DAVID WILKENFELD, CPA, CA, canadian tax CONSULTANT

What’s Your Tax Issue? – Overseas Employment

In Canadian Income Tax, Residency on June 20, 2010 at 3:06 pm

The Tax Issue:

I have been offered a job working in Afghanistan for a non-Canadian company. They do not report my income or any information to any government agency and they pay once a month in US dollars. After every 10 weeks I get a 3 week holiday where they pay my way home and back. My wife and I own a home in Ontario where she resides and doesn’t work. Is there a way to legally avoid paying income tax in Canada?

The Answer:

With so much mobility in the work place these days, I get this type of question quite often. While each set of facts is different, I can make the following general comments:

Every individual who is resident in Canada for tax purposes is subject to Canadian tax on his or her world income. That should be the starting point for everyone with this issue.

The next question should be obvious: If I leave Canada to work elsewhere for a fixed period of time, am I a Canadian resident? Residency is determined by “social and economic ties”. In order to become a non-resident of Canada, you must cut those ties. The most of important of these ties are your family and your home. If you leave to work on a temporary assignment and your family stays behind in your home, then it’s clear that you are still a Canadian resident.

Once we establish that you are still subject to tax in Canada, we then look to see if there are any rules that relieve you of your tax burden. There are two places to look: The Canadian domestic law, and the international tax treaties involving Canada.

Under Canadian law, there is really only one provision that might give you a break on your taxes. It’s called the Overseas Employment Tax Credit. This is a deduction of up to $80,000 on income earned outside of Canada by an employee, but it doesn’t apply to everyone. You must be employed by either a resident of Canada or its foreign affiliate. The credit only applies to employees working outside Canada for six months or more, in connection with a resource, construction, installation, agricultural or engineering project.

The next step is to look at the country in which you are carrying out your employment. They may have their own tax rules that conflict with ours. For example, many countries will tax non-residents on their employment income, or consider you as a resident for purposes if you live there for a period of time. Normally, we would look to any tax treaty  between that country and Canada in order to resolve any double-tax issues.

So, getting back to your question, it seems clear since your family and home remain here that you are still a Canadian resident, subject to Canadian tax on your income earned in Afghanistan. Even if your earnings are not reported to any tax authority, you must self-assess and report them (converted to Canadian dollars) on your Canadian income tax return. Since your employer is not Canadian (assuming it is not a foreign affiliate of a Canadian company) then you will not qualify for any relief from the overseas employment tax credit. Finally, Canada does not have a tax treaty with Afghanistan, so any tax you may have to pay there will not be exempt in Canada; however, it should be eligible for a foreign tax credit under Canadian rules.

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