You can earn up to $12,069 (2019) tax-free if at least 90% of your total income is from Canada. If more than 10% of your income came from outside Canada, you aren’t eligible for that basic personal deduction amount.
On your TD1 form, you disclose if you will earn at least 90% of your income in Canada in the year. If yes, then you claim the credit. If not, then you tick NO and don’t claim the credit. You pay some taxes, but it’s better than owing money later when you file. This is the most common reason Canadian non-residents end up owing taxes to the CRA.
Canada and many foreign countries have tax agreements or treaties. This avoids you paying double taxes, and it helps prevent tax evasion for foreign-earned income.
Tax treaties set out resolutions, define residency outline eligibility criteria to enforce disputes over foreign income. They cover the exemptions for some people and organizations. Plus, detail how your taxes work on salaries, pensions, self-employment or other taxable income.
The Canada / US Tax Treaty
Canadians most commonly use the Canada/US tax treaty. Foreign income tax credits apply to:
- Income earned in the US
- Self-employment income for Canadians who own US businesses
- US income from annuities and pensions.
For US Social Security benefits, you claim a deduction of 15% of the benefits you report on line 115. If you have received Social Security continuously since 1996 or if the SS benefits are from a spouse who did reside in Canada from 1996 until they died, you claim a 50% deduction if you still live in Canada.
Declaring that your foreign income is tax-free – Exempt Foreign Income
If some or all of your foreign income is non-taxable because of a tax treaty, you declare that on line 25600 (formerly line 256) of your income tax return. Declaring that some portion of your foreign income is tax-free changes depending on the tax treaty. Finally, check the Canadian Department of Finance tax treaties on the website.
Different kinds of income, like your business or pension income, can be taxed differently, even from the same country. Sometimes, even the same kinds of income from the same country fall under different treaty rules depending on when your payments started or other details in the treaties.
If some or all of your income comes from a foreign country, several factors determine how much foreign income is tax-free in Canada. The CRA determines exempt foreign income depending on the type of income, the country and several other factors.