How to report foreign income in Canada
Canadians have reporting requirements for foreign assets, income and tax paid. Here’s how to claim each of these on your tax return.
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Canadians have reporting requirements for foreign assets, income and tax paid. Here’s how to claim each of these on your tax return.
Residents of Canada are taxable on their worldwide income. So, just because income is earned somewhere else in the world, that does not make it exempt on a Canadian tax return. Tax may also be payable on that income in another country.
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.
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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.
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.
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. 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.
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:
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.
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.
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