For Simplicity, you should treat your foreign income the same way as your income earned inside Canada. You’ll need to report foreign income with the CRA from every country. Some of your foreign income may be exempted from the taxes due to tax treaties between Canada and some other countries.
Let us discuss some key points with you on declaring foreign income in Canada.
Tax Resident in Canada
If you live or work in Canada, you’ll have to report all of your foreign income with the CRA. The CRA specifies specific rules on determining the tax residency.
According to the CRA, you are a tax resident in Canada if:
- Own a house in Canada
- You have a spouse or children living in Canada
- You have investment, property, insurance, Bank Account, Credit Card, in Canada
If you fulfill any of the above conditions, you’ll need to file the tax return with the CRA by declaring all of your foreign income. You’ll need to report the income earned in the foreign countries. If you have paid any foreign taxes, you can claim the credits if the country has a tax treaty with Canada.
Reporting Foreign Income in Canada
Once you determine the residency status in Canada, it’s time to report the foreign income with the CRA. You’ll report the foreign income with the CRA using Form 10400.
You should report the foreign income with the CRA by:
- Indicating the country of income.
- Reporting all income earned in the foreign country, or multiple countries separately.
- Declaring the full earnings before any applicable taxes in the foreign country.
- Indicating whether the foreign country has a tax treaty with Canada.
Declaring the Exempted Foreign Income in Canada – 25600
Canada has a tax treaty with more than 80 countries including the US, Britain, France, Germany, and China. You can avoid double taxation if you earn foreign income from these countries.
You’ll still need to report all of the foreign income even if you are paying foreign taxes. You’ll need to report all income from multiple countries through investments, social security benefits, or other sources of income. You will use Form 25600 (256 old version) to report the exempted foreign income with the CRA.
If you have multiple sources of foreign income, it may be treated differently. The tax treatment can also be different depending on the tax declaration dates in foreign countries.
You can also apply for a Canada Resident Certificate with the CRA to avoid double taxation in other countries.
Claiming Foreign Tax Credits – Federal
If you have been a resident of Canada during the tax year, the CRA allows you to claim a foreign tax credit. You can claim the tax credit on the income tax paid in other countries. The federal foreign tax credit is available to you if you report the foreign income having a tax treaty with Canada.
Some key points to consider regarding the foreign tax credits:
- You’ll report the foreign income separately for each country if you have paid foreign tax above $200.
- You must declare the business and non-business income separately.
- You should apply for the tax credit on Form T2209 and use line 40500.
Claiming the Foreign Tax Credits – Provincial and Territories
You can further reduce the tax liability in Canada by claiming a provincial or territorial tax credit. You can claim the provincial tax credit from all provinces in Canada apart from Quebec and Alberta.
You can claim the provincial and territories tax credit if you meet the following conditions:
- You are a resident of Canada during the tax year.
- You have a permanent establishment as a business in Canada.
- You have foreign investment income during the tax year.
- The foreign earned income is only non-business.
You can only claim the provincial tax credit if it exceeds the allowable federal tax credit amount for the tax year.
Since you’ll report the foreign earned income with the CRA, it has to be converted into Canadian Dollars. The CRA determines the foreign Exchange rates as declared by the Bank of Canada.
You can use the foreign exchange rates on the foreign income receiving day, or use the average rates on the tax filing day.
Talk to a Professional
Our team of professional tax specialists includes Chartered Accountants. We have a team of experts to take you through the tax imbroglio. If you have foreign income and you have resident status in Canada, we can help you to minimize the tax burden efficiently.
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