Canada is going the extra mile to support the Ukrainians affected by the Russian Invasion. With every passing day number of applications for temporary residence is growing. Many of the Ukrainians are already in Canada while more are still on the way.
We are receiving a high number of daily information requests from Ukrainians who are planning to move to Canada. This post is an attempt to provide very high-level information about the income taxes in Canada for them. Though informative, we caution the readers that, this post is for general information purposes only and cannot replace formal tax advice from an income tax professional in Canada.
Based on the top questions asked by Ukrainian immigrants in past two weeks, the top issues identified are:
- Tax Residency Issues
- Double Taxation Issues and relief provided under the treaty
- Worldwide income reporting for Canadian Tax Residents
- Bringing funds earned in Ukraine to Canada
Tax Residency in Canada
Canada taxes its residents on their worldwide income. With very high tax rates in Canada, even after the foreign tax credits, taxpayers can expect to pay taxes to Canada.
The very first thing that needs to be determined is the Tax Residency of the Ukrainians temporarily moving to Canada.
This is extremely important to know that tax residency is different from immigration residency in Canada. One may be a resident of Canada for immigration purposes whereas a non-resident or deemed a non-resident for income tax purposes. Therefore it is important to familiarize yourself with some of the key terms used in Canada.
- Resident of Canada
- Deemed resident of Canada
- Factual Resident of Canada
- Non resident of Canada
- Deemed non-resident of Canada
- Immigrant/Emigrant for tax purposes & Part-year residents of Canada
While determining an individual’s tax residency status, both Significant residential ties and Secondary residential ties are analyzed together. An individual becomes a resident of Canada when (s)he established significant residential ties with Canada. The year when you move to Canada (Immigrate) is generally a part-year tax residency year.
If you do not establish significant residential ties to Canada, you may be a deemed resident of Canada if you spend more than 183 days in Canada. However, you can still be considered deemed non-resident (even after meeting the 183 days rule) if you use the tie-breaker rules provided in the tax treaty between Ukraine and Canada.
Some common questions about tax residency in Canada are answered in this post about tax residency. While you can determine the residency status using these rules, always remember to look for tie-breaker rules provided in the tax treaty.
Using Tie-breaker Rules: Canada-Ukraine Tax Treaty
Article IV of the tax treaty between Ukraine and Canada provides specific rules around tax residency. It also provides tie-breaker rules where an individual is considered a resident of both countries. This can be really useful for those Ukrainians who spend more than 183 days in Canada but have closer ties to Ukraine.
If using the tie-breaker rules, you are a Ukrainian tax resident, you only have to pay income taxes on Canadian-sourced income in Canada. However, you must be careful in applying tie-breaker rules and ensure a correct tax return is filed in Canada. When you use tie-breaker rules to avoid getting taxed on income earned outside Canada, bear in mind it can affect eligibility for other government supports such as GST/HST credits or other similar benefits.
Double Taxation Issues and relief provided under the treaty
One of the most frequently asked questions in the past few days is about double taxation.
Yes, there is a relief provided in the tax treaty. If you are a resident of Canada and reporting your Ukrainian-sourced income (or other worldwide income), the income is taxable in Canada. Relief is provided by allowing a foreign tax credit against the taxes paid in Ukraine.
Foreign tax credits and foreign tax deductions are two different concepts. Sometimes foreign tax deductions are available where foreign tax credits are not available. However, that’s beyond the scope of this post here.
Worldwide Income Reporting and Taxation in Canada
As mentioned before, Canada taxes its residents (tax residents) on its worldwide income. Of course, providing relief from double taxation in form of foreign tax credits. Some of the key points you need to know are listed below. Please note this is not an exhaustive, but a very limited list for general purposes.
- Business income earned in a corporation versus an unincorporated form of business has different tax treatments.
- An unincorporated business such as a sole proprietor or partnership generally falls under self-employment for income tax purposes. Self-employment income is sourced from the country of residence of the taxpayer.
- A business income earned by a corporation is taxed in the country of residence of that corporation. The dividends distributed to the shareholders are then taxed in the shareholders’ hands.
- The concept of Permanent Establishment is critical to the determination of taxation of the business profits. Article 7 provides the details on the business profits whereas permanent establishment (PE) is described in article 5 of the treaty. The readers are strongly advised to read through these treaty articles.
- Unlike business profits, passive income (such as rents, dividends, royalties, and other passive income) is taxed on a current basis in Canada. Even if this income is earned in a foreign corporation.
- Beware of Canada’s Foreign affiliate rules, foreign asset reporting, and transfer pricing rules when structuring corporate entities and cross-border transactions.
- Foreign employment income is reported and taxed in Canada as well with relief provided by FTCs.
Bringing Funds to Canada
Quite a few people were confused about bringing funds from Ukraine to Canada.
Yes, you can bring as many funds as you want to Canada, through whatever channel, this is not taxed in Canada. The income you earned before coming to Canada is not taxed in Canada. (Beware of the physical cash limitations while moving across borders, please check with customs).
While we are going to update this post again based on the feedback provided in the comments section below, please do not rely on this post as a sole source of information. Leave comments if you have some questions, we try our best to join the discussion. Please do not discuss your specific tax situation using the comments section as we provide the response to questions/comments of generic nature only. Specific tax situations are discussed through formal tax planning requests only.