Canadian Tax Laws on Foreign Business Income
Treat foreign business income the same way you would handle business income from Canadian sources when filing your Canadian income tax return. If you are a sole proprietor or part of a partnership, report foreign income as part of your business or professional income on Form T2125: Statement of Business or Professional Activities.
Since your foreign income needs to be converted into Canadian dollars, the Canada Revenue Agency (CRA) advises using the Bank of Canada exchange rate that was in effect on the day you received the income or using the average annual exchange rate.
For instance, suppose you are in Canada and do some work for an American client, who sends you a check in U.S. dollars. It gets converted to Canadian funds when you deposit it into your Canadian business account, and you record it in your business records. When you fill out your personal T1 income tax form, this foreign income is part of your total business income calculations.
However, if you are actually performing your work in a foreign country, such as the United States, you may have to pay income tax in that country.
The U.S. bases its income tax system on citizenship and where the work is performed, unlike Canada, which bases its income tax system on residency.
To further complicate matters, some states in the U.S. have state income tax and some don't. You may end up having to file a tax return with the Internal Revenue Service (IRS) and pay American taxes.
If you earn all or part of your foreign income from working abroad, you still have to file a Canadian tax return if you are deemed a resident of Canada for tax purposes. Generally, you are considered a resident if you maintain "significant residential ties with Canada," according to the CRA. This includes:
- Owning a home in Canada
- Having a spouse or children in Canada
- Having personal property in Canada, such as vehicles, furniture, etc.
- Having health insurance in a Canadian province or territory
- Having Canadian bank accounts, credit cards, investment accounts, etc.
If you are considered a resident of Canada then you must file a Canadian tax return and report all domestic and foreign income. If you have earned income abroad and paid tax on the income in the country it was earned, you will be credited the foreign tax on your Canadian tax return.
If you earned $30,000 of income from working in the United States and you filed a U.S. tax return and paid $5,000 in U.S. taxes, you still would report the $30,000 of U.S. income on your Canadian tax return. Because Canada and the U.S. have a tax treaty you would be credited with the $5,000 you paid in the U.S.
Note that you may have to pay additional tax on the foreign income if the Canadian rate is higher. So in the above example, if the Canadian tax rate on the $30,000 of income was $7000 you would have to pay an extra $2000 in taxes in Canada.
If you qualify as a non-resident for tax purposes then you do not have to file a Canadian tax return.
To avoid double taxation, Canada has tax treaties with more than 80 countries, including the United States, Mexico, Britain, France, Germany, Italy, and China. Canada's Department of Finance maintains a list of tax treaties currently in force. Tax treaties generally limit the amount of taxes payable to that which you would pay in your country of residence. However, treaty provisions can vary significantly from country to country. If you have business income from a country that does not have a tax treaty with Canada, you may wind up paying double taxes.
Some countries may require that you provide a Canadian Certificate of Residency in order to prove that you reside in Canada and exempt you from paying tax in their jurisdiction. To obtain the certificate, you can apply to the CRA. Some countries also may want the Certificate of Residency to be authenticated.
Consulting Tax Professionals
Before performing any business activities outside of Canada that may generate taxes in that jurisdiction, consult with a tax professional or contact your local tax office and explain the situation. Dealing with a domestic tax problem can be difficult enough, but resolving a tax issue between domestic and foreign tax agencies can lead to months of frustration and expense.