How to report foreign income in Canada

Even if an asset does not earn income, it may still need to be reported on a Canadian tax return, and stiff penalties may apply for missed disclosures. Let’s take a closer look at the tax implications for Canadians with foreign income and assets.

Reporting foreign income on a Canadian tax return

Foreign income should be reported on your Canadian tax return. This includes employment income, self-employment income, pensions, investment income and rental income.

There may be occasional exceptions for pensions if they are exempt in a tax treaty between Canada and the foreign country. But the default presumption should be that foreign income is taxable in Canada.

Income should be converted to Canadian dollars based on the exchange rate on the date it was earned. For practical reasons, an average rate for the year may be used, particularly if the foreign income includes multiple transactions in a currency that does not fluctuate significantly.

The Canada Revenue Agency (CRA) suggests using the Bank of Canada exchange rate, but it will also accept sources that are widely available, verifiable, published by an independent provider and used regularly from year to year. Alternate sources cited by the CRA include rates from Bloomberg L.P., Thomson Reuters Corporation and OANDA Corporation.

Claiming foreign tax

Many countries tax foreign residents on income earned in their own countries as well. As a result, Canadians earning foreign income may be subject to either withholding tax or income tax in that foreign country, and they may have to file a foreign tax return.

Foreign tax can generally be recovered on a Canadian tax return by claiming foreign tax credits. In most cases, this reduces the Canadian tax payable by the foreign tax already paid. However, it may depend on the tax treaty between Canada and the foreign country, as well as your income and tax payable on your Canadian tax return.

Disclosing foreign assets

Foreign assets may need to be disclosed annually on a Canadian tax return, whether they generate income or not. Taxpayers who own certain investments with a cost of more than $100,000 Canadian may need to file Form T1135 Foreign Income Verification Statement.

This form is typically used for foreign bank accounts, foreign investment accounts or foreign rental properties, but it can include other foreign assets. Foreign investments, including U.S. stocks, must be reported even if they are held in Canadian investment accounts. Foreign personal-use properties, like a snowbird’s condo that is not earning rental income, may be exempt.

Foreign asset disclosure applies to taxable investments, so assets held in tax-sheltered accounts like registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), pensions and other non-taxable accounts are generally exempt.

U.S. persons in Canada

U.S. citizens or green card holders must generally file U.S. tax returns despite living in Canada. The United States is one of the few countries in the world that has this requirement for non-residents. As a result, you may have to report both Canadian and U.S. income, deductions, credits and foreign tax payable.

Adding to the complexity is that certain types of income are taxable in one country but not the other, and some deductions or credits may only apply on one tax return.

Voluntary disclosure for previous years

If you have not reported foreign income or declared foreign assets in the past and you should have done so, you may be able to file a voluntary disclosure with the CRA. This program may allow relief on a case-by-case basis for taxpayers who contact the CRA to fix errors or omissions for past tax returns.

There are five conditions to apply:

1. You must submit your application voluntarily and before the CRA takes any enforcement action against you or a third party related to you.
2. You must include all relevant information and documentation (including all returns, forms and schedules needed to correct the error or omission).
3. Your information involves an application or potential application of a penalty.
4. Your information is at least one year or one reporting period past due.
5. You must include payment of the estimated tax owing, or request a payment arrangement (subject to CRA approval).

Before pursuing a voluntary disclosure, you should seek professional advice. The CRA also offers a pre-disclosure discussion service that is informal and non-binding, and it does not require the disclosure of your identity.

Bottom line

When you are a Canadian tax resident, whether you are a citizen or not, you have worldwide income and asset disclosure requirements on your tax return. Some Canadian residents, despite living abroad, may still be considered factual residents or deemed residents of Canada with ongoing tax-filing requirements.

Most foreign income is not subject to double tax for Canadian residents, but most foreign income is indeed taxable, whether a taxpayer likes it or not.

Learn more about reporting foreign income in Canada

• The tax implications for Canadians selling foreign real estate
  How are Canadians taxed on foreign property? Find out if you should report the sale on your tax return and what role tax treaties play.
  
• Tax planning for Canadians who invest in the U.S.
  There are good reasons for Canadians to invest in the U.S., including portfolio diversification. Just keep these tax-planning and compliance requirements in mind.
  
• How to report U.S. employment income in Canada
  Canadian citizens who work in the U.S. have to meet Canadian and U.S. tax filing requirements. Here’s what to know about the rules, including getting a foreign tax credit.
  
• “Where do we pay income tax if we retire abroad?”
  There are tax implications in both countries if Marianna moves from Canada to Mexico full-time.
  
• Do non-residents pay tax on CPP? What if you live in the U.S.?
  Withholding tax is generally the only Canadian tax a non-resident pays for their CPP pension, and the tax burden is even smaller for non-residents living in the U.S.
  
• How to prepare your finances for coming to Canada
  Here’s an overview of what to know about personal finance in Canada and buying a home, including down payments, taxes and mortgages.
  
• Goodbye, Canada: A guide to departure tax, withholding tax for non-residents
  Some Canadian residents plan to retire abroad, while others are only here temporarily for work. No matter the reason, let’s look at the tax consequences.
  
• What is a tax treaty?
  Find out how investors benefit from tax treaties between Canada and other countries.
  

About Jason Heath, CFP

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.

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