A Quick Guide to Canadian Tax on Foreign Income

Filing taxes is already a complicated task. There are deductions, forms, exemptions, dependents and more to keep straight, which is why many Canadians use the help of tax professionals to file their annual taxes. This process is made infinitely more complex when you introduce income from foreign sources.

How much foreign income is tax-free in Canada? How does the CRA know you’ve made foreign income this year? Are there ways to save like deductions and exemptions that apply to this income? We’ll address these concerns in this article.

How much foreign income is tax-free in Canada?

Canada has many tax treaties and agreements with foreign countries to prevent Canadian citizens from having to pay double taxes. It also helps ensure that tax evasion on foreign income is kept to a minimum. These treaties outline a wide variety of details, such as defining residency, eligibility criteria for enforcing foreign income disputes, exemptions for organizations and employees, and how taxes apply to payments like pension, self-employment income and more.

Each tax treaty is different, so let’s look at the Canada-US tax treaty as an example since this is one of the most utilized. Foreign income tax credits cover self-employment earnings for Canadians who own businesses in the US, earn income in the form of US pensions or annuities, and US income that was earned in the states. Income that is non-taxable is declared on line 25600 of your income tax return, and all tax treaties can be found on the Canadian Department of Finance’s website. You can find more specific information about the US-Canada Tax treaty here.

How does CRA know about foreign income?

Along with these tax treaties come information-sharing agreements. For example, the CRA in Canada and the IRS in the United States have an agreement where they share earning information for citizens from each other’s countries. This means the CRA likely knows how much income you made from the US and if you underreport or withhold that information, you risk being penalized and paying far more in the long run. You will have to pay US taxes on US income, but you should receive credit from Canada on taxes that you paid on US income once you file and properly report your income.

The one exception is retirement accounts. Interestingly, US IRA, 401Ks and ROTH IRAs don’t have to be reported on the T1135 form that you file.

Filing US taxes in Canada

Filing taxes in Canada works similarly to filing in other western countries. The Canadian government has information on your income, but you still have to gather the appropriate forms, check the deductions and exceptions that you are eligible for, fill out the appropriate paperwork and file your taxes by the deadline. You can apply for an extension if you need one, but you must file your taxes either way. Failing to file amounts to tax evasion and is illegal. In the end, you will be assessed fines that total way more than the amount you would have paid if you filed on time. You also have to report all income earned, whether it was made in Canada or from a foreign country.

How to save when converting your money from CAD to USD or USD to CAD

While Remitbee can’t file your taxes for you, we can help you retain as much of your income as possible if you earn from a foreign country, like the US. Our service helps you convert your currency with fees that are as low as possible, enabling you to retain more of your money than if you went through a bank or another organization. Learn more about online currency exchange here