Temporary assignments outside Canada
Many assignments outside Canada are only temporary, ranging from a few weeks to several years. For income tax purposes, it’s important that you determine your residency status during the period you’re outside Canada. A resident of Canada is taxed on his or her worldwide income. Therefore, if you’re a Canadian resident for income tax purposes, any income you earn during an assignment abroad will be subject to Canadian tax.
Residence is a question of fact and the term “resident” is not defined in the Income Tax Act. The courts, however, have held that you’re a resident of Canada for tax purposes if Canada is the place where you regularly or customarily live.
In prior years, the CRA administratively took the position that, unless the circumstances indicated otherwise, you would likely be considered a non-resident if you were absent from Canada for two years or longer and you had severed your ties with Canada. It is now the CRA’s position that there is no particular length of stay abroad that necessarily results in an individual becoming a non- resident. In making a determination of residence status, all of the relevant facts in each case must be considered, including residential ties with Canada and length of time, object, intention and continuity with respect to stays in Canada and abroad.
Canada also has income tax treaties with a number of countries that contain tie-breaker rules to determine residency when you’re considered to be a resident of both Canada and the other country.
If you cease to be a resident of Canada for income tax purposes, special rules apply (see topic 119).
Dividends and interest income are generally taxable in Canada as the income is received. In addition, for investments that do not pay interest on an annual basis, an annual interest accrual may need to be determined and included in taxable income. Dividends from taxable Canadian corporations are taxed at a reduced rate through a gross-up and tax credit mechanism, which in principle takes into account income taxes paid at the corporate level. In the case of income from foreign investments, taxes withheld in another jurisdiction are creditable against Canadian taxes otherwise payable, based on tax treaty rates where applicable, and calculated on a country-by-country basis..
Upon the disposition of capital property, the gain or loss is calculated as the difference between the cost base of the asset and the proceeds of sale (less any selling expenses). Only one-half of the net capital gain is added to taxable income, while a net capital loss may be carried back to reduce capital gains realized in any of the three prior years, and thereby recover the relevant tax, or be carried forward and applied to reduce net taxable capital gains realized in any future tax year. Canadian residents owning “qualified small business corporation shares” may qualify for a lifetime exemption (applied on a cumulative basis) of up to CAD 848,252 , or for a lifetime exemption of up to CAD 1,000,000 for qualified Canadian farm property or qualified Canadian fishing property they own, on the disposition of that property on or after January 1, 2018. Donations of certain appreciated capital property to registered charities may result in no capital gains being subject to tax and a donation credit being available to the donor.
Accrued capital gains can also create an income tax liability at death. An individual is deemed to dispose of all assets held at the date of death for proceeds equal to their fair market value on that date, and the accrued capital gains or losses are reported on the individual’s tax return for that year. An exception to this deemed disposition rule applies if the individual was a resident of Canada at the time of death and the property was transferred either to a surviving spouse who was also resident in Canada on the same date or to a Canadian spousal trust created under the deceased spouses’ will for the lifetime of the surviving spouse.
Capital gains are generally measured from the original cost of the particular property. However, on immigration to Canada, most property owned by the individual is deemed to be reacquired at its fair market value as of the date of immigration. This helps ensure that Canada only taxes the capital gains that accrue while the individual is resident in Canada.