Canada - Income Tax

Canada - Income Tax

Taxation of international executives

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Tax returns and compliance

When are tax returns due? That is, what is the tax return due date?

30 April except for individuals reporting self-employment income, in which case it is June 15.

What is the tax year-end?

31 December.

What are the compliance requirements for tax returns in Canada?

The Canadian tax system is a self-assessment system. Individuals are required to determine their own liability for income taxes and file the required returns for any taxation year in which taxes are payable. Individuals each file their own tax returns; spouses do not file jointly. The taxation year for an individual is the calendar year.

Individual returns are due on 30 April of the following year and there are no provisions for extension of this deadline other than by the government authorizing an extension for all individual filers. This usually occurs when the regular date falls on a weekend or public holiday. The tax return due date for individuals with self- employment income is 15 June, but taxes must be paid by 30 April to avoid interest. Late filing penalties and interest are based on unpaid taxes and additional penalties apply to certain forms not filed on a timely basis. 

Employers are required to withhold and remit taxes with respect to all amounts characterized as employment income.

Residents

Individuals resident in Canada are subject to Canadian income tax on their worldwide income, regardless of where it is earned or where it is received, and are eligible for a potential credit or deduction for foreign taxes paid on income derived from foreign sources.

There are no few specific Canadian tax rules for determining whether an individual is resident in Canada. Each case is usually decided on its own merits based on the application of criteria developed by Canadian jurisprudence and applied by the CRA. By commencing long-term or permanent employment, acquiring a dwelling place, moving one’s family into the country, and establishing residential and social ties (such as acquiring bank accounts, club memberships, or a driver’s license) in Canada, an individual may establish residence in Canada at a specified point in time. Residence is also established by virtue of the taxpayer’s intent to remain in Canada. Where residence is established by reference to particular events, individuals are taxed as resident for one part of the year and as non-residents for that part of the year that precedes residence. An individual may also be considered a deemed resident taxpayer if he/she is present in Canada for 183 days or more in a calendar year. As a deemed resident, the individual is subject to tax on his/her worldwide income. Tax relief may be available if the individual is also a resident of another country in which Canada has a tax treaty.

Non-residents

Non-resident individuals are subject to Canadian income taxes, calculated at the same graduated rates applicable to residents, on Canadian-source income, such as Canadian employment income, Canadian business income, or the disposition of taxable Canadian property. Income earned in Canada from property and certain other sources such as dividends, gross rents, and royalties is subject to federal tax levied at a flat rate of 25% (which may be reduced under the terms of an applicable tax treaty) that is withheld at the source. A non-resident may elect, if done on a timely basis, to pay Canadian tax at the same graduated rates as a resident on net rental income from Canadian real property.

An individual is deemed, under the Income Tax Act, to be a non-resident of Canada if he/she is primarily a resident of another country under the residency provisions of a tax treaty between that country and Canada. 

Tax rates

What are the current income tax rates for residents and non-residents in Canada?

Residents

Federal tax

Federal tax is calculated by applying a progressive tax rate schedule to taxable income. The tax rates are the same for residents and non-residents.

Income tax table for 2016

Taxable income bracket

Total tax income below bracket

Tax rate on income in bracket

From CAD

To CAD

CAD

Percent

0

45,282

0

15

45,282.01

90,563

6,792

20.5 

90,563.01

140,388

16,075

26

140,388.01

200,000

29,029

29

200,000.01                                   Over 46,316 33

The above rates will be reduced, by means of a credit equal to 16.5% of the applicable regular federal rate, for individuals who are also subject to Québec income tax in the same year.

Provincial and Territorial income taxes

The provinces and territories (except Québec) use the taxable income calculated for federal tax purposes, but apply their own tax rates and tax brackets to that income figure. The provinces and territories also set their own non-refundable tax credits and maintain any low-rate tax reductions and other provincial/territorial credits currently in place. The Canada Revenue Agency ("CRA") administers both federal and provincial/territorial taxes (except for Québec's tax system); thus, most taxpayers calculate their federal and provincial/territorial taxes on one return.

2015 tax rates (as a percent of taxable income)

  Brackets

%

Provincial surtax threshold

British Columbia 5.06% - 0-38210
7.7% - 38,210.01 – 76,421
10.5% - 76,421.01 – 87,741
12.29% - 87,741.01 – 106,543
14.7% - 106,543.01 and over
   
Alberta 10% - 0 – 125,00012% - 125,000.01 – 150,00013 %  - 150,000.01 – 200,00014% - 200,000.01 – 300,00015% - 300,000.01 and over
   
Saskatchewan 11.0% - 0 – 44,60113.0% - 44,601.01 – 127,43015.0% - 127,430.01 and over
   
Manitoba 10.8% - 0-31,000
12.75% - 31,001-67,000
17.4% - 67,001 and over
   
Ontario 5.05% - 41,5369.15% - 41,536.01 – 83,07511.16% - 075.01 – 150,00012.16% - 150,000.01 – 220,00013.16% - 220,000.01 and over

20%
36%

4,484
5,739

Québec 16.0% - 42,39020.0% - 42,390.01-84,78024.0% - 84,780.01-103,15025.75% - 103,150.01 and over
   
New Brunswick 9.68% - 0-40,49214.82% - 40,492.01 – 80,98516.52% - 80,985.01 – 131,66417.84% - 131,664.01 – 150,00021.00% - 150,000.01 – 250,000
   
Nova Scotia 8.79% - 0-29,59014.95% - 29,590.01-59,18016.67% - 59,180.01- 93,00017.5% - 93,000.01- 150,00020.3% - 150,000.01 and over
   
Prince Edward Island 9.8% - 0-31,98413.8% - 31,984.01-63,96916.7% - 63,969.01 and over

10%

12,500

Newfoundland and Labrador 7.7% - 0-35,14812.5% - 5,148.01 – 70,29513.3% - 70,295.01 and over
   
Yukon Territory 6.4% - 0-45,2829.0% - 45,282.01 -90,56310.9% - 90,563.01-140,38812.8% - 140,388.01-500,00015.0% - 500,000.01 and over

 

 

Nunavut 4.0% - 0-43,1767.0% - 43,176.01-86,3519.0% - 86,351.01-140,38811.5% - 140,388.01 and over
   
Northwest Territories 5.9% - 0- 41,0118.6% -  41,011.01-82,02412.2% -  82,024.01-133,35314.05% - 133,353.01 and over
   

 

Non-residents

Non-residents have the same federal tax and provincial/territorial tax rates as residents. On income not allocable (by regulation) to a province or territory, a federal surtax calculated as of 48 percent of the normal federal tax is applicable (in lieu of provincial tax).

Residence rules

For the purposes of taxation, how is an individual defined as a resident of Canada?

Residency is determined on the facts of each case applying criteria developed by jurisprudence. The following considerations are taken into account:

  • the nature of the stay in Canada
  • the length of the stay
  • whether or not the individual is accompanied by his/her family
  • the individual’s center of economic interests
  • the individual’s intentions
  • whether or not the individual is registered in a municipal register to vote
  • the place where bank accounts are held
  • the place where the person’s assets are located
  • the terms of employment
  • entitlement to subsidized provincial healthcare.

The criteria looks to whether there are durable ties of a personal nature that the individual has with Canada. The term durable need not mean permanent; the closeness of the tie is more important. Ties of a personal nature excludeing purely business considerations; personal circumstances, such as the maintenance of an abode and whether the spouse and dependent children live with the taxpayer in Canada, are more determinative. Residence abroad does not in itself exclude the possibility of being considered resident in Canada. However, dual residence resulting in double taxation may be resolved under the residency tie-breaker terms of a particular tax treaty. Canadian civil servants living abroad are deemed resident in Canada.

Married couples file tax returns as separate individuals.

Is there a de minimus number of days rule when it comes to residency start and end date? For example, a taxpayer cannot come back to the host country for more than 10 days after their assignment is over and they repatriate.

No.

What if the assignee enters the country before their assignment begins?

An assignee that enters the country before the  start of the assignment may be considered to have established residential ties on the earlier date and thus be required to pay Canadian taxes on worldwide income commencing from that day for the remainder of the calendar year, or even for the entire year if the assignee is physically present in Canada for 183 or more days in that year and cannot invoke the residency tie-breaker rules in a Tax Treaty between Canada and the country where the assignee purportedly remains resident.

Termination of residence

Are there any tax compliance requirements when entering or leaving Canada?

Generally, an individual must pass through a Canada Border Services Agency checkpoint at the place of entry or departure and show a valid work permit or employment authorization and passport.

Departure tax

Individuals are deemed to dispose of most property upon ceasing Canadian residency. Exceptions include Canadian real property, certain property used in a business in Canada, stock options, and certain pensions, which remain subject to Canadian tax upon sale or distribution unless relieved by a tax treaty.

The departure tax may be deferred until the asset is actually disposed of by posting security acceptable to the Canada Revenue Agency prior to the filing deadline for the tax return for the year of departure and by making the appropriate election on that return, which must be timely filed. The intention is that taxpayers should be taxed on all gains that accrue during their period of residence. However, provisions exist to exempt short-term residents from the application of these rules in relation to property that was held throughout the period of residence. A short-term resident is an individual who has been resident in Canada for less than 60 months during the 120 month period that ends on the individual’s departure date. If an individual qualifies for this exemption, the deemed disposition rule will only apply to any property acquired while the individual was resident in Canada. (Furthermore, gifts or inheritances received during the period of Canadian residency are also excluded if the individual is resident in Canada for less than 60 months during the 120 month period ending on the individual’s departure date.).

Certain information returns also need to be filed with the departure year return, which include a listing of assets held by an emigrant of Canada on the date that he/she ceased Canadian residency (Forms T1161 and T1243), and late-filing penalties will apply if they are not filed by the filing deadline for the individual’s Canadian tax return for the year of departure.

What if the assignee comes back for a trip after residency has terminated?

An assignee that returns to Canada for a trip after residency has terminated may thereby be viewed by the CRA as having extend their assignee’s residency termination date and subject their assignee’s income earned after the assignment to Canadian taxation.

Furthermore, the assignee may be deemed to be a resident for the entire calendar year and subject to tax on worldwide income if he/she sojourned (was temporarily present) in Canada for a total of 183 days or more in any calendar year unless eligible for a tax treaty exemption.

Communication between immigration and taxation authorities

Do the immigration authorities in Canada provide information to the local taxation authorities regarding when a person enters or leaves Canada?

Not directly, but information may be shared between the two groups.

Filing requirements

Will an assignee have a filing requirement in the host country after they leave the country and repatriate?

Generally, an assignee is considered a non-resident of Canada for tax purposes if he/she is repatriated to his/her home country and residential ties with Canada are severed. For the part of the tax year that he/she is a resident of Canada for tax purposes, income from all sources, both inside and outside Canada, should be reported on the Canadian tax return. After leaving Canada, the assignee should be treated as a non-resident. Non-residents are only subject to Canadian tax on income received from Canadian sources. Compensation and bonuses related to the Canadian assignment may still be taxable in Canada subsequent to departure from Canada.

After departure from Canada, Canadian source employment income and self-employment income is generally subject to Canadian income tax at the same federal and provincial rates and thresholds as apply to residents of Canada, whereas Canadian source investment income received by a non-resident is subject to federal Part XIII tax (25 percent withholding tax on passive income) or Part I tax. If the income received is subject to Part XIII tax, a Canadian tax return need not be filed, except when Canadian rental income, timber royalties, or certain Canadian pension income is received, in which case the nonresident individual may be able to elect to file a Canadian tax return and have the net income taxed at regular rates and thresholds, if that will result in a lower amount of Canadian tax than if the flat 25% Part XIII tax applies. If the income is subject to Part I tax, a tax return usually has to be filed.

An assignee must file a Canadian tax return if:

  • tax is owed
  • a refund is to be claimed because too much tax was withheld or paid in the tax year.

The due date of the tax return is 30 April.

Economic employer approach

Do the taxation authorities in Canada adopt the economic employer approach to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in Canada considering the adoption of this interpretation of economic employer in the future?2

Most of Canada’s tax treaties adopt the economic employer approach.

De minimus number of days

Are there a de minimus number of days before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days?3

The economic employer approach is not based on a minimum number of days; however, there are certain treaties that permit exemptions from Canadian income tax on maximum employment income amounts earned in Canada each calendar year regardless of who pays them or whether they are charged to a source in Canada (such as CAD 10,000 maximum earned under the Canada- US tax treaty).

Types of taxable compensation

What categories are subject to income tax in general situations?

Resident taxpayers are subject to income tax on their worldwide income. Non-residents are subject to tax only on income derived from certain specific sources in Canada as follows.

  • Income from carrying on a business in Canada (unless a treaty exemption applies).
    • Income from an office or employment in Canada (including director’s fees).
    • Income from real estate located in Canada.
    • Royalty and other income from Canadian resource property.
    • Dividends from securities issued by a company resident in Canada.
    • Capital gains from the disposition of Taxable Canadian Property (a term defined in the Income Tax Act of Canada). Examples of Taxable Canadian Property include but are not limited to:
      • real or immovable property located within Canada
      • capital property, intangible property and inventory used in carrying on a business in Canada
      • an interest in a private corporation , partnership or trust which derived more than 50 percent of its value directly or indirectly from real estate property or resource property or timber property located in Canada at any time during the 60 months period ending on the disposition or deemed disposition date
      • any shares in the capital stock of a publicly traded corporation of a mutual fund corporation or units in a mutual fund trust if the shares or units constituted 25% or more of the issued shares or the issued units and the public corporation, mutual fund corporation or mutual fund trust derived more than 50% of its fair market value directly or indirectly from real property or resource property or timber property located in Canada at any time during the 60 months period ending on the disposition or deemed disposition date

Employment income is taxable when received or when the individual is entitled to receive it, if earlier. Employment income is subject to tax to the extent it was earned during a period of Canadian residence or in the case of income earned while non-resident, to the extent it was earned in respect of duties performed in Canada.

Tax-exempt income

Are there any areas of income that are exempt from taxation in Canada? If so, please provide a general definition of these areas. 

Certain employer provided housing allowances (employer’s contribution to rent) - Special Work Site Provisions

If an employer provides an employee with a housing allowance, board and lodging, low-rent or rent-free housing, the employee has a taxable benefit. Employer-provided household furnishings are taxable to the extent that the individual would otherwise have been out-of-pocket. An exemption exists if the taxpayer qualifies for the special work site provisions. To qualify for this special provision, all of the following requirements must be met.

  • The individual is required to work at a special work site on a temporary basis  (i.e., generally, the period to be spent at the special work site is reasonably expected at its outset not to exceed two years)..
  • The individual’s principal residence (his/her original home) must be available for his/her use throughout the period and not rented out.
  • The residence must be too far from the special work site for daily commuting.
  • The individual is required to be away from his/her ordinary residence, or at the special work site, for at least 36 hours.

If these requirements are met, this provision also covers transportation costs to travel between the work location and the place of principal residence.

This exemption may also be available if the individual is required to work at a remote location (logging camp, mine, and so on).

It is recommended that individuals, or their employers, consult their tax advisers regarding their particular facts and circumstances to determine if they qualify for this exemption.

Certain employer provided housing allowances (cost of utilities)

The cost of utilities paid for employees is considered a taxable benefit. An exemption exists if the taxpayer qualifies for the special work site provisions. It is recommended that the taxpayer consult their adviser regarding their particular facts and circumstances to determine if they qualify.

Living away from home allowance (LAFHA)

The Living Away From Home Allowance (LAFHA) is considered a taxable benefit. An exemption exists if the taxpayer qualifies for the special work site provisions. It is recommended that the taxpayer consult their adviser regarding their particular facts and circumstances to determine if they qualify. 

Certain employer provided tax reimbursements

The following are the usual methods of recognizing tax reimbursements paid by the employer:

  • current-year gross-up
  • current-year reimbursement
  • one-year rollover.

A gross-up is not required in the year of departure but it may be advisable in order to avoid having to file an income tax return in the year after departure.

Certain employer provided relocation reimbursements

The reimbursement of actual relocation expenses is generally not taxable. However, if a non-accountable allowance is provided instead, any amount in excess of CAD650 is a taxable benefit. Eligible moving expenses may offset this taxable allowance. However, eligible moving expenses are usually deductible only for moves within Canada.

Home leave

Home leave is considered a taxable benefit. An exemption exists if the taxpayer qualifies for the special work site provisions. It is recommended that the taxpayer consult their adviser regarding their particular facts and circumstances to determine if they qualify.

Under the special work site provisions, exempt employer-provided transportation or allowances must relate to transportation between the individual’s principal place of residence and the work site. Accordingly, any transportation assistance relating to travel between the work site and a location other than the individual’s principal place of residence (such as a vacation in lieu of going home) will not be excluded from taxable income.

Certain employer provided education costs

Education provided to the individual that is mainly for the benefit of the for the individual’s benefit or relates to schooling for his/her dependents.

Certain bonus payments

A bonus (in respect of non-Canadian employment), if paid before the individual becomes taxable in Canada, or after he/she ceases to be taxable in Canada is not taxable in Canada. Bonuses received while resident in Canada or relating to Canadian-source employment are taxable in Canada.

Certain interest subsidies

If the employer provides a low-interest or interest-free loan to an individual, the individual is considered to have received a benefit from employment. The benefit is determined based on (CRA’s) current prescribed interest rate applicable at the time the interest free or low interest loan is advanced, calculated as simple interest on the loan balance, and is included in the individual’s employment income each year or partial year the loan is outstanding. The benefit will be reduced by any interest actually paid by the individual on the loan during the year or within the first 30 days of the following year. The prescribed rates are set quarterly. The imputed interest that is included in income as a taxable benefit is deemed to be interest paid by the individual. As a result, if such interest would otherwise have been deductible had it been paid on the loan by the individual, it can be deducted.

Special rules exist with respect to low-interest or interest-free “home relocation” loans. The employee is considered to have received a loan or incurred a debt when the funds are advanced or the relevant documents are produced and he/she becomes legally obligated to repay the loan or discharge the debt. The employee may claim a special deduction for the first five years of the loan, equal to the imputed interest on CAD25, 000. There are certain conditions that must be met for such loans that are made by the employer to be considered as employee home relocation loans. It is recommended that individuals consult their tax advisers regarding their particular facts and circumstances to determine if the e loan qualifies.4

Certain auto allowances

Reasonable automobile allowances calculated on a per kilometer basis that are paid to employees who uses their personally owned motor vehicles for business purposes is are not considered a taxable benefit to the those employees if the allowances do not exceed the rates set for each year by CRA(For 2016, the rates are CAD 54 cents kilometer for the first 5,000 kilometer driven and CAD 48 cents per kilometer driven after that). However, those allowances will become taxable if the employer also reimburses the employees for any of the employees’ car expense (e.g., gas, insurance) or pays the employees any additional lump sum allowance. 

If the employer provides a car for the individual, rather than paying a cash allowance or reimbursement, the value of the benefit is calculated using a predetermined formula and may differ depending on whether the car is purchased or leased by the company. The benefit is based on a two-fold calculation including a stand-by charge and an operating cost benefit.

The stand-by charge may be reduced if the individual uses the car more than 50 percent for business and drives less than 20,000 kilometers per year for personal use. The operating cost benefit may also be reduced if the individual uses the car more than 50 percent of the time for business use.

Health insurance

Employer contributions to contributions to private health plans (such as medical or dental plans) made on behalf of employees are not considered to be taxable benefits, except for Québec tax purposes. However, employer contributions of an employee’s premiums to a provincial medical care insurance plan are considered taxable benefits for the employee.

Expatriate concessions

Are there any concessions made for expatriates in Canada?

Adjustment in tax cost basis

Prior to establishing residency in Canada, an individual is deemed to have disposed of all of his/her assets (other than taxable Canadian property) and to have reacquired the same assets at fair market value. Thus, if an individual has highly appreciated assets and establishes residency in Canada prior to selling the asset and if the gain is not subject to tax in another country, an individual may not be taxed on a portion of capital gain. Any tax strategies in this area warrant extensive planning.

Special work site exemption

See also section titled Tax-Exempt Income section with respect to the special work site provision.

Foreign Pension Plans

Canada allows individuals who are temporarily working in Canada to continue to participate in qualifying foreign employer-sponsored pension plans or foreign Social Security Arrangements. Under the terms of some of Canada’s tax treaties (e.g., the tax treaties with the US, Germany, France, and the UK) aAn individual may be able to claim a deduction for the contributions made to a foreign employer-sponsored pension plan and/or a non-refundable tax credit for contributions made to a foreign Social Security Arrangement in the country where the individual resided before coming to Canada. For contributions made to qualifying US plans, Form RC267 is applicable and for contributions made to qualifying foreign plans of other countries, Form RC269 is applicable. The relevant form must be completed and filed with the individual’s Canadian tax return.

Salary earned from working abroad

Is salary earned from working abroad taxed in Canada? If so, how?

The salary of a Canadian resident is taxable in Canada regardless of where the services are performed or where the salary is received by or paid to the employee or where the employer paying the compensation is resident. The allocation of income to foreign business trips is beneficial only as far as it can be used to alleviate double taxation through the foreign tax credit mechanism. The relevant foreign tax must have been paid to the country where the services were provided to be eligible to be claimed as a foreign tax credit to reduce the Canadian tax on that income.

See also section titled Tax-Exempt Income section with respect to special work site provision.

Taxation of investment income and capital gains

Are investment income and capital gains taxed in Canada? If so, how?  

Dividends, interest, and rental income

Dividends and interest income are generally taxable in Canada as the income is received. In addition, for investments that do not pay interest on an annual basis, an annual interest accrual may need to be determined and included in taxable income. Dividends from taxable Canadian corporations are taxed at a reduced rate through a gross-up and tax credit mechanism, which in principle takes into account income taxes paid at the corporate level. In the case of income from foreign investments, taxes withheld in another jurisdiction are creditable against Canadian taxes otherwise payable, based on tax treaty rates where applicable, and calculated on a country-by-country basis..

Upon the disposition of capital property, the gain or loss is calculated as the difference between the cost base of the asset and the proceeds of sale (less any selling expenses). Only one-half of the net capital gain is added to taxable income, while a net capital loss may be carried back to reduce capital gains realized in any of the three prior years, and thereby recover the relevant tax, or be carried forward and applied to reduce net taxable capital gains realized in any future tax year. Canadian residents owning qualified small business corporation shares” may qualify for an lifetime exemption (applied on a cumulative basis) of up to CAD 824,176,  or for a lifetime exemption of up to CAD 1,000,000 for qualified Canadian farm property or qualified Canadian fishing property they own, on the disposition of that property on or after January 1, 2016. Donations of certain appreciated capital property to registered charities may result in no capital gains being subject to tax and a donation credit being available to the donor.

Accrued capital gains can also create an income tax liability at death. An individual is deemed to dispose of all assets held at the date of death for proceeds equal to their fair market value on that date, and the accrued capital gains or losses are reported on the individual’s tax return for that year. An exception to this deemed disposition rule applies if the individual was a resident of Canada at the time of death and the property was transferred either to a surviving spouse who was also resident in Canada on the same date or to a Canadian spousal trust created under the deceased spouses’ will for the lifetime of the surviving spouse.

Capital gains are generally measured from the original cost of the particular property. However, on immigration to Canada, most property owned by the individual is deemed to be reacquired at its fair market value as of the date of immigration. This helps ensure that Canada only taxes the capital gains that accrue while the individual is resident in Canada. 

Gains from employee stock option exercises

Stock option income is taxable in Canada if the individual is a resident when the options are exercised. Stock option income may also be taxable in Canada if the options were granted while the individual was a resident of or working in Canada (even if exercised after departure from Canada). A foreign tax credit may be available if the stock option income was subject to tax in another jurisdiction.

A deduction equal to 50 percent of the taxable stock option benefit may be available if all of the following criteria is met.

  • The shares are qualifying shares (generally common shares).
  • The exercise price is not less than fair market value at the time the options were granted.
  • The employee deals with the employer at arm’s length.

Foreign exchange gains and losses

When non-Canadian property is sold or deemed to have been sold, generally the gain for Canadian tax purposes must be calculated by converting the net proceeds into Canadian Dollars on the closing date or the deemed closing date and by converting the cost into Canadian Dollars using the exchange rate as of the date the property was purchased or was deemed to have been purchased. As a result, a foreign exchange gain or loss may arise on the sale or the deemed sale that is independent of the actual gain or loss on the property.

The tax treatment of the foreign currency gain/loss as either income (100% taxable or deductible) or as capital (50% taxable and any loss being deductible only against capital gains) usually follows the character of the asset generating the gain/loss.

Principal residence gains and losses

Capital gains arising on the disposition of a principal residence are generally not subject to tax with respect to the years it was owned and lived in by an individual, or by a spouse or child of that individual, while the individual was a resident of Canada. A principal residence can be located in another country. A family (husband and wife) is limited to designating only one home as a principal residence per tax year.

Capital losses

Capital losses can be used to reduce capital gains incurred during the year to a balance of zero. A net capital loss occurs when capital losses exceed capital gains during the year. Generally, net capital losses can be applied against taxable capital gains of the three preceding years and to taxable capital gains of all future years to reduce the tax liability of those years.

Personal use items

When a taxpayer disposes of personal-use property that has an adjusted cost base or proceeds of disposition of more than CAD1,000, capital gains or losses may be recognized. Capital gains must be reported from such dispositions. However, deductions are usually not available for capital losses unless the items disposed of belong to a restrictive class of assets known as listed personal property.

Gifts

There is no gift tax in Canada. However, income tax may arise on the gifting of capital property that has appreciated in value since it was acquired by the donor because the donor will be deemed, under Canadian tax rules, to have disposed of the capital property for proceeds equal to itsat fair market value on the date the gift is made. There are certain exceptions for gifts to a spouse.

Also, rules pertaining to income splitting must be considered. In certain circumstances, if the item gifted is an income-producing asset or is used to purchase an income-producing asset, the income may be attributed back to the taxpayer. This is generally the case for gifts to a spouse and minor children and low-interest loans to non-arm’s length persons.

Foreign property reporting

Canadian residents are required to file the following information returns, in addition to their personal income tax returns, if they:

  • own specified foreign property, the total cost of which exceeds CAD100,000 at any time in the tax year (Form T1135)
  • transfer or loan any amount, directly or indirectly, to a non-resident trust or to a controlled foreign affiliate of a non-resident trust (Form T1141)
  • receive distributions from, or are indebted to, non-resident trusts in which they are beneficially interested (Form T1142)
  • have ownership in a non-resident corporation or trust that is a foreign affiliate or a controlled foreign affiliate (Form T1134).

The deadline for filing the information return is generally the individual's normal filing deadline. Failure to file the information return on a timely basis may result in the assessment of penalties.

Non-resident trusts

Rules for non-resident trust expand the taxation of income earned by these trusts. If an offshore trust has a Canadian resident contributor, or a Canadian beneficiary and a contributor with nexus to Canada, the trust will be deemed to be a resident of Canada and will be subject to tax in Canada on its worldwide income and capital gains. At the same time, all Canadian-resident contributors and beneficiaries will be liable jointly for the tax liability of the trust.

Additional capital gains tax (CGT) issues and exceptions

Are there capital gains tax exceptions in Canada? If so, please discuss.  

Pre-CGT assets

Capital gains were not taxed prior to 1 January 1972. Therefore, to eliminate any capital gains that accrued before 1972, transitional rules apply when a taxpayer disposes of a capital property acquired before 1972. The transitional rules allow the taxpayer to reduce the proceeds of disposition when a taxpayer calculates the capital gain on the disposition of a property.

Deemed disposal and acquisition

Where a taxpayer ceases to be resident in Canada at any particular time, the taxpayer is deemed to have disposed of certain capital properties owned immediately before departure for proceeds equal to fair market value. The taxpayer is also deemed to have reacquired the property immediately after ceasing to be resident in Canada at a cost of the same amount. Ownership is to be interpreted in the broadest sense, in accordance with Canadian judicial interpretation, no matter where the property is located. However, for valuation purposes the fair market value in the country or area of location of the property will usually govern.

A taxpayer who becomes a resident of Canada is deemed to have acquired at the time of becoming a resident each property owned at a cost equal to fair market value at that time.

A capital gains exemption of up to CAD 824,176 (CAD 1,000,000 for the second and third categories listed below) may be claimed against capital gains arising from the disposition, on or after January 1, 2016, of the following types of properties:

  • qualified small business corporation shares
  • qualified farm property
  • qualified fishing property
  • a reserve brought into income, from any of the above.

A taxpayer must be a resident of Canada for tax purposes throughout the entire taxation year to be eligible to claim the capital gains exemption. If a taxpayer was only a resident for part of the taxation year in question, then he/she will also be considered to be a resident if he/she was considered a resident throughout the year preceding and subsequent to the year in question.5

General deductions from income

What are the general deductions from income allowed in Canada?

Deductions permitted depend on amounts actually expended and substantiation of the expenditure is generally required.

Allowable deductions include the following.

  • Union and professional dues
  • Non-reimbursed travel costs and other expenses of commissioned salespersons
  • Non-reimbursed travel costs and other expenses incurred where the individual is required to carry out the duties of employment away from the employer’s place of business
  • Home office expenses where the space is used exclusively on a regular and continuous basis for the purpose of meeting customers or if the work space is where the individual principally performs the duties of his/her employment and only to the extent of business income in the year and in following years
  • Retirement savings plans that are funded by an individual rather than an employer are known as Registered Retirement Savings Plans (RRSPs). RRSP contributions that qualify under the Canadian Income Tax Act are deductible for any given year if they are contributed in that year or within 60 days after the end of that year and the total does not exceed the individual's contribution room for that year. Generally, the annual deduction for contributions to an RRSP is limited to the lesser of the following:
    1. Eighteen percent of the individual’s prior year’s earned income (as defined)
    2. The RRSP limit for the year (CAD25,370  for 2016 and CAD24,930 for 2015) .The limit is reduced by certain pension adjustments to reflect employer and individual funding of other registered pension plans.
      This poses a problem for new residents of Canada earning substantial Canadian-sourced income in the year of arrival, as they are unable to contribute to an RRSP in the first year in order to reduce their taxable income. However, contributions can be made following departure from Canada for deductibility in the final reporting year. This is beneficial if there is substantial income to report in the year of departure or if there will be trailing Canadian source employment income (e.g. bonuses, stock option benefits, RSU benefits) that will be received in a subsequent year that will be required to be reported on a non-resident Canadian tax return and be subject to Canadian tax. 
      The deduction limit may be higher if the individual has unused contribution room carried forward from previous years.
  • Childcare expenses (subject to certain limitations) if they were incurred to allow the taxpayer and spouse to work, carry on business, attend school full-time or part-time, or to carry on grant-funded research. In general, the lower net income (including zero income) spouse must claim the child care expense.
  • Interest, carrying charges, and investment counsel fees related to the earning of taxable investment income.
  • Non-reimbursed moving expenses to and from a qualifying relocation (within Canada).
  • Child support payments paid under a pre-May 1, 1997 written agreement or court order.
  • Periodic alimony payments made pursuant to a court order or written agreement.

Tax reimbursement methods

What are the tax reimbursement methods generally used by employers in Canada?

The following are the usual methods of recognizing tax reimbursements paid by the employer:

  • current-year gross-up
  • current-year reimbursement
  • one-year rollover.

A gross-up is not required in the year of departure but may be advisable in order to avoid having to file an income tax return in the year after departure.

Calculation of estimates/ prepayments/ withholding

How are estimates/prepayments/withholding of tax handled in Canada? For example, Pay-As-You-Earn (PAYE), Pay-As-You-Go (PAYG), and so on.

The withholding tax constitutes a payment towards an individual’s tax liability and thus parallels the rates in the (progressive) individual income tax schedules. If an individual is taxable in respect of employment income, the payer has a withholding requirement. The CRA provides tax-withholding tables to calculate the amount of withholdings required on various types of payments (such as periodic and lump sum). The Québec Ministry of Revenue provides similar withholding tables for Québec provincial taxes.

When are estimates/prepayments/withholding of tax due in Canada? For example, monthly, annually, both, and so on.

Employers are required to report, withhold, and remit withholding tax each pay period unless a waiver of withholding tax has been issued by CRA (or by the Quebec Ministry of Revenue in respect of Québec withholding tax).

An individual is required to make installment payments if the difference between the tax payable and amounts withheld at source is more than CAD3,000 in both the current year and either of the two preceding years (the installments are calculated differently for an individual subject to federal and Quebec tax). There are three possible ways to calculate the amount.

The first method is to have the total installments, paid in four equal payments, equal to the taxes owing for the year on sources of income not subject to withholdings (that is, equal to the balance due amount at the end of the year). However, instalment penalties will be charged if the estimated instalments are less than the lower of either the actual tax balance calculated on that year’s tax return in excess of total taxes withheld at source during the year or the instalments that would have been calculated under the second method described below.

The second method is for quarterly installments to equal the tax owing (after source withholdings) on the previous year’s tax return.

The third method is to have the March and June installments equal to the total tax owing (after source withholdings) for the second prior year. The September and December installments then have to make up the difference so that the total installments paid for the year equal the amount determined in method two.

If the second or the third method is applied, the individual is not required to increase the instalments for the current year to reflect any increase in the individual’s income for that year and may pay the balance of any remaining tax on or before the filing deadline for the tax return without incurring any penalties. The CRA will generally send installment reminder notices indicating the installments due under method three.

Relief for foreign taxes

Is there any Relief for Foreign Taxes in Canada? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?

The Canadian Income Tax Act (and the Québec Taxation Act) provides two mechanisms for the relief of double taxation: foreign tax credits and, in certain circumstances, a deduction from income for income taxes paid in a foreign jurisdiction. Additionally, Canada has negotiated international tax treaties with many countries to prevent double taxation.

Foreign tax credits are calculated by each source country, with separate computations for business and non-business income taxes paid. The allowable foreign tax credit cannot exceed the Canadian tax that would otherwise be payable on that category of income. Foreign tax credits on property income (other than real property) cannot exceed 15 percent of income from the foreign property. Unused non-business foreign credits cannot be carried over to other years, but may be claimed as a deduction if the foreign tax does not exceed the withholding rate specified under a Tax Treaty between Canada and the country that levied the tax. (The Canada/US tax treaty provides relief against US tax for the non-creditable foreign tax on property income, as well as allows taxes in excess of the specified withholding rate to be deducted by US citizens on their Canadian tax returns.). Any unused business foreign tax credits may be carried back three years and forward ten years.

General tax credits

What are the general tax credits that may be claimed in Canada? Please list below.

Non-refundable tax credits that may be claimed on a Canadian income tax return by a resident include (but are not limited to):

  • basic personal amount
  • spouse or common-law partner amount
  • amount for an eligible dependent or child under 18
  • amount for infirm dependents age 18 or older
  • Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) contributions
  • Employment Insurance premium
  • Canadian employment amount
  • public transit amount
  • children’s fitness amount
  • children’s arts amount
  • home buyer’s amount
  • adoption expenses
  • student loan interest
  • pension income amount
  • caregiver amount
  • disability amount
  • tuition, education, and textbook amounts (your own or amounts transferred from a spouse or child)
  • amounts transferred from a spouse or common-law partner
  • donations and gifts made to a registered charity or to a registered political party
  • eligible medical expenses.

The applicable credits are generally calculated by applying the basic federal and relevant provincial rates to the eligible amounts identified above and they are  pro-rated for the year of arrival and for the departure year, by the percentage obtained by dividing the total number of days the individual was a resident of Canada by the total number of days in the relevant calendar year.

Non-residents may only claim general tax credits for the following items, if relevant, unless 90% or more of their net income for the relevant calendar year is subject to Canadian income tax:

  • Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) contributions
  • Employment Insurance premiums
  • Donations made to a Canadian registered charity

Sample tax calculation

This calculation assumes a married taxpayer resident in Ontario, Canada with two minor children whose three-year assignment begins 1 January 2014 and ends 31 December 2016. The taxpayer’s base salary is USD160,000 and the calculation covers three years.6

  2014
USD
2015
USD
2016
USD
Salary 160,000 160,000 160,000
Bonus 30,000 30,000 30,000
Cost-of-living allowance 10,000 10,000 10,000
Housing allowance 12,000 12,000 12,000
Company car benefit 6,000 6,000 6,000
Moving expense reimbursement 20,000 0 20,000
Home leave 0 5,000 0
Education allowance 3,000 3,000 3,000
Interest income from non-local sources 6,000 6,000 6,000

Exchange rate used for calculation: USD1.00 = CAD1.00.

Other assumptions

  • All earned income is attributable to local sources.
  • Bonuses are paid at the end of each tax year, and accrue evenly throughout the year.
  • The company car is used for business and private purposes and originally cost USD50,000.
  • The employee is deemed a resident in Canada throughout the assignment.
  • Tax treaties and totalization agreements are ignored for the purpose of this calculation.
  • Spouse has no income.
  • Moving reimbursements are of the nature that they are considered non-taxable in Canada.

Calculation of taxable income

Year-ended 2014
CAD
2015
CAD
2016
CAD
Days in Canada during year 365 365 366
Earned income subject to income tax      
Salary 160,000 160,000 160,000
Bonus 30,000 30,000 30,000
Cost-of-living allowance 10,000 10,000 10,000
Housing allowance 12,000 12,000 12,000
Company car 6,000 6,000 6,000
Moving expense reimbursement 0 0 0
Home leave 0 5,000 0
Education allowance 3,000 3,000 3,000
Total earned income 221,000 226,000 221,000
Investment income 6,000 6,000 6,000
Total income 227,000 232,000 227,000
Deductions 0 0 0
Total taxable income 227,000 232,000 227,000

Calculation of tax liability

       
Taxable income as above 227,000 232,000 227,000
Canadian income tax (federal and provincial) thereon 88,335 90,459 88,733
Less:      
Non-refundable tax credits 6,098 5,175 5,296
Total Canadian income tax 82,237
85,284
83,437
Employee contribution to Canada Pension Plan (CPP)  2,426
 2,480
 2,544
Employee contribution to Employment Insurance (EI)  914
931
955 

Footnotes:

1CRA - Leaving Canada (emigrants)

Certain tax authorities adopt an ‘economic employer’ approach to interpreting Article 15 of the OECD model treaty treaty that deals with the Income from Employment Article. In summary, this means that if an employee is assigned to work for an entity in the host country for a period of less than 183 days in the fiscal year (or, a calendar year or a 12-month period), the employee remains employed by the home country employer but the employee's salary and costs are recharged to the host entity, then the host country tax authority will treat the host entity as being the ‘economic employer’ and therefore the employer for the purposes of interpreting Article 15. In this case, Article 15 relief would be denied and the employee would be subject to tax in the host country.

3For example, an employee can be physically present in the country for up to 60 days before the tax authorities will apply the ‘economic employer’ approach.

4CRA - Employee home relocation loan deduction

5CRA - Capital gains deduction

6Sample calculation generated by KPMG LLP, a Canada limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.

In the sample calculation, the non-refundable tax credits for 2015 and for 2016 no longer include the credit for minor children, as it has been replaced with an increased Unified Child Care Benefit that will be paid directly to qualifying taxpayers.

© 2016 KPMG LLP, a Canada limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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