Navigating Canada’s tax system as a non-resident can be complex and confusing. Whether you’re planning to leave Canada, have recently moved abroad, or earn Canadian income while living elsewhere, understanding non-resident tax rules is crucial to staying compliant and avoiding costly mistakes. This guide breaks down everything you need to know about non-resident taxation in Canada.
Who Is Considered a Non-Resident of Canada?
The Canada Revenue Agency (CRA) determines your residency status based on residential ties to Canada, not just citizenship or physical presence. You’re generally considered a non-resident if you:
- Normally live in another country and are not considered a resident of Canada
- Don’t have significant residential ties to Canada
- Stay in Canada for less than 183 days in the tax year
Residential ties include having a home in Canada, a spouse or dependents living in Canada, personal property (vehicles, furniture), social ties, and economic ties like Canadian bank accounts or credit cards.
It’s important to note that you can be a Canadian citizen and still be a non-resident for tax purposes, or vice versa—be a non-citizen but a tax resident of Canada.
Deemed Residency and Factual Residency
The CRA recognizes different types of residency status:
Deemed Residents: If you stay in Canada for 183 days or more in a tax year and don’t have significant residential ties to another country, you may be deemed a resident and taxed on worldwide income.
Factual Residents: Those who maintain significant residential ties to Canada while living abroad may still be considered factual residents, subject to Canadian tax on worldwide income.
Non-Residents: Those who have severed residential ties and live permanently outside Canada, taxed only on Canadian-source income.
Determining your status can be complicated, especially if you maintain some ties to Canada while living abroad. The CRA considers each situation individually.
What Income Do Non-Residents Pay Tax On?
As a non-resident of Canada, you’re only taxed on Canadian-source income, which includes:
Employment Income
Wages or salary earned while working in Canada are subject to Canadian tax. Your employer must withhold tax at source, and you may need to file a Canadian tax return.
Business Income
If you carry on business in Canada, any profits from that business are taxable. This includes income from a permanent establishment in Canada.
Rental Income
Income from Canadian rental properties is subject to Canadian tax. You have two options: pay a flat 25% withholding tax on gross rents, or file a Section 216 tax return to pay tax on net rental income (after expenses), which is often more favorable.
Capital Gains
Certain capital gains on Canadian property, particularly taxable Canadian property like real estate and shares of private Canadian corporations, are subject to Canadian tax.
Pension and RRSP Income
Canadian pension payments, RRSP withdrawals, and annuity payments are subject to withholding tax, typically at 25% (or lower treaty rate).
Scholarships and Grants
Research grants and certain scholarships from Canadian sources may be subject to withholding tax.
Withholding Tax Rates for Non-Residents
Canada imposes withholding tax on certain types of income paid to non-residents, including:
- Interest payments: 25%
- Dividend payments: 25%
- Rental income: 25% (on gross rent)
- Pension payments: 25%
- RRSP/RRIF withdrawals: 25%
These are default rates that may be reduced under tax treaties between Canada and your country of residence. For example, the Canada-US tax treaty reduces withholding rates on many income types to 15% or even 0% in some cases.
Tax Treaties and Reduced Rates
Canada has tax treaties with over 90 countries designed to prevent double taxation and reduce withholding rates. If you’re a resident of a treaty country, you may be eligible for:
- Reduced withholding tax rates on dividends, interest, and pensions
- Exemption from Canadian tax on certain income types
- Tax credits in your home country for taxes paid to Canada
- Tie-breaker rules to determine residency when you could be considered a resident of both countries
To claim treaty benefits, you’ll need to provide the payer with form NR301 (Declaration of Eligibility for Benefits under a Tax Treaty for a Non-Resident Taxpayer) or NR302 for reduced withholding.
Filing Requirements for Non-Residents
Departure Tax Return
When you become a non-resident, you must file a departure tax return for the part of the year you were a resident. You’ll also face deemed disposition rules on certain property (as if you sold it), potentially triggering capital gains tax.
Annual Tax Returns
Non-residents must file a Canadian tax return (Form T1) if they:
- Earned employment or business income in Canada
- Want to claim a refund of taxes withheld
- Disposed of taxable Canadian property
- Received rental income and choose to file under Section 216
The filing deadline is June 15 if you or your spouse are self-employed, or April 30 for others.
Section 216 Returns
Non-residents receiving rental income can elect to file a Section 216 return to pay tax on net rental income instead of the 25% gross withholding rate. This election must be made within two years of the end of the tax year.
Common Mistakes Non-Residents Make
Not Severing Residential Ties: Keeping a home available for your use, maintaining provincial health insurance, or leaving a spouse in Canada can mean you’re still considered a resident.
Missing Filing Deadlines: Late filing can result in penalties and interest charges, even if no tax is owing.
Ignoring Deemed Disposition: Failing to report deemed dispositions when leaving Canada can lead to significant tax bills and penalties later.
Not Claiming Treaty Benefits: Many non-residents overpay tax by not claiming available treaty reductions.
Selling Property Without Clearance: You need a clearance certificate when selling certain Canadian property as a non-resident, or the buyer must withhold 25% of the purchase price.
Tips for Managing Non-Resident Tax Obligations
- Document Your Departure: Keep records of when you left Canada, where you established residence, and evidence of severed ties.
- Notify the CRA: File form NR73 (Determination of Residency Status) to get official confirmation of your non-resident status.
- Understand Treaty Benefits: Research the tax treaty between Canada and your new country of residence to minimize withholding taxes.
- Keep Canadian Accounts: While you should sever most ties, you may want to keep one bank account for receiving income and paying Canadian tax obligations.
- Plan Property Sales: If selling Canadian real estate, obtain a clearance certificate to avoid the 25% withholding requirement.
- Consult Professionals: Cross-border taxation is complex—work with tax advisors in both Canada and your new country.
Conclusion
Understanding non-resident tax rules in Canada is essential for anyone leaving the country or earning Canadian income while living abroad. While you’ll only pay tax on Canadian-source income as a non-resident, the rules around withholding taxes, deemed dispositions, and filing requirements can be intricate.
Proper planning when leaving Canada, understanding tax treaty benefits, and staying compliant with filing obligations will help you minimize your tax burden and avoid penalties. When in doubt, consult with a personal tax accountant canada who can provide guidance tailored to your specific situation. If you’re in the Greater Toronto Area, our personal tax accountant mississauga team specializes in cross-border tax matters and can help you navigate these complex requirements with confidence.