If you are a Canadian who has invested overseas, you must report your foreign income to the Canada Revenue Agency (CRA) for taxation purposes. Also, you have to declare the foreign income when filing annual tax returns. So, how can you report the earnings?
Calculating and reporting income from foreign sources seems complicated, especially when dealing with many foreign countries. So, you have to familiarize yourself with the tax rules in Canada and other countries. That way, you’ll avoid tax penalties either way.
This guide explores all you need to know about reporting your foreign income and the taxes that apply. We look at the different foreign income rules for Canadian residents and non-residents, including the W-8BEN instructions. Keep reading to learn more.
That said, let’s get started.
How to Report Foreign Income in Canada
So, what rules must you remember when reporting your foreign income in Canada?
Well, when declaring your foreign income to the CRA, you need to consider the rules for your residency status. That is because the foreign income taxation rules for Canadian residents and non-residents vary. So, you’ll need to determine your residential status.
Your foreign income can get taxed depending on whether you are a Canadian resident or non-resident. So, what happens if you have residential ties in Canada and another country and regularly travel in both countries?
In that case, you become Canada’s deemed non-resident depending on the tax treaty between Canada and the other country. So, you must determine your status by applying the tie-breaker rule. That will help you to calculate your taxable income in Canada.
Reporting Your Foreign income as a Canadian Resident
All Canadian residents must report their foreign income when filing tax returns every year. The foreign country holding your investments may also want you to pay taxes. So what happens in Canada after you have already paid taxes in a foreign country?
To report your foreign income to the CRA when filing Canadian tax returns, you should:
- Mention the foreign countries where you earned your income
- Disclose the amount of money you made before withholding the foreign taxes
Suppose you have settled the taxes on your foreign income in another country. In that case, you can use the Canadian foreign income tax credits to claim the taxes you had already paid in the foreign country. Although the tax credit is non-refundable, it helps to lower your taxes payable in Canada.
To be eligible for the tax credit, you must be residing in Canada in the tax year you got your income. Also, you need to check if the country where you have invested has a tax treaty with Canada. That’s because it will help you know if you qualify for tax exemption.
When you earn foreign income from several countries, you have to submit separate tax credit forms for each country. Also, if your income comes from both business and non-business sources, you have to use different forms when claiming tax credits.
To claim the foreign income tax credits, you must fill out Form T2209 (Federal Foreign Tax Credits) and Line 40500. Remember to convert your foreign income to Canadian currency when filling out the forms. Use the Bank of Canada’s exchange rates.
Once you submit the tax credit forms, the CRA will determine your foreign income tax-exempt by reviewing the nature of your income and the countries where you earned the income. You will successfully claim the credit if there’s a tax treaty between the parties.
Tax Treaties in Canada
The most popular tax treaty in Canada is the Canada/U.S. tax treaty. Its primary goal is to protect the citizens in the United States and Canada from paying taxes twice. Also, it prevents people with investments in either country from evading foreign income taxes.
Most people in Canada use the Canada/U.S. tax treaty to claim foreign income tax credits for their income in the United States, including pensions and annuities. You can also claim a tax credit for self-employed earnings from your businesses in the U.S.
If part of your foreign income is from the United States, you need to familiarize yourself with the W-8BEN form. This form certifies that your area of residence is outside the country for taxation purposes. As a Canadian resident, you will need to use the form.
The W-8BEN form confirms that you are not a citizen of the United States and own the income indicated on the form. It’s also evidence that you qualify for a reduction of the withholding tax rate as a person living in a country with which the U.S. has a tax treaty.
For that reason, if you are a proven Canadian resident, consider using the W-8BEN form to claim a reduced tax withheld on the U.S. income you’ll receive in your account.
Reporting Your Foreign income as a Canadian Non-Resident
If you live in another country and don’t have any residential ties with Canada, the CRA considers you as a non-resident. An excellent example is a tourist visiting Canada for less than 183 days in the country every year.
Even if you don’t plan to stay permanently in Canada, you’ll have to declare the income you earned in Canada. That will help you claim a non-refundable tax credit issued in Canada. Your home country may also require you to report your income in Canada.
When you report your non-Canadian income, the CRA won’t tax it. Instead, the agency will use the report to establish the non-refundable tax credits you are eligible for in Canada. For that reason, consider filing your Canadian tax return before your country.
Thankfully, filing the Canadian tax return will help you know your Canadian net income and the tax payable to your home country. But as a non-resident, you don’t need to report the income you earn outside of Canada to the CRA.
As a Canadian resident, it’s essential to report your foreign income to the CRA for tax purposes. You have to specify the country where the revenue originated from and the total amount you earned in each country. Finally, don’t forget to convert your earnings to Canadian dollars for accurate calculations.