Foreign Income: How-to Reduce Double Taxation

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If you are working or living in Canada and also earn additional income from another country, you can wind up facing Double Taxation from both nations. This is because Canada, and other countries as well, will tax your global income rather than just what you make directly within Canada. However, there are ways to reduce or even completely eliminate the costs of being taxed twice. Here are is basic outline of the three methods available to you.

Tax Treaty

Thankfully, Canada has treaties with several other governments like the USA to help relieve some of the cost to people who make an income from both countries. Each treaty might define things like residency, eligibility, and income differently so you should either look up the details or consult an accountant or advisor. Things that can be defined as income include:

  • Employment salaries, earnings and pensions
  • Business or self-employment revenue
  • Investments, royalties and interest
  • Social security benefits

In Canada you must disclose any additional income you earn from another country, but the treaties relieve the amount of tax you have to pay. You might also be allowed some exemptions as a specific individual or being part of certain under the tax treaty.

Foreign Income Tax Credits

Taxpayers who are residents of Canada at any point of the tax year can be eligible for tax credits on their foreign income. However, if there is a tax treaty with the foreign country you cannot get any additional tax credit. For each individual foreign country you must submit a separate income tax credit form. You also need to submit a separate form for business and non-business income. To be eligible for a foreign income tax credit, you must provide the following:

  • The country where the income was earned
  • How much income you received
  • Any losses or gains to the income

You can claim foreign tax credit equal to whichever is lower: the tax that the other country would charge on the income you made there, or the Canadian income tax you have to pay on your total global income instead. 

Claiming Foreign Income Exclusion

If you are an American living and working in Canada on a temporary but long-term basis, you can exclude your foreign income when paying your taxes. This means that the portion of income you exclude will not be taxed.

If you choose to go with an income exclusion you claim either a set flat amount that changes year to year, or your foreign income from the previous tax year—whichever is the lower amount. If you are married, both you and your spouse can claim an income exclusion. If your employer is contributing to the cost of your housing while in Canada you might also be eligible Foreign Housing Cost Exclusion. However, this might lower the amount of income you can exclude.

You cannot claim both an exclusion and a foreign tax credit; you have to claim one or the other. Therefore, you should do some careful math to figure out if it is more beneficial to you to claim the foreign tax credit or the income exclusion.

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