The major determinant of Canadian income tax liability is an individual’s residence status. An individual resident in Canada is taxable on worldwide income. Nonresidents are taxed on Canadian-source income only.
The tax statutes do not contain a specific definition of “residence.” Accordingly, the residence of an individual is determined by such matters as the location of dwelling places, spouse, dependents, personal property, economic interests and social ties. However, a nonresident individual who stays temporarily in Canada for 183 days or longer in a calendar year is deemed to be a resident of Canada for the entire year, unless he or she is determined to have nonresident status under a tax treaty. This provision applies only to an individual who would otherwise be considered a nonresident, and not to an individual who purposely takes up residence in Canada or to an existing resident who ceases to be a resident after moving away from Canada. These latter individuals may be treated as part-year residents.
In certain situations, an individual may move from Canada to another country and retain enough ties to continue to be considered a Canadian resident for domestic tax purposes. At the same time, this individual may be considered a nonresident of Canada for tax treaty purposes. Individuals who become treaty nonresidents of Canada after 24 February 1998 are deemed to be nonresident in Canada for domestic tax purposes as well.
In the year that an individual becomes a Canadian resident, that individual is considered a part-year resident, and is subject to tax in Canada on worldwide income for the portion of the year he or she is resident in Canada. A part-year resident is also subject to Canadian tax on any Canadian-source income received during the nonresident period.
Income subject to tax. The taxation of various types of income is discussed below.
Employment income. Income from employment includes salaries, wages, directors’ fees and most benefits received from employment. Some examples of taxable benefits are low-interest loans, the use of company-owned automobiles, subsidized or free personal living expenses and stock option benefits (see Taxation of employer-provided stock options). Among the few non-taxable benefits are employers’ contributions to certain employer-sponsored retirement savings plans, including registered Canadian pension plans and deferred profit-sharing plans.
Reasonable education allowances provided by an employer to its relocated employee with respect to the employee’s children who live away from home to attend school on a full-time basis are not taxable for income and social security tax purposes if a school suitable for the child, offering instruction primarily in the official language of Canada that is primarily used by the employee, is not available in the location where the employee is required to live as a result of his or her employment. The school must be the closest one that satisfies both of the following conditions:
- It has suitable boarding facilities.
- The language primarily used for instruction is an official language of Canada, and is the official language of Canada primarily used by the employee.
A Salary Deferral Arrangement (SDA) includes most situations in which the following two circumstances exist.
- An employee has the right to receive an amount after the end of the year instead of salaries or wages for that year or a prior year.
- One of the principal purposes of the arrangement is to postpone the payment of Canadian tax.
Consequently, foreign deferred compensation plans may be subject to Canadian tax under the SDA rules. If the SDA rules apply, the amount of salary deferred in the year and any interest earned on amounts pre viously deferred are subject to Canadian tax on a current basis.
An exception applies to certain amounts that were deferred under a plan established primarily for the benefit of nonresidents with respect to services rendered in a country other than Canada. Amounts deferred before an employee becomes resident in Canada, or deferred in the first 36 months of Canadian residence, are not subject to Canadian tax if the employee was a member of the plan before moving to Canada, and if the deferred amount relates to services rendered while the employee was a nonresident of Canada (or during the first 36 months of Canadian residence). Amounts deferred after an employee becomes resident in Canada that are not taxed on a current basis are usually taxed when received. Consequently, other than in the case of the above exception, an amount deferred after an employee becomes resident in Canada is taxed in the year earned, while any interest or other amount accruing on the amounts deferred before moving to Canada is not taxable unless received while a resident of Canada.
Self-employment income. The computation of an individual’s income from a business or property is similar to that for a corporation, with business income generally computed using the accrual method of accounting.
Income derived from a partnership is allocated among the partners in accordance with either the partnership agreement or, in the absence of such an agreement, the governing partnership law. Deductions and credits also flow through to the individual partners. Special rules limit the amount of business or property losses that may be claimed by a limited partner of a limited partnership.
Directors’ fees. Directors’ fees derived from Canada or a foreign country are taxable to a Canadian resident as employment income. Tax treaties signed by Canada generally do not allow a resident of Canada to be exempt from tax on directors’ fees received from a foreign (nonresident) company or to otherwise receive favorable tax treatment.
For a nonresident, directors’ fees are considered to be earned where the services of the director are rendered. Therefore, fees for services rendered at a specific board meeting in Canada are taxable in Canada. If a fee is related to services rendered both in and outside Canada, it may be possible to prorate the fee in proportion to the number of days that the director spent in Canada during the year. However, no specific guidelines for such allocations are provided.
Under certain tax treaties, directors’ fees are considered similar to compensation from regular employment. If the conditions exempting a nonresident from Canadian taxes on compensation from regular employment are met, the directors’ fees are exempt.
Investment income. Interest income may be reported by an individual using the cash basis (when received), the receivable basis (when due) or the accrual basis (as earned during the year) on investments if the investment is held for less than 12 months. Whichever method is selected, it must be applied to an investment consistently. However, for most investments held for a period of more than 12 months, accrued interest must be included in income annually. The bonus or premium paid on the maturity of certain investments, such as treasury bills, strip bonds or other discounted obligations, must be reported as interest income.
Dividends received by individuals resident in Canada from taxable Canadian corporations are given special treatment to recognize corporate taxes already paid on the accumulated income used as the source for the dividend distribution. These dividends are classified as “eligible dividends” or “ineligible dividends.”
An “eligible dividend” is a taxable dividend paid to a person resident in Canada by a corporation resident in Canada and designated by the corporation at the time of payment to be an “eligible dividend.”
For eligible dividends, 138% of the actual amount received is included in income, and a credit against federal tax is allowed in an amount approximately equal to 20.73% of the cash amount of the dividend. For other taxable dividends from Canadian corporations, 117% of the actual amount received is included in income, and a credit against federal tax is allowed in an amount approximately equal to 10.5% of the cash amount of the dividend. For many Canadian-controlled private corporations and their shareholders, the result of this gross-up and dividend tax credit procedure is that the combined corporate tax on the original income and the net personal tax on the dividend is approximately equal to the tax that would have been paid on the original income had it been received directly by the individual rather than passed through the corporation.
Royalties and rental income are taxed as ordinary income. In computing a loss from the rental of real estate or leasing of other property, allowable depreciation generally is limited to the net income determined before deducting depreciation. Therefore, the depreciation claimed by an individual may not create or increase a rental loss.
Beginning in 2009, all residents of Canada age 18 or older may contribute to a tax-free savings account (TFSA). No tax deduction is allowed for the contributions, but the investment earnings are not subject to tax. For 2016 and subsequent years, the annual TFSA limit is CAD5,500.
Passive income derived by nonresidents. Nonresidents with sources of income from Canada other than employment or business in come generally are subject to a withholding tax of 25% of gross income received. Examples of income subject to withholding tax are rental income, royalties, dividends, trust income, pensions and alimony. The payer must withhold and remit the appropriate amount of tax and must file the required returns. For the recipient, withholding taxes generally are final taxes, and tax returns are not required for income subject to withholding. However, nonresidents receiving real estate rentals or timber royalties may choose to file a tax return and be taxed in Canada on the net rental or timber royalty income at the same tax rates that apply to Canadian residents (that is, at marginal rates on net income rather than at withholding tax rates on gross income). Nonresidents receiving certain pension and benefit income may elect to be taxed on such income at the same incremental tax rates as Canadian residents, rather than at the withholding tax rate.
Most arm’s-length interest payments to nonresidents are exempt from Canadian withholding tax.
Canada’s double tax treaties generally reduce withholding taxes to 15% or less on most types of passive income paid to nonresidents.
Other sources of income. Other amounts that must be included in income are receipts from superannuation or pension plans and amounts paid from Canadian Registered Retirement Savings Plans. Eligible pension income can be split between spouses for tax reporting purposes. Under this measure, if spouses have taxable income in different income tax brackets, overall tax may be reduced by moving income from the higher-rate taxpayer to the lower-rate taxpayer.
In general, amounts received as a result of severance pay in recognition of long service at retirement, and spousal support payments (deductible to the payer, subject to certain limitations) are also includible in income. Child support payments pursuant to agreements or court orders made on or after 1 May 1997 are neither taxable to the recipient nor deductible by the payer. Pay ments made pursuant to agreements or court orders made before 1 May 1997, continue to be taxable to the recipient and de ductible by the payer. However, the new rules may apply if the amount of child support payable under the agreement is changed.
Taxation of employer-provided stock options. Individuals are not taxed when the employer grants stock options. In general, tax consequences arise when the employee exercises the options.
Under the longstanding view of the Canada Revenue Agency on determining the location of services to which a stock option benefit relates, the benefit was generally considered to be attributable to services rendered in the year of grant, unless compelling evidence existed to suggest that some other period was more appropriate. However, for stock options exercised after 2012, the Canada Revenue Agency applies the principles set out in the Organisation for Economic Co-operation and Development (OECD) model to allocate a stock option benefit for purposes of the Income Tax Act, unless an income tax treaty specifically applies.
Under these principles, the process of determining the amount of a stock option benefit that is derived from employment exercised in a source country is to be carried out by examining all relevant facts and circumstances, including any underlying contracts, applicable to a specific situation. In particular, a stock option benefit is apportioned to each source country based on the number of days of employment exercised in that country over the total number of days in the period during which the employment services from which the stock option is derived are exercised. In making this determination, a stock option benefit is generally presumed to relate to the period of employment that is required as a condition for the employee to acquire the right to exercise the option (that is, the vesting period). In addition, a stock option benefit is generally presumed not to relate to past services, unless evidence indicates that past services are relevant in the particular circumstances.
The fifth protocol to the Canada-United States income tax treaty introduced a sourcing method for options based on where days are worked in the period between grant and exercise. This change is effective for stock options exercised on or after 1 January 2009.
The amount of the taxable benefit equals the difference between the value of the shares at the time the shares are acquired and the exercise price paid. The shares have a cost basis equal to the fair market value of the shares at the time of acquisition, provided the employee does not hold identical shares of the issuer at that time.
The employee may be entitled to a deduction equal to 50% of the taxable benefit (25% for Quebec tax) if the option price is at least equal to the fair market value of the shares on the date of grant, if the shares are prescribed shares and if certain other conditions are met. The effect of this deduction is taxation of the benefit at tax rates applicable to taxable capital gains.
The Canadian stock option rules apply to both shares and to units of mutual fund trusts.
If the employee is a resident of Canada at the time that the shares are sold, any gain is subject to the regular capital gains rules. If the employee ceases to be a Canadian resident prior to the sale of the shares, then he or she is subject to the deemed disposition rules at departure (see Capital gains and losses).
An automatic deferral of tax is provided with respect to the option benefit for shares of Canadian-controlled private companies acquired through stock options.
Capital gains and losses. Fifty percent of the year’s capital gains are included in taxable income, to the extent that the amount exceeds 50% of capital losses for the year. This includes capital gains on real estate and personal property, regardless of whether used in a trade or business, and on shares held for personal in vestment. Special rules apply to determine the nature of the gain or loss on the sale of depreciable property.
The adjusted cost basis of identical shares must be averaged for the purpose of determining the capital gain or loss on a disposition of such shares if the individual has acquired shares of a particular corporation at different dates.
The specific identification method is used to calculate the adjusted cost basis of shares that are acquired through the exercise of a stock option and that are disposed of within 30 days after the acquisition of the shares.
Capital gains derived from the sale of a principal residence are generally exempt from tax. Capital losses incurred on the sale of a principal residence may not be used to reduce income for the year. In general, capital losses from personal-use assets are not allowed.
Gains derived from the sale of qualifying farm property, qualifying fishing property or shares of small business corporations (see below) qualify for a lifetime capital gain exemption. However, the amount of this ex emp tion is reduced by any amounts claimed in prior years under the CAD100,000 lifetime capital gain exemption that was eliminated in 1994.
Qualifying farm property. Farmers are eligible for a lifetime exemption equal to CAD824,176 (2016 indexed amount; it will eventually exceed CAD1 million) on the sale of qualified farm property, which includes farmland, shares of a family farm corporation or an interest in a family farm partnership. The available exemption is reduced by the amount of any exemption claimed on the disposition of any other capital property during the tax year or in preceding years.
Qualifying fishing property. Fishers are eligible for a lifetime exemption equal to CAD824,176 (2016 indexed amount; it will eventually exceed CAD1 million) on the sale of qualified fishing property, which includes real or immovable property or a fishing vessel used in a fishing business in Canada, shares of a family fishing corporation or an interest in a family fishing partnership. The available exemption is reduced by the amount of any exemption claimed on the disposition of any other capital property during the tax year or in preceding years. The exemption is effective for dispositions of qualified fishing property after 2 May 2006.
Shares of a small business corporation. Capital gains realized on the disposition of shares of a small business corporation qualify for a lifetime CAD824,176 capital gains exemption, provided that certain criteria are met. This exemption amount is reduced by any portion of a gain eligible for the exemptions described in the preceding paragraphs.
The use of this exemption may be restricted in a particular year because of cumulative net investment loss (CNIL) rules. Essentially, an individual’s CNIL is the excess of his or her post-1987 investment expenses over investment income for those years. To the extent that an individual has a CNIL balance, the capital gains for the year that are eligible for the exemption are reduced.
An individual using the various capital gains exemptions may be subject to minimum tax.
For capital gains realized on the disposition of an eligible small business investment, individuals are permitted a tax-free rollover if the proceeds of the disposition are used to make other eligible small business investments. The amount of gain deferred is proportional to the amount reinvested.
Capital losses. Except for allowable business investment losses, capital losses not utilized in the year realized are deductible only against net capital gains realized in another year. Unused capital losses may be carried back to any of the three preceding years or may be carried forward indefinitely.
Allowable business investment losses (ABILs), a special type of capital loss, are deductible against any other source of income in the year incurred. Any unused ABIL realized in a particular year is converted into a business loss and is subject to the business loss carryover rules described in Relief for losses. If an unused portion of the ABIL remains at the end of the 10 years following the year when it was realized, the loss converts back into a capital loss and may be carried forward indefinitely.
Ceasing Canadian residency. An individual who ceases Canadian residency is generally deemed to have disposed of all assets, including taxable Canadian property, and excluding real property located in Canada, capital property or inventory used in carrying on a business in Canada, certain pension rights and unexercised employee stock options, at fair market value on the date that residency is terminated. The deemed disposition rule is commonly referred to as “departure tax.”
The following special tax rules and exceptions apply to individuals entering or leaving Canada with respect to the calculation of capital gains or losses and the general deemed disposition rule:
- The departure tax provision is modified for an individual who was not resident in Canada for more than 60 months during the 120 month period preceding departure. Property owned by such an individual when he or she became resident, or property in herited since that time, is not subject to the deemed disposition rule.
- Nonresidents who return to Canada after emigrating may elect to reverse the tax effects of the deemed dispositions of the assets that are still held regardless of how long they were nonresidents.
- Emigrating taxpayers who are subject to the deemed disposition rules may post security for the departure tax instead of paying such tax by the balance-due date for the year of departure. An individual is not required to provide security for an amount of departure tax that is equal to or less than the taxes payable on the first CAD100,000 of capital gains resulting from the deemed dispositions.
Deductible expenses. Few deductions are allowed in computing income from employment. Among the deductible items are employee contributions to a registered pension plan (up to a certain maximum amount), travel and certain other expenses of commission employees, certain travel expenses of other employees, and union or professional dues.
Employers must generally withhold income tax, government pension contributions and unemployment insurance premiums from remuneration paid to employees, and must remit those amounts to the tax authorities for credit to the employees’ accounts.
Interest may be claimed as a deduction in the year it is paid or when it becomes payable, depending on the taxpayer’s normal practice, as long as the money is borrowed for the purpose of earning income. Other costs, including investment counseling fees and accounting costs (but not tax return preparation fees), are deductible. Personal interest, including interest on mortgages or charge accounts, is not deductible.
Other deductions include contributions to registered retirement savings plans (an individual retirement income plan), payments for alimony, expenses for certain moves within Canada and certain child-care expenses.
Federal personal credits and allowances. A resident individual is allowed to deduct several federal personal tax credits in computing the amount of basic federal tax for the year. Personal tax credits include a basic personal credit, a spousal credit subject to thresholds for spousal income, an employment credit, a disabled dependent’s credit, an age credit, a disability credit, and education and tuition fee credits. An employee’s contributions to the Canada/Quebec pension plan and to employment insurance/the Quebec parental insurance plan are also eligible for tax credit treatment.
Charitable donations (up to 75% of net income) are eligible for a federal tax credit of 15% on the first CAD200 and a federal tax credit of 29% for donations in excess of CAD200. The unused portion of the donation credit may be carried forward for up to five years. Qualifying first-time donors may receive an additional federal tax credit of 25% on the first CAD1,000 of monetary donations. Similarly, medical expenses in excess of the lesser of CAD2,237 or 3% of net income are eligible for a federal tax credit equal to 15% of the excess. An individual is eligible for a federal tax credit of up to CAD300 on the first CAD2,000 of qualifying pension income.
Various other credits are available, including credits determined with reference to employment income, public transit costs, adoption expenses and child art and fitness expenses.
The federal credit amounts mentioned above are based on known and proposed amounts as of 1 July 2016. The credit amounts are indexed annually for inflation.
A taxable universal child-care benefit (UCCB) of CAD160 per month per child is available for all Canadian residents with children under age 6 and CAD60 per month per child for children aged 6 to 17. Effective from 1 July 2016, the Canada Child Benefit (CCB) program will replace the UCCB program. In general, the CCB will provide a maximum benefit of up to CAD6,400 per child under the age 6 and CAD5,400 per child aged 6 through 17. These benefit amounts will be reduced (phased out) if adjusted family net income exceeds CAD30,000.
Provincial tax credits. Several provinces provide provincial tax credits against taxes otherwise payable for certain groups of taxpayers. The credits are available to taxpayers with low incomes and are calculated by reference to rental or other occupancy costs.
Business deductions. Interest and other charges incurred to ac quire business assets or investment property generally may be deducted. Limitations apply to the deduction of automobile and home office expenses. Deductions for business meals and entertainment expenses are limited to 50% of actual expenses.
Federal/provincial tax authorities. The federal government, as well as the provinces and territories, impose income taxes on resident individuals. However, only the province of Quebec collects its own individual income tax and requires filing a separate return. The federal government collects the tax on behalf of all other provinces and territories, which means that only one combined return must be filed.
The calculation of an individual’s tax payable is a two-step process. An individual’s federal income tax for a given year is calculated on taxable income using a single graduated rate schedule. From this amount, allowable federal personal tax credits (see Federal personal credits and allowances) and the dividend tax credit are deducted. The net result is the individual’s basic federal tax payable. The Family Tax Cut was eliminated, effective for tax years after 2015.
Income tax is generally paid to one of the provinces or territories based on the individual’s residency on the last day of the year. All of the provinces and territories calculate tax by applying their graduated tax rates to taxable income. A separate calculation of taxable income, which is similar to the calculation of federal taxable income, is required. However, the treatment of certain items may differ.
Federal tax rates. Canada has four tax brackets for federal in come tax purposes. These brackets are indexed annually by the inflation rate for the period from 1 October to 30 September of the previous year. The federal tax brackets and rates for 2016 shown below are based on known and proposed amounts as of 1 July 2016.
|Exceeding (CAD)||Not exceeding (CAD)||Tax on lower amount (CAD)||Rate on excess (%)|
Top marginal combined rates. The following table summarizes the top marginal combined federal and provincial/territorial tax rates in 2016 for an individual residing in various provinces and territories.
Top marginal combined rate (a)
|Ordinary income (%)||Eligible dividends (%)||Non-eligible dividends (b) (%)||Capital gains (c)|
|Newfoundland and Labrador||48.30||38.47||39.40||24.15|
|Prince Edward Island||51.37||34.22||43.87||25.69|
a) The rates shown are the maximum combined federal and provincial/territorial marginal tax rates, including surtaxes. The rates are based on known and proposed amounts as of 1 July 2016.
b) The rates apply to the actual amount of taxable dividends received by individuals from taxable Canadian corporations.
c) Only 50% of capital gains is included in taxable income (see Capital gains and losses). Consequently, total capital gains are effectively taxed at 50% of the ordinary tax rates.
Minimum income tax. To ensure that high-income taxpayers pay a certain level of tax, an alternative minimum tax applies. Under its provisions, individuals are required to recalculate taxable in come, without deducting certain items that are otherwise de duct ible in the regular tax calculation. In recalculating taxable income, a blanket CAD40,000 exemption is permitted. Individuals pay the greater of the regular tax or the minimum tax. If the minimum tax exceeds the regular tax, the excess amount may be carried forward for seven years. The carryforward amount may be used to reduce regular tax to the extent that regular tax exceeds minimum tax.
Relief for losses. In general, business losses not utilized in the year incurred may be deducted from taxable income earned in the 3 years preceding the year of loss or in the 20 years following the year of loss.
Estate and gift taxes
Canadian succession law does not include an estate or gift tax. How ever, provincial probate fees may apply at rates that vary depending on the province.
In the year of death, the income of a deceased taxpayer includes income on an accrual basis from all sources up to the date of death, including accrued capital gains and losses. Various provisions alleviate hardship caused by the taxation of income and capital gains on an accrual basis at death. Among these provisions are the options to file a separate tax return for certain types of income and to tax the beneficiaries on certain transferred amounts. Special tax-free rollover provisions are available for property transferred to the Canadian-resident spouse of the deceased or to a qualifying trust for the benefit of the spouse, and for transfers of farm property to a child of the deceased.
Contributions. Individuals employed in Canada and their employers must each make Canada Pension Plan (CPP) contributions at a rate of 4.95% on salaries. Contributions to the Québec Pension Plan, when applicable, are made at a rate of 5.325%. For 2016, the maximum amount of earnings subject to CPP contributions is CAD54,900, with a basic exemption of CAD3,500. This results in a maximum annual CPP contribution for employers and employees of CAD2,544.30 each. Self-employed individuals must pay both portions for a maximum annual contribution of CAD5,088.60. Quebec Pension Plan contributions are subject to the same thresholds, resulting in maximum employers’ and employees’ contributions of CAD2,737.05 and self-employed individuals’ contributions of CAD5,474.10.
Employment insurance premiums are also payable. For 2016, an employee’s required employment insurance premiums are calculated at a rate of 1.88% on the maximum annual amount of insurable earnings of CAD50,800. This results in a maximum annual premium of CAD955.04. Employers must make contributions equal to 1.4 times the amount of the employee’s premiums, up to CAD1,337.06. The federal employment insurance premiums for Quebec residents are lower. The premium rates are 1.52% for employees and 2.128% for employers. Quebec has lower rates because Quebec residents also participate in the Quebec parental insurance plan. For 2016, an employee’s required premiums under the Quebec parental insurance plan are calculated at a rate of 0.548% on the maximum annual amount of insurable earnings of CAD71,500. This results in a maximum annual premium of CAD391.82 for the Quebec parental insurance plan. Employers must make contributions equal to 1.4 times the amount of the employee’s premiums, up to a maximum of CAD548.54.
Beginning in 2012, if employees are at least 65 but under 70 and work while receiving government pension amounts, employees must continue to make contributions to the plan unless they file an election not to contribute. Also, if employees are under 65 and work while receiving a CPP retirement pension, both the employee and the employer must make government pension plan contributions. While contributing during this period, the number of years of low or zero earnings are automatically dropped from the calculation of CPP retirement pension distributions.
Coverage. The following table shows the maximum monthly amounts of the listed CPP benefits for 2016 (the Quebec pension plan provides similar benefits).
|Survivor with disability||1290.81|
The maximum amounts are paid to a person at 65 years of age. The pension amount is reduced if a person retires before reaching 65 years of age and is increased if the person delays taking the pension until the age of 70.
Canadian resident individuals or employers may have to contribute to health care plans operated by the provinces. Most hospital bills and physicians’ fees, including those for drugs and dental care in some provinces, are covered by these plans.
Totalization agreements. To provide relief from double social secu rity taxes and to assure benefit coverage, Canada has entered into total ization agreements with the countries listed below (as of 1 July 2016). The agreements usually apply for a maximum of two to five years.
Antigua and Guernsey and Jersey Poland
Barbuda Hungary Portugal
Australia Iceland Romania
Austria India St. Kitts and Nevis
Barbados Ireland St. Lucia
Belgium Israel (b) St. Vincent and the
Brazil Italy Grenadines
Bulgaria Jamaica Serbia
Chile Japan Slovak Republic
Croatia Korea (South) Slovenia
Cyprus Latvia Spain
Czech Lithuania Sweden
Republic Luxembourg Switzerland
Denmark Macedonia Trinidad and
Dominica Malta Tobago
Estonia Mexico Turkey
Finland Morocco United
France (a) Netherlands Kingdom (b)(c)
Germany New Zealand United States
Greece Norway Uruguay
a)An existing agreement between Canada and France is in force. However, a revised agreement between the countries is not yet in force.
b) A limited interim agreement, which is in force, deals only with contributions and does not cover benefits.
c) Consolidated arrangements permit residents of the United Kingdom to use their periods of residence in Canada as if they were periods of contribution to the United Kingdom.
The province of Quebec has separate totalization agreements. As a result, it does not follow the agreements listed above.
Tax filing and payment procedures
Married persons are taxed separately, rather than jointly, on all types of income. Therefore, spouses must file separate tax returns.
Individuals must file tax returns if they owe tax or if they are specifically requested to do so by the tax authorities. In addition, because of the capital gains exemption rules (see Section A), all individuals with capital gains or losses must file income tax re turns, regardless of whether tax is owed for the year.
Nonresident individuals generally must file Canadian income tax returns if they earn employment or business income (including resource income, which is generally oil, gas and mineral rights) in Canada or if they have capital gains from dispositions of “taxable Canadian property” (TCP), which includes the following:
- Real estate in Canada
- Property used in carrying on a business in Canada
- Shares of a Canadian resident or nonresident corporation not listed on a designated stock exchange, capital interests in trusts, income interests in nonresident trusts (other than units of mutual fund trusts) or interests in partnerships, if at any time during the 60-month period before the disposition, more than 50% of the fair market value of these shares or interests was derived directly or indirectly from real or immovable property located in Canada, Canadian resource property, timber resource property or options on or interests in any of these properties (or from any combination of these properties)
- Shares of a Canadian resident or nonresident corporation listed on a designated stock exchange, shares of mutual fund trust corporations or units of mutual fund trusts, if at any time during the 60-month period before the disposition, 25% or more of the issued shares of the corporation or units of the mutual fund trust was owned by nonresident and related parties and more than 50% of the fair market value of the shares or units of the mutual fund trust was derived directly or indirectly from real or immovable property located in Canada, Canadian resource property, timber resource property or options on or interests in any of these properties (or from any combination of these properties)
- Income interests in trusts resident in Canada
Canada’s double tax treaties may modify or exempt nonresidents from the above tax provisions. However, in general, Canadian nonresident tax withholding is required unless a payroll waiver is obtained or unless the employer becomes certified under a new certification process implemented in 2016.
The tax year for individuals in Canada is the calendar year. Annual income tax returns must generally be filed on or before 30 April of the year following the tax year. The filing due date is extended to 15 June for individuals earning self-employment or business income. This extended due date also applies to these individuals’ spouses. No other extension of time to file income tax returns is available in Canada.
Any unpaid income taxes are due on or before 30 April of the year following the tax year, regardless of the due date of the individual’s return. Penalties are levied if any tax due is not paid on time, and interest is charged on unpaid taxes.
Individuals may be required to make quarterly installment payments if the difference between tax payable and the amount withheld at source is greater than CAD3,000 (for Quebec residents, CAD1,800 of federal tax payable after federal withholding) in both the current year and either of the two preceding years. The amount of the quarterly installments is based on the lesser of the liability calculated by the tax authorities on installment notices, the liability for the preceding year or the liability projected for the current year after deduction of withholdings.
Taxpayers coming to or departing from Canada during a tax year are taxed on their worldwide income for the portion of the year in which they are residents of Canada. They are entitled to the same deductions and tax credits for the period of residency as a full-time resident with the exception of personal credits, which are prorated for the number of days during the year in which they are resident in Canada.
Double tax relief and tax treaties
Foreign tax relief. Foreign taxes paid are generally allowed as credits. If an individual receives foreign-source income that has been subject to foreign tax, foreign tax credit relief may be provided in Canada to reduce the effects of double taxation. The foreign tax credit is computed on a country-by-country basis and may be taken only to the extent of Canadian tax payable on the net foreign income from the country. Separate foreign tax credits are computed for business income and nonbusiness income. The nonbusiness foreign tax credit allowed on income derived from property, other than real property, is further limited to 15% of gross foreign income from property.
To the extent that foreign taxes paid on foreign nonbusiness income are not credited against Canadian federal tax, the individual may deduct the excess amount in computing income derived from property. The individual also has the option of deducting from property income any foreign nonbusiness income taxes paid, rather than applying the amount for foreign tax credit purposes.
Unused foreign business tax credits may be carried back 3 years and forward 10 years. Unused foreign nonbusiness tax credits are not eligible for carryover.
Provincial foreign tax credit relief for nonbusiness foreign income taxes is also provided. The provincial tax credit is generally limited to the lesser of the provincial taxes payable on the income and any foreign tax paid exceeding the amount of tax allowed as a credit and deduction for federal in come tax purposes.
Double tax treaties. Canada has negotiated double tax treaties with most major industrialized nations and many developing nations. All treaties negotiated after 1971 generally follow the provisions of the model treaty developed by the OECD. Many treaties currently in force were negotiated prior to 1972 and may vary significantly from the OECD model treaty.
Double tax treaties have been entered into with the following jurisdictions as of 1 July 2016.
Algeria Iceland Peru
Argentina India Philippines
Armenia Indonesia Poland
Australia (b) Ireland Portugal
Austria Israel (b) Romania
Azerbaijan Italy Russian Federation
Bangladesh Jamaica Senegal
Barbados Japan Serbia
Belgium Jordan Singapore
Brazil Kazakhstan Slovak Republic
Bulgaria Kenya Slovenia
Cameroon Korea (South) South Africa
Chile Kuwait Spain
China (b)(c) Kyrgyzstan Sri Lanka
Colombia Latvia Sweden
Côte d’Ivoire Lebanon (a) Switzerland
Croatia Lithuania Taiwan (a)
Cyprus Luxembourg Tanzania
Czech Republic Madagascar (b) Thailand
Denmark Malaysia (b) Trinidad and
Dominican Malta Tobago
Republic Mexico Tunisia
Ecuador Moldova Turkey
Egypt Mongolia Ukraine
Estonia Morocco United Arab
Finland Namibia (a) Emirates
France Netherlands (b) United Kingdom
Gabon New Zealand United States
Germany Nigeria Uzbekistan
Greece Norway Venezuela
Guyana Oman Vietnam
Hong Kong SAR Pakistan Zambia
Hungary Papua New Guinea Zimbabwe
a) This treaty has been signed, but it is not yet in force.
b) This treaty is under negotiation or renegotiation.
c) This treaty does not apply to the Hong Kong Special Administrative Region (SAR); a separate treaty with the Hong Kong SAR is in force.
Entry visas. An individual who is not a citizen or permanent resident of Canada or a national from a designated country that is exempt from the visa requirement and who wishes to enter the country as a tourist, business visitor, student or foreign worker must obtain a Temporary Resident Visa through a consulate outside Canada before entering Canada.
Electronic travel authorization. A foreign national who is exempt from the above requirement to possess a travel entry visa (for example, most citizens of a European Union country, Australia and Japan) must first obtain an electronic travel authorization (eTA) before departing for Canada when arriving by air for visitor, temporary work or study purposes. An eTA is normally valid for five years or for the duration of the traveler’s passport, whichever is shorter. The application and approval process is normally very fast for most travelers through the Immigration, Refugee and Citizenship Canada website, but must be completed before departure in order for the airline to allow the traveler to board the aircraft. It is recommended that a traveler apply for his or her eTA as soon as possible in advance of travel to Canada in case of any delays in processing such requests. US citizens are exempt from the eTA requirement and can travel to Canada without any such prior authorization.
Tourists. An individual wishing to enter Canada as a tourist must generally first secure a Temporary Resident Visa from a consulate outside Canada or, in the case of visa-exempt foreign nationals, an eTA (see Electronic travel authorization). US citizens are exempt from the eTA and Temporary Resident Visa requirement. Visitors are generally admitted to Canada for periods of up to six months after the original date of entry. Extensions may be obtained in Canada, depending on the circumstances.
Business visitors. An individual wishing to enter Canada as a business visitor generally must first secure a Temporary Resident Visa or, in the case of visa-exempt foreign nationals, an eTA (see Electronic travel authorization). A foreign national may enter Canada as a business visitor, without obtaining a work permit, in certain limited instances. In general, these instances are limited to foreign nationals engaging in international business activities in Canada, without directly entering the Canadian labor market or providing services to a Canadian entity. Common circumstances in which a foreign national may enter Canada as a business visitor include the following:
- Foreign nationals attending business meetings or conferences
- Foreign nationals seeking to purchase Canadian goods or services or receiving training and familiarization with such goods or services
- Foreign nationals giving or receiving training with a Canadian parent or subsidiary of the corporation that employs the foreign national abroad
- Foreign national sales representatives who come to Canada to sell goods (or services) manufactured outside Canada, if they do not sell to the general public
With few exceptions, most individuals providing services in Canada’s labor market require a work permit, regardless of duration of stay or source of income. Admission to Canada is generally granted for a specific purpose and is subject to a limited duration. All foreign nationals seeking entry to Canada must ensure that they have the appropriate status for their intended activities and length of stay.
The federal government, through Service Canada and Employment and Social Development Canada, is responsible for ensuring that the Canadian labor market is not negatively affected by the use of foreign nationals in place of Canadian citizens or permanent residents. A foreign worker may apply to Immigration, Refugees, Citizenship Canada (IRCC) for a work permit only after Service Canada has provided a Labor Market Impact Assessment (LMIA; see Labor Market Impact Assessment) to the employer that a job may be offered to a foreign worker. However, in certain circumstances, an employer is exempt from obtaining approval from Service Canada (see Exempt categories), and the qualifying employee may apply directly to IRCC for a work permit.
Labor Market Impact Assessment. In general, unless a foreign national meets the criteria for an exemption, a LMIA is required before the foreign national can apply for a work permit (see Exempt categories). The LMIA process requires the employer to demonstrate to Service Canada that a job offer to a foreign worker is likely to have a positive or neutral impact on the Canadian labor market. In reaching its opinion, Service Canada considers a number of factors, including the efforts made by the employer to recruit Canadians for the position, whether the work will result in direct job creation or retention for Canadians, and whether the work will result in the creation or transfer of skills and knowledge for the benefit of Canadians.
In addition, Service Canada assesses the genuineness of a job offer, the ability to transition the job to a Canadian in the future, its consistency with the terms of applicable federal-provincial/territorial agreements, whether the foreign worker will be paid a prevailing wage in Canada, and the employer’s past history of compliance with the items stated in previous job offers to foreign nationals.
After Service Canada is satisfied that the above criteria are met, it issues a positive LMIA confirming the job offer to the foreign worker, who must then submit an application for a work permit to IRCC.
Work permits are issued for a specific time period, depending on various factors. To obtain an extension of a work permit, another LMIA must be obtained and an application must be submitted to the IRCC processing center in Canada. As a general guideline, temporary foreign workers in higher-skilled occupations working under a LMIA-based work permit may work in Canada for up to five to seven years. Foreign workers employed in lower-skilled and lower-wage occupations have greater restrictions on their ability to work in Canada. If a foreign worker is contemplating a longer stay, he or she should consider obtaining Canadian permanent resident status.
Recent changes to the LMIA process include strict new employer compliance obligations and attestations. Employers must now make 18 attestations that cover ongoing employer compliance obligations. The new LMIA application form emphasizes that broad inspection powers are bestowed upon government officials, including unannounced work site inspections. Penalties for failing to meet these ongoing obligations can be severe. Consequently, strong compliance measures should be followed.
Exempt categories. Canadian immigration policies with respect to work permits, which are administered jointly by Service Canada, IRCC and Canada Border Services Agency, recognize that in certain specific situations, it is in Canada’s best interest to waive the requirement to obtain an LMIA or that international obligations provide such waiver. The most common LMIAexempt categories are discussed below.
Free trade agreement professionals. The North American Free Trade Agreement (NAFTA) provides a special opportunity for US and Mexican citizens to secure a Canadian work permit without obtaining an LMIA. Applicants with certain education and skill levels may accept job offers from Canadian employers in listed professions. For certain professions, licensing in Canada may also be required. Listed professions include, among others, accountants, architects, economists, engineers, hotel managers, lawyers, librarians, management consultants and scientists. Canada has also entered into free trade agreements with Chile, Colombia, Korea (South) and Peru, which provide similar benefits to professionals of those countries.
Students. Major changes to the Study Permit system entered into force on 1 June 2014. These regulatory amendments are directed toward improving the quality of education offered to foreign students while reducing incidences of fraud. Certain exemptions provide students with the opportunity to gain Canadian work experience. The following situations are covered under this category:
- A full-time student at a post-secondary institution seeks to engage in on-campus employment or, in certain circumstances, off-campus employment. Study Permits for post-secondary students issued after June 2014 authorize the holder to work off campus for up to 20 hours during the school term and full time during scheduled school breaks (Christmas and summer break).
- The spouse of a foreign student wishes to work in Canada while the student is attending a full-time course at the post-secondary educational level.
- A foreign student who has graduated from a post-secondary educational program in Canada obtains a post-graduation work permit to allow the student to be hired for up to three years by a Canadian employer.
- A reciprocal arrangement with the student’s home country exists, creating working holidays or student work programs, allowing young people of certain countries to work in Canada for up to one or two years. Countries with which Canada has these reciprocal agreements include Australia, Japan, Sweden, the United Kingdom and many others.
Intracompany transferees. The most common LMIA confirmation-exempt category is intracompany transferees. The exemption for intracompany transferees is designed to facilitate the transfer of “executive,” “managerial” and “specialized knowledge” personnel from companies affiliated with those established in Canada. The applicant must be employed by the foreign affiliate for at least one year in the three years preceding the transfer, and must come to Canada to take a similar role in a “senior management,” “executive” or “specialized knowledge” position.
Spousal work permits. Spouses, including common-law and same-sex partners, who are in Canada accompanying their foreign workers or student spouses ordinarily qualify for work permits themselves under the spousal work permit program. These work permits are “open” work permits, which allow the accompanying spouse to work for any employer in Canada and are usually valid for a period concurrent with the foreign national spouse’s status in Canada or the period of validity of the spouse’s passport, whichever is shorter.
Permanent residence status
The following descriptions apply to permanent residence outside the province of Quebec. Individuals intending to settle in Quebec should consult with Quebec-based professionals to obtain relevant information.
Express Entry. On 1 January 2015, IRCC introduced a new application intake management system, which governs most economic immigrants to Canada. Individuals interested in applying for permanent residence through the Skilled Worker Class, Canadian Experience Class (CEC) or certain Provincial Nominee Programs must submit an online profile through the Express Entry System. Individuals who qualify for one or more of the streams are assessed a Comprehensive Ranking Score (CRS) based on several factors including age, education, language ability in English and/or French, and previous work experience. Potential applicants are then entered into a pool of potential candidates who may be selected based on their CRS score through a periodic draw and invited to apply for permanent residence under one of the categories outlined below. An individual can only submit a permanent residence application after receiving an invitation to apply. IRCC is mandated with processing 80% of permanent residence applications within six months after an application is submitted.
Skilled Worker Class. The Skilled Worker Class, through which the majority of applicants are assessed, is designed for individuals who are prepared to enter the Canadian workforce and have education, skills and expertise. The assessment system is based on a “points grid,” which awards applicants points based on several factors, including age, education, language ability and work experience. To qualify for immigration under the Skilled Worker Class, an applicant must be assessed at least 67 out of a possible 100 points.
At a minimum, the applicant must have at least one year of work experience in a skilled occupation, demonstrate that he or she meets the minimum language proficiency requirements in French or English, and have his or her foreign educational credentials formally assessed.
The applicant must also demonstrate that he or she meets the minimum language proficiency requirements in French or English, and the applicant must have his or her foreign educational credentials formally assessed.
Canadian Experience Class. The Canadian Experience Class (CEC) recognizes that certain individuals have the qualities to make a successful transition from temporary to permanent residence and can contribute to the Canadian economy. It is a simplified program that allows certain high skilled temporary foreign workers to remain permanently in Canada and apply for permanent residence from within Canada. To be eligible under the CEC, the applicant must be proficient in English or French and must have obtained at least 12 months of full-time (or an equal amount of part-time) skilled work experience in Canada in the three years before the application is made.
CEC applicants must also submit the results of a designated third-party English or French language proficiency assessment to meet language proficiency requirements.
Start-up Visa. The Start-up Visa is a new initiative designed by IRCC, which allows qualifying foreign entrepreneurs to apply for immediate permanent residence in Canada. To be eligible for permanent residence under the Start-up Visa Program, applicants must meet the following criteria:
- He or she must have a commitment of support from a designated Canadian venture capital fund or angel investor group.
- He or she must have the ability to communicate in either French or English.
- He or she must show that the start-up business meets the minimum ownership requirements.
- He or she must have an adequate amount of money to settle and provide for the cost of living before earning an income.
Applicants must also meet the standard admissibility criteria applicable to permanent residence in Canada.
Business Class Immigration Program. Currently, Canada’s Immigrant Investor Program and entrepreneur immigrant program are both suspended by the government. At the time of writing, the Start-up Visa and the various provincial programs (see Provincial nominee program) are the primary vehicles for Canadian permanent residence for investors and entrepreneurs. The federal government has stated that they will shortly announce details of a new immigration investor program.
Self-employed persons. Self-employed persons are individuals with relevant experience in cultural activities, athletics or farm management. Applicants must have the intention and ability to establish a business that will, at a minimum, create employment for themselves, and must make a “significant contribution” to cultural activities or athletics, or purchase and manage a farm in Canada.
Provincial nominee programs. Increasingly, provinces in Canada have created their own programs to select new immigrants who intend to settle and establish themselves in the particular province. The requirements for each province differ, but the overriding principle is that applicants have skills or resources in demand in the particular province, that they have a job offer from an employer in the province, and that the applicants intend to reside permanently in such province. Some provinces also have programs for immigrant entrepreneurs. Because each province has its own set of unique qualification categories for selecting new immigrants, please consult a professional immigration advisor for further information.
Family and personal considerations
Family members. The spouse and any dependent children of a holder of a Canadian work permit in a high-skilled occupation may enter and reside in Canada for a term concurrent with the principal holder’s work permit. These family members are usually issued Visitor Records, if required, to document their status as accompanying family members. Study Permits for minor children are not required unless the children require Temporary Resident Visas to enter Canada. Attendance at a post-secondary institution requires a letter of acceptance from that institution prior to the issuance of the Study Permit. Study Permits are not required if the student is enrolled in a short-term program in Canada of six months or less.
Married spouses, common-law and same-sex partners may be eligible for work permits if their spouse/partner is in Canada on a work permit or a study permit. An applicant for a spousal work permit may be eligible for an “open” work permit if the applicant’s spouse is performing work that is at a management level, is a professional occupation, or is a technical or skilled trade and is valid for a term of at least six months.
Driver’s permits. Foreign nationals may drive temporarily in Canada using driver’s licenses from their home countries. Because each Canadian province issues driver’s licenses independently, rules for foreigners vary. In general, foreign nationals have 60 days from the time of their arrival in Canada to obtain a Canadian driver’s license. Depending on the province, an eye examination and a driving examination may be required.