June/July 2007

Taxes for the Canadian abroad

By D. Zlotnikov

There’s no shortage of Canadians working outside of Canada’s borders. This is especially true in the mining industry, with its tendency for long-term projects and the need to go where the deposits are, regardless of political boundaries.

Whether you’ve been sent on a long-term work project outside of Canada or have developed a taste for the expatriate life, you should keep informed of the implications such a status carries with it, not the least of which are the financial implications in your dealings with the governments. Or, simply put, taxes.

Cleo Hamel, senior tax analyst with H&R Block, was kind enough to offer some pointers.

While most of the conversation centred on tax treaties between Canada and other nations, the first point of note is not connected to any treaty at all - this is the overseas employment tax credit. This credit applies to Canadians working for Canadian companies, but living outside of the country, and all persons in that situation are eligible for the credit in some measure. "When you’ve been out of the country, you are exempt from tax for the number of days that you are out of the country. So although you may have tax withheld from your income, when you file your taxes, in most cases they [people eligible for the overseas employment credit] get every shred of tax they’ve ever paid." This primarily happens with workers in the oil and gas industry, Hamel said.

Back among the jungle of tax treaties…

The important thing to keep in mind, said Hamel, is that "the main purpose of the tax treaty is to prevent any double taxation." This is true for all treaties, but how this goal is achieved may differ greatly. "Some treaties are only set out to say that any income earned in that country is only considered on a Canadian tax return and will only be taxed in Canada and any income taxes collected in that country will be subject to a foreign tax credit in Canada. Others will actually have items in them that limit the amount of tax that can be withheld from that other country." These treaties also limit which income you can be taxed on in that foreign country. "Specifically, only employment income."


Each tax treaty determines not only how much and where you can be taxed, but also where you must file a tax return in the first place. The first step in finding out the answer is to determine whether you are, in fact, a Canadian resident. This is not an idle question, as the answer will be used to determine where you have to file a tax return, whose tax laws take precedence, and even which income you must declare on which return. The question is also not as clear-cut as it sounds at first. "Some people think that by leaving, they become a non-resident and don’t have to file," said Hamel. The government, however, sees it in a different light. By simply assuming you don’t have to file taxes in Canada while living elsewhere, you are running the risk of serious complications.

"If you leave and come back after a number of years, it gets really technical,” Hamel said. “The government wants to know where’ve you been, why haven’t you filed, where’s all this money, and how did you live…" In the end, you won’t only have to file returns for all the years you’ve missed (which is already a far greater headache), but you will also have to pay taxes on all of the missed years. To make matters worse, "there may not be any foreign tax credits available," said Hamel, at which point you really will have been double-taxed; once by the country you’ve been living in and once by Canada.

So is the solution to keep on the safe side, and file every year, regardless of where you are? Not exactly. There are three classifications of "resident" that Canada uses specifically for people spending prolonged periods of time outside of Canada. The first, and simplest, is "deemed resident," used to describe persons who, despite residing and working outside of Canada’s physical boundaries, are considered to be living and working in Canada. This primarily applies to embassy and military personnel, and their immediate family.

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