Taxation of international executives
30 April except for individuals reporting self-employment income, in which case it is 15 June.
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 for both residents and nonresidents of Canada 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 who are reporting self-employment income on their Canadian tax returns is 15 June for both residents and nonresidents, but any taxes due must be paid by 30 April to avoid arrears interest being assessed. Late filing penalties and interest are based on unpaid taxes owing on the 30 April or, for self-employed taxpayers, 15 June filing deadline and additional penalties apply to certain tax information forms if they are not filed by the relevant income tax return deadline.
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 they are eligible for a potential credit or deduction for foreign taxes paid on income derived from foreign sources.
There are few specific rules in the Income Tax Act of Canada for determining whether an individual is resident in Canada. Each case is usually decided based on the application to an individual’s facts of criteria developed by Canadian jurisprudence and applied by the Canada Revenue Agency (“CRA”), which is the federal tax authority. By commencing long-term or permanent employment, acquiring a dwelling place, moving one’s family into the country/jurisdiction, and establishing multiple secondary residential ties with Canada (such as acquiring Canadian bank and investment accounts, club and/or professional memberships, a provincial health card and/or a provincial driver’s license), an individual may establish Canadian residency at a specific point in time. Canadian residency may also be established by virtue of the taxpayer’s clear intention to remain in Canada for a lengthy or indefinite period. Where residence is established by reference to the occurrence of particular events on or by a specific date in a calendar year, the individuals are taxed as Canadian residents for the part of the year that commences from that date and as non-residents for the preceding portion of that year. When residency is terminated by reference to the occurrence of particular events, individuals are taxed as Canadian residents for the period of 1 January to the date residency ends, and as non-residents for the remainder of that year,
An individual may also be deemed, under the “sojourning” rule in the Income Tax Act, to be a Canadian resident taxpayer for the entire calendar year in which the individual is physically present in Canada for 183 days or more in that year. Deemed residents are subject to Canadian tax on their worldwide income for the relevant calendar year. Tax relief may be available if the individual is also a resident of another country/jurisdiction which has a tax treaty with Canada, as described in the following section.
Non-resident individuals are subject to Canadian income taxes, calculated at the same graduated rates applicable to residents, on the following types of Canadian-source income:
Non-residents must file Canadian tax returns to report any of the above types of income and the final Canadian tax liabilities on the relevant income.
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 percent (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, instead of having to pay a tax of 25 percent on the gross rents received in the calendar year.
An individual is deemed, under the Income Tax Act, to be a non-resident of Canada if they are primarily a resident of another country/jurisdiction under the residency provisions of a tax treaty between that country/jurisdiction and Canada, regardless of Canadian domestic residency rules or the sojourning rule.
What are the current income tax rates for residents and non-residents in Canada?
Federal income tax
Federal tax is calculated by applying a progressive tax rate schedule to taxable income. The tax rates and income thresholds are the same for residents, part-year residents and non- residents.
The thresholds are indexed by the Federal government for inflation prior to the start of each calendar year.
Taxable income bracket
Total tax income below bracket
Tax rate on income in bracket
The above rates will be reduced, by means of a credit equal to 16.5 percent 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 same 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 CRA administers both federal and provincial/territorial taxes, except for Québec’s tax system, which is administered by Revenu Québec (formerly called the Québec Ministry of Revenue or “MRQ”); thus, most taxpayers calculate their Canadian federal and provincial/territorial taxes on one return.
Provincial surtax threshold
5.06% 0 – 41,725
7.70% 41,725.01 – 83,451.00
10.50% 83,451.01 – 95,812.00
12.29% 95,812.01 – 116,344.00
14.70% 116,344.01 –157,748.00
16.80% 157,748.01 and over
10% 0 – 131,220.00
12% 131,220.01 – 157,464.00
13 % 157,464.01 – 209,952.00
14% 209,952.01 – 314,928.00
15% 314,928.01 and over
10.50% 0 – 45,225.00
12.50% 45,225.01 – 129,214.00
14.50% 129,214.01 and over
10.8% 0 – 33,389.00
12.75% 33,389.01 – 72,164.00
17.4% - 72,164.01 and over
5.05% 0 – 44,740
9.15% 44,740.01 – 89,482
11.16% 89,482.01 – 150,000.00
12.16% 150,000.01 – 220,000
13.16% 220,000.01 and overr
20% on tax greater than 4,830 Plus an additional 36% on tax greater than 6,182
15.0% 0 – 44,545.00
20.0% 44,545.01 – 89,080.00
24.0% 89,080.01 – 108,390.00
25.75% 108,390.01 and over
9.68% 0 – 43,401.00
14.82% 43,404.01 – 86,803.00
16.52% 86,803.01 – 141,122.00
17.84% 141,122.01 –160,776.00
20.30% 160,776.01 and over
8.79% - 0-29,590
14.95% - 29,590.01-59,180
16.67% - 59,180.01- 93,000
17.5% - 93,000.01- 150,000
21.00% - 150,000.01 and over
|Prince Edward Island||
9.8% - 0-31,984
13.8% - 31,984.01-63,969
16.7% - 63,969.01 and over
10% on regular tax greater than 12,500.00
|Newfoundland and Labrador||
8.70% 0- 37,929.00
14.50% 37,929.01 – 75,858.00
15.80% 75,858.01 – 135,432.00
18.30% 189,604.01 and over
|A Temporary Deficit Reduction Levy applies beginning with CAD100 on taxable income of CAD50,000 or more and increases to a maximum of CAD1,800 on taxable income greater than CAD600,000|
6.40% 0 – 48,535.00
9.00% 48,535.01 – 97,069.00
12.80% 150,473.01 – 500,000.00
15.00% 500,000.01 and over
4.00% 0 – 46,277.00
7.00% 46,277.01 – 92,555.00
9.00% 92,555.01 – 150,573.00
11.50% 150,573.01 and over
5.90% 0 – 43,957.00
8.60% 43,957.01 – 87,916.00
12.20% 87,916.01 – 142,932.00
14.05% 142,932.01 and over
Non-residents have the same federal tax and provincial/territorial tax rates as residents. On income not allocable (by Federal regulation) to a province or territory, a federal surtax calculated as 48 percent of the normal federal tax is applicable (in lieu of provincial tax).
Residency is determined on the facts of each case applying criteria developed by jurisprudence. The following considerations are taken into account:
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 excluding 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.
An individual may also be deemed, under the “sojourning” rule in the Income Tax Act, to be a resident of Canada for the entire calendar year in which that individual was physically present in Canada for more than 182 days, unless they are able to apply the residency tie-breaker rules in a tax treaty between Canada and the individual’s country/jurisdiction of residence to override this rule.
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/jurisdiction for more than 10 days after their assignment is over and they repatriate.
An assignee who enters the country/jurisdiction before the start of the assignment may be considered to have established sufficient residential ties with Canada to become a resident 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 is unable to invoke the residency tie-breaker rules in a tax treaty between Canada and the country/jurisdiction where the assignee purportedly remains resident.
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. However, there are no income tax compliance requirements on the entry or departure dates.
Taxpayers who establish or terminate Canadian residency during a calendar year must report the relevant date of that event on page 1 of their Canadian tax return for that year.
Individuals are deemed by the Income Tax Act (Canada) to dispose of most property upon ceasing Canadian residency for notional proceeds equal to the fair market value of the subject property on the date they cease being residents of Canada for income tax purposes. Exceptions include Canadian real property, certain property used in a business in Canada, unexercised stock options, and assets held inside of certain pension plans, which remain subject to Canadian tax upon sale or distribution unless relieved by a tax treaty, as well as to assets held within various foreign pension plans which are usually never subject to the deemed disposition rule.
If a departing taxpayer owns assets that are subject to departure tax, the tax may be deferred until the assets are actually disposed of by posting security acceptable to the CRA 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 behind the departure tax rule 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, 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 may 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 they ceased Canadian residency (Forms T1161 and T1243). Late-filing penalties will apply if these information returns are not filed with the CRA by the filing deadline for the individual’s Canadian tax return for the year of departure.
Assignees who return to Canada for a trip after their Canadian residency originally terminated may be viewed by the CRA as having extended their residency termination date and thereby become subject Canadian tax on their income earned after the end of their assignment in Canada.
Furthermore, the assignees may be deemed to be resident in Canada for the entire calendar year and be subject to Canadian tax on worldwide income if they sojourned (were temporarily present) in Canada for a total of 183 days or more in any calendar year unless they are eligible for a tax treaty exemption under the residency tie-breaker rules.
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.
Generally, assignees are considered to become non-residents of Canada for tax purposes when they are repatriated to their home country/jurisdiction and all primary residential ties with Canada are severed and established in that home country/jurisdiction. For the part of the calendar year an assignee 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, provided most, if not all, residential ties with Canada have been eliminated and have been established with the jurisdiction where the assignee is purportedly resident. Non-residents are only subject to Canadian tax on income received from Canadian sources. Deferred compensation such as bonuses, stock options and Restricted Share Units related to the Canadian assignment may still be taxable in Canada when received by former assignees subsequent to their departure from Canada.
After departure from Canada, Canadian source employment income and self-employment income are generally subject to Canadian income tax, under Part I of the Income Tax Act (and the corresponding provisions of the relevant provincial or territorial tax statutes), calculated by applying the same federal and provincial rates and thresholds that apply to residents of Canada, whereas Canadian source investment income received by a non-resident is generally subject to federal Part XIII tax (imposed at a flat rate of 25 percent) on passive income, although this rate may be subject to reduction under the relevant terms of an applicable tax treaty. 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 are 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 lower amount of Canadian tax than if the flat 25 percent Part XIII tax applies to the gross income. If the income is subject to Part I tax, a Canadian nonresident tax return has to be filed to report the income and calculate the Canadian tax that is applicable.
An assignee must file a Canadian tax return if:
The due date of a Canadian individual tax return is 30 April following the end of the reporting calendar year, unless self-employment income is being reported on it, in which case the filing deadline is 15 June. The same filing deadlines apply to any individual who has to file a Québec tax return.
Do the taxation authorities in Canada adopt the economic employer approach to interpreting Article 15 of the Organisation for Economic Co-operation and Development (OECD) treaty? If no, are the taxation authorities in Canada considering the adoption of this interpretation of economic employer in the future?
Most of Canada’s tax treaties adopt the economic employer approach.
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 the exemption from Canadian tax on employment compensation earned in Canada if the total amount received does not exceed CAD10,000 in the calendar year, which is provided in the Canada-US tax treaty).
What categories are subject to income tax in general situations?
Taxable compensation includes the following items of employee compensation:
Employment income is taxable when received or when the individual is entitled to receive it, if earlier.
Employment income is subject to Canadian tax to the extent it was earned during a period of Canadian residence, regardless of where it was earned or received, or, in the case of income earned while non-resident, to the extent it was earned in respect of duties performed in Canada, regardless of who paid it.
Residents of Canada are subject to Canadian income tax on their employment compensation they either received in the calendar year or are legally entitled to receive during the year, regardless of where they earned it or where they were paid or where their employer is located.
Non-residents are only subject to Canadian income tax on their taxable compensation earned from performing employment or self-employment services in Canada.
Will a non-resident of Canada who, as part of their employment within a group company, is also appointed as a statutory director (i.e. member of the Board of Directors in a group company situated in Canada trigger a personal tax liability in Canada, even though no separate director's fee/remuneration is paid for their duties as a board member?
Yes, but only to the extent the director fees were earned by the non-resident from physically attending board meetings held within Canada, or performing other activities in Canada to earn those fees. Fees earned from participating in Board Meetings held in Canada by telephone, Skype or some other media while the nonresident director is actually physically present outside of Canada should be exempt from Canadian income tax.
a) Will the taxation be triggered irrespective of whether or not the board member is physically present at the board meetings in Canada?
No. The nonresident director must perform the relevant director duties while being physically present within Canada to be subject to Canadian income tax.
b) Will the answer be different if the cost directly or indirectly is charged to/allocated to the company situated in Canada (i.e. as a general management fee where the duties rendered as a board member is included)?
No. Whether the costs are directly or indirectly borne by the Canadian company, the nonresident director should only be subject to Canadian on the portion of any compensation received from physically performing the relevant services in Canada.
c) In the case that a tax liability is triggered, how will the taxable income be determined?
The Canadian company has the legal responsibility, under the Act and the Income Tax Regulations of Canada, to withhold Canadian income tax from the gross fees and to report the gross fees and related Canadian withholding tax on a T4 “Statement of Remuneration Paid” (the Canadian equivalent of a US W-2 or a UK P60 statement).
Are there any areas of income that are exempt from taxation in Canada? If so, please provide a general definition of these areas.
The following paragraphs identify the types of employment income that may qualify for exemption from Canadian income tax.
If an employer provides an employee with a housing allowance, board and lodging, low-rent or rent-free housing, the employee is deemed by the Act to have received a taxable benefit equal to the relevant amount. 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.
If all of the above requirements are met, this provision also exempts reasonable transportation costs paid to, or on behalf of, the employee for travel between the special work location and the place of principal residence.
This exemption may also be available if the employee is required to work at a remote location (logging camp, mine, and so on).
It is recommended that employees, or their employer, consult their tax advisers regarding their particular facts and circumstances to determine whether the employees qualify for this exemption.
The cost of utilities paid for employees is considered a taxable benefit. An exemption exists if the employee qualifies for the special work site provisions described in the preceding paragraphs. It is recommended that employees coming to Canada on assignment, or their employer, consult their adviser regarding their particular facts and circumstances to determine if they qualify.
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 employees or their employer consult their tax adviser regarding the employees’ particular facts and circumstances to determine whether the employees qualify for the exemption.
The following are the usual methods of recognizing tax reimbursements paid by the employer:
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.
The reimbursement of most 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 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.
The cost of education provided to an employee that is mainly for the benefit of the employer is not taxable to the employee. A taxable benefit arises when the education is mainly for the employee’s benefit or relates to schooling for their dependents.
A bonus in respect of non-Canadian source employment is generally not subject to Canadian tax if paid before the individual becomes a resident of Canada, or after they cease to be resident in Canada (e.g. stock options that were granted and fully vested before the employee began working in Canada, but were not exercised by the employee until after leaving Canada).
However, both a bonus received by an employee while resident in Canada, regardless of when and where it was earned, and a bonus that is received after the employee ceases to be a Canadian resident, but was earned during a Canadian assignment, are taxable in Canada.
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 by applying the CRA’s prescribed interest rate applicable during each quarter of the year the loan is outstanding to the loan balance in that quarter. The resulting products are then prorated by the number of days the loan is outstanding during the relevant quarter divided by the total days in the calendar year before being added together and included in the employee’s taxable compensation for the year. The calculation of the taxable benefit is calculated on a simple interest basis, with no compounding required.
Any partial repayments made during the year are netted from the loan balance in calculating the deemed interest benefit. The benefit is 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 before being included in the employee’s taxable compensation.
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 on the individual’s Canadian tax return.
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 they become legally obligated to repay the loan or discharge the debt. The CRA prescribed rate applicable on the date the loan is advanced is used for calculating the taxable income during the first 5 years the loan is outstanding, and is replaced by the prescribed rate in effect on the first day of each succeeding 5-year period the loan remains outstanding.
Reasonable automobile allowances calculated on a per kilometer basis that are paid to employees who use their personally owned motor vehicles for business purposes are not considered a taxable benefit to those employees if the allowances do not exceed the rates set for each year by CRA (For 2020, the rates are CAD59 cents per kilometer for the first 5,000 kilometers driven and CAD53 cents per kilometer driven after that). However, those allowances will become taxable in the year received if the employer also reimburses the employees for any of the employees’ car expenses (e.g. gas, insurance) or pays the employees any additional lump sum allowance during the same year.
If the employer provides a car for the individual, rather than paying a cash allowance or reimbursement, the value of the taxable benefit received by the employee is calculated each year using a predetermined formula and may differ depending on whether the car is purchased (with the original cost to the employer always being used to calculate the benefit) or leased (with the actual monthly lease payments for the relevant year being used) by the company. The benefit is based on a two-fold calculation including a stand-by charge, which is based on the employer’s purchase or lease cost for the car, and an operating cost benefit that is calculated by multiplying the employee’s annual total personal use mileage for the car by the rate set by the federal government for the relevant year (for 2020, this rate is CAD0.28 per kilometer).
The stand-by charge may be reduced if the individual uses the car more than 50 percent for business and drives less than 20,004 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. Contemporary documentation, such as log books, is usually required by the CRA to support the eligibility of an employee for a reduced automobile benefit.
Employer contributions to contributions to private health plans (such as medical or dental plans) made on behalf of employees (including their spouses and dependent children) 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.
Are there any concessions made for expatriates in Canada?
The following paragraphs describe the provisions in the Act that may apply to expatriates working on temporary assignment within Canada:
An individual is deemed by the Income Tax Act (Canada) to have disposed of all of their assets (other than Taxable Canadian Property) and to have reacquired the same assets at their fair market value immediately before becoming residents of Canada. Thus, if an individual has highly appreciated assets and establishes residency in Canada prior to selling any of them, only the appreciation in the fair market value of those asset between the individual’s entry date and the sale closing date will be subject to Canadian income tax. However, any appreciated loss for assets acquired before establishing Canadian residency due to a decrease in their fair market values from their original costs will be lost due to the application of this rule.
See also section titled Tax-Exempt Income section with respect to the special work site provision.
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, Italy, The Netherlands and the UK) an individual may be able to claim a deduction on their Canadian tax returns for the contributions made in the reporting year 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/jurisdiction where the individual resided before coming to Canada.
The relevant prescribed form must be completed to identify the portion of the contributions made to the eligible foreign plan during the year that may be deducted, or claimed as a credit, in calculating the contributor’s Canadian income tax and filed with the individual’s Canadian tax return. For contributions made to qualifying US plans, Form RC267 is applicable and for contributions made to qualifying foreign plans of other countries/jurisdictions, Form RC269 is applicable.
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.
For Québec income tax purposes, the deduction is generally equal to 25 percent of the qualifying stock option benefit.
The Federal Department of Finance released draft legislation on 17 June 2019 proposing to limit the amount of qualifying stock option benefits that may benefit from the 50 percent deduction for each calendar year in respect of stock options issued by corporations (other than those that fell within the definition of a “Canadian Controlled Private Corporation”) after 31 December 2019 through the application of a complex formula. However, the Department of Finance announced on 19 December 2019 the withdrawal of the draft legislation and that new draft legislation would be introduced as part of the Federal Budget that will be presented to Parliament sometime in March or April of 2020. No further details have been released as at the time of this update, although it is expected that some form of limitation will apply to the availability of the 50 percent deduction.
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/jurisdiction 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 the special work site provision.
Are investment income and capital gains taxed in Canada? If so, how?
Yes, as described in the following paragraphs.
Dividends and interest income are generally taxable in Canada in the calendar year in which the income is received. In addition, for loan 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 the source jurisdiction are creditable against Canadian taxes otherwise payable, based on the lower of 15 percent and the applicable tax treaty rates, and calculated on a country-by-country basis. Taxes paid to one foreign jurisdiction may not be claimed to reduce Canadian income tax applicable to investment income received from another foreign jurisdiction.
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 3 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 a lifetime exemption (applied on a cumulative basis) of up to CAD883,384, or for a lifetime exemption of up to CAD1,000,000 for qualified Canadian farm property or qualified Canadian fishing property they own, on the disposition of that property on or after 1 January 2020. 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 by the Act 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 spouse’s 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 usually ensures that Canada only taxes the capital gains that accrue while the individual is resident in Canada.
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 percent taxable or deductible) or as capital (50 percent taxable and any loss being deductible only against capital gains) usually follows the character of the asset generating the gain/loss.
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/jurisdiction. A family (husband and wife) is limited to designating only one home as a principal residence per tax year. A loss realized on the sale of a principal residence is not deductible.
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 3 preceding years and to taxable capital gains of all future years to reduce the tax liability of those years.
Both residents and non-residents are subject to Canadian income tax on any net gains realized from the disposition in a calendar year of Taxable Canadian Property (“TCP”). This term is defined in the Income Tax Act (Canada) and includes:
Depending on the nature of the TCP, the gain will be treated as either income (100 percent taxable) or as a capital gain (50 percent taxable) and must be included in the individual’s Canadian tax return for the year of disposition. The sale of inventory and the recapture of past tax depreciation on depreciable assets (e.g. a rental property) are examples of dispositions giving rise to income, whereas most other sales generally result in capital gains or losses being realized by the vendor.
Non-residents are also subject to a Canadian withholding tax, which must be deducted and remitted to the CRA by the purchaser (whether a resident or a non-resident of Canada), equal to either 25 percent or 50 percent (depending whether income or a capital gain was realized on the sale) of the gross sales proceeds within 30 days from the end of the month in which the disposition is closed, unless the non-resident vendors obtain tax clearance certificates from the CRA (and from Revenu Québec in respect of the sale of Taxable Canadian Property located in Québec) to base the withholding tax on their net gains from the dispositions and pay that tax to the CRA (and to Revenu Québec in respect of the disposition of Taxable Canadian Property located in Québec). Any withholding tax paid by the non-resident may be claimed on their Canadian tax returns against their final tax liability determined on those returns and any excess withholding tax should be refunded by the CRA (or by Revenu Québec in respect of any Québec tax returns) following the assessment of those returns.
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”, which consists of artworks, coins, stamps, jewelry and rare folios, manuscripts and books.
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 its fair market value on the date the gift is made. There are certain exceptions for gifts made 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.
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.
Are there capital gains tax exceptions in Canada? If so, please discuss.
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.
Where a taxpayer ceases to be resident in Canada at any particular time, the taxpayer is deemed by the Income Tax Act (Canada) to have disposed of certain capital properties owned immediately before departure for proceeds equal to their fair market value on the departure date. 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/jurisdiction or area of location of the property will usually govern.
Certain assets are exempt from this deemed disposition rule, such as interests in Canadian and most foreign pension plans, unvested restricted share units, unexercised stock options and Taxable Canadian Property. In addition, if the taxpayer was a resident of Canada no longer than 60 months during the 120 month period ending on their departure date, any assets owned when the taxpayer first became a resident and still owned at the time of departure will be exempt, as well as any assets inherited during the period if still owned by the taxpayer on the departure date.
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 immediately before that time.
A capital gains exemption of up to CAD883,384 (CAD1,000,000 for the second and third categories listed below) may be claimed against capital gains arising from the disposition, on or after 1 January 2020 of the following types of properties:
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. Taxpayers who were only residents for part of the taxation year in question will also be considered to be qualifying residents if they were considered residents of Canada throughout the year preceding or subsequent to the year in question.
Deductions permitted depend on amounts actually expended and substantiation of the expenditure is generally required.
Allowable deductions include the following.
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.
The following are the usual methods of recognizing tax reimbursements paid by the employer:
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.
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 employers with tax-withholding tables prior to the start of each calendar year to calculate the amount of federal and provincial (excluding Québec) withholding taxes required on various types of payments (such as periodic and lump sum). Revenu Québec provides similar withholding tables for Québec provincial taxes. These tables are updated if there are any changes in the withholding rates during the relevant year.
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 Revenu Québec in respect of Québec withholding tax).
An individual is required to make instalment 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 2 preceding years (the instalments are calculated differently for an individual subject to federal and Québec tax).
Personal tax instalments, other than for the first year that an individual is required to make them, are paid quarterly and must be received by the CRA (or by Revenu Québec in respect of Québec provincial income taxes) no later than the 15th day of the last month in each quarter of the calendar year (i.e. on or before 15 April, 15 June, 15 September and 15 December).
For the first year an individual is required to pay instalments, only two instalments are required and they must be received by the relevant Canadian tax authority no later than 15 September and 15 December. Late remittance penalties will be applied on any instalments received after the relevant due date.
There are three possible ways to calculate the instalment amounts:
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 taxpayers instalment reminder notices indicating the instalments due under method three, following the first tax year the taxpayers have a balance due on the filing of their tax returns that is in excess of CAD3,000.
The Income Tax Act (Canada) and the Québec Taxation Act provide two mechanisms for the relief of double taxation:
Additionally, Canada has negotiated international tax treaties with many countries/jurisdictions to prevent double taxation.
Foreign tax credits are calculated by each source country/jurisdiction, 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 the lesser of 15 percent or the withholding rate provided in a relevant tax treaty (e.g. many of Canada’s treaties provide a 10 percent rate on interest income) of the income received 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/jurisdiction 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 US taxes in excess of the withholding rate specified in the treaty to be deducted by US citizens on their Canadian tax returns. This provision does not apply to US Green Card holders who are residents of Canada.
Any unused foreign tax credits incurred in respect of foreign business income may be carried back 3 years and forward 10 years. Unused non-business taxes expire if they cannot be fully claimed as foreign tax credits for the relevant tax year.
Non-refundable tax credits that may be claimed on a Canadian income tax return by a resident include (but are not limited to):
The applicable credits are generally calculated by applying the basic federal and relevant provincial or territorial rates to the eligible amounts identified above. Many of these amounts must be 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 percent or more of their net income for the relevant calendar year is subject to Canadian income tax:
This calculation assumes a married taxpayer resident in Ontario, Canada with two minor children whose 3-year assignment begins 1 January 2016 and ends 31 December 2018. The taxpayer’s base salary is 160,000 US dollars (USD) and the calculation covers 3 calendar years
|Company car benefit||6,000||6,000||6,000|
|Moving expense reimbursement||20,000||0||20,000|
|Interest income from non-local sources||6,000||6,000||6,000|
Exchange rate used for calculation: USD1.00 = CAD1.00.
Calculation of taxable income
|Days in Canada during year||365||365||366|
|Earned income subject to income tax|
|Moving expense reimbursement1||0||0||0|
|Total earned income||221,000||226,000||221,000|
|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||87,237||89,264||86,014|
|Non-refundable tax credits||5,381||5,516||5,635|
|Total Canadian income tax||81,856||83,748||80,379|
|Employee contribution to Canada Pension Plan (CPP)|| 2,594
|Employee contribution to Employment Insurance (EI)|| 858
2. Certain tax authorities adopt an ‘economic employer’ approach to interpreting Article 15 of the OECD model 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/jurisdiction 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/jurisdiction employer but the employee's salary and costs are recharged to the host entity, then the host country/jurisdiction 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.
3. For example, an employee can be physically present in the country/jurisdiction for up to 60 days before the tax authorities will apply the ‘economic employer’ approach.
4. CRA - Employee home relocation loan deduction
6. Sample 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 Cooperative (“KPMG International”), a Swiss entity.
All information contained in this publication is summarized by KPMG LLP, the Canadian member firm affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity, based on The Income Tax Act (R.S.C., 1985, c.1 , 5th Supp.), The Excise Tax Act (R.S.C., 1985, c. E-15), the Immigration and Refugee Protection Act (S.C. 2001, c.27), and on current information for 2019 regarding personal income tax rates and thresholds, payroll taxes, sales taxes and income tax treaties and social security tax agreements provided by the official websites of the Canada Revenue Agency, the Canadian Department of Finance, Immigration, Refugees and Citizenship Canada, the Ontario Ministry of Finance, the Québec Ministry of Revenue, the British Columbia Department of Finance, the Newfoundland and Labrador Department of Finance, the Nunavut Department of Finance, the Northwest Territories Department of Finance, and the Manitoba Department of Finance.
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