The article “The tax implications of working abroad for residents and non-residents of Canada” was originally published in MoneySense on February 1, 2023 . Photo by Jopwell from Pexels.
What taxes do you owe when working in another country if you’re a resident of Canada or have significant residential ties to the country?
“My wife, two kids (boy, 14 years old, and girl, 10 years old) and I are all Canadian citizens.
I am planning to work in the UAE (United Arab Emirates) while my wife and kids remain in Canada. We have our own home in Canada, and we have a pre-construction condo and are expected to receive it at the end of 2023. I have no other investments in Canada and pay all my tax on time.
The question is: I know I have to pay tax, but do you have any idea how much and how it works to the best of our family?” Eddy
Tax implications of working in another country
Congratulations, Eddy. That sounds exciting but obviously challenging to leave your family behind in Canada while you are working half a world away.
Canada levies federal and provincial income tax based on residency, not citizenship. So, while residing in Canada, both citizens and non-citizens alike have to report and pay tax on their worldwide income. When income is subject to tax in another country as well, Canada generally allows a foreign tax credit to be claimed to avoid double taxation.
The United Arab Emirates (UAE) does not charge income tax, nor is there any withholding tax. It is a common expat destination where incomes and the cost of living can be high, and its tax-free status is appealing. That said, when a Canadian works in the UAE and does not break ties with Canada, they will typically continue to file Canadian tax returns and pay Canadian tax.
Who is considered a “resident” for tax purposes?
In your case, Eddy, your wife and minor children will still be Canadian residents and live in your home. A spouse, dependants and a permanent home available in Canada would be considered significant residential ties.
When you are temporarily living or working outside of Canada, but still have residential ties like yours, Eddy, you may remain a factual resident of Canada. In order to be considered an emigrant non-resident of Canada and no longer subject to Canadian income tax on worldwide income, you must generally sever residential ties.
What if you have residential ties in another country?
In some situations, you can establish residential ties in another country while you still have significant residential ties in Canada. You and your spouse could, for example, move to another country to work, while a child stays behind and lives in your home while going to university.
In this situation, you may be considered a resident of the other country as well as Canada. You need to look to the tax treaty between the two, if applicable, to determine which country is your primary tax residence. In some countries, a tax treaty might allow you to be considered a deemed non-resident of Canada and avoid Canadian taxation.
If you do not become a non-resident of Canada, Eddy, your tax obligations in Canada will not change. Based on your situation, it sounds like you may remain a factual resident of Canada, such that you are still a resident for tax purposes.
You will report your UAE income, converted to Canadian dollars, as foreign employment or self-employment income, depending on the facts of your situation. You can convert the income to Canadian dollars using the rate on the date the income gets paid or by converting all of the foreign income for the year to Canadian dollars using the average annual exchange rate.
The tax implications of being self-employed or not
As far as tax deductions, the same rules that would apply to a salaried employee or a self-employment consultant in Canada would generally apply to someone working in the UAE or elsewhere in the world. The first thing is to establish if you are an employee or self-employed. It sounds like you, Eddy, are an employee with an employment contract and benefits that are typical of an expat employee in the UAE. The CRA provides a good summary of employment expenses that are tax-deductible. (See here for a summary of business expenses for self-employed taxpayers.)
Some or most of your expenses in the UAE may be considered personal in nature and not deductible for an employee, unfortunately. But if you are working from home in the UAE, the same home office expense deductions would be permissible, for example.
Taxes on Canadian real estate when living abroad
The house and pre-construction condo will have the same tax implications as would apply to other Canadian residents. The house will presumably continue to be your tax-free principal residence. Depending on your plans for the condo, it will be taxed accordingly. If it is a rental property or a vacation property, it will be subject to capital gains tax when you sell it. If you sell it within 12 months of closing on the property, it may be subject to full inclusion as business income under new anti-flipping rules that came into force on January 1, 2023.
I wish I could give you better news about the tax implications of your new work situation, Eddy. Due to Canada’s relatively high tax rates, it can be advantageous in many cases to become a non-resident, especially when you live in a tax-free jurisdiction. But simply living and working in another country may not be enough to become a non-resident for tax purposes.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.