status is, be aware of the following rules:
– Any income earned outside Canada should be declared
– You will not be taxed on your foreign income but the amount will affect how many non-refundable tax credits you’re entitled to
The Canadian tax office will let you earn up to the tax-free threshold if 90% or more of your earnings for that year were earned in Canada. You should not claim the credits if you earn 10% or more of your income from outside Canada
– Income earned outside Canada must be declared
– You are taxed on your worldwide income
If you move to Canada with the intention to settle, anything earned up to that point should be declared, but you won’t be taxed on it and for that year you will be treated as non-resident
Filing your tax return
Once you have your residency status sorted, filing your taxes is relatively straightforward from here. There are however a number of different ways to physically complete your tax return. One is using a professional tax preparer such as Taxback.com. The folks at Taxback kindly helped me to write this post and if you choose to use their services using the affiliate link above, you will receive a 5% discount.
Remember to complete your tax return before the deadline!
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