Understanding Reporting Requirements for Canadian NRIs

Globally, residents of every country are required to file their taxes on the income earned worldwide. It means that no matter what the origin of the income is, an individual is liable to report that income to the Government of the country he is residing. Reporting of worldwide income in your tax returns results in compliance of tax laws of the country but it was leads to higher taxes. Higher taxes certainly are not due to double taxation. Almost all the countries across the world have double taxation avoidance agreements and the tax paid by a resident in a country is allowed as credit in the other country.

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We, Indians are spread across the world but as they have their roots in India, they also get fruits from India. In the context of taxation, roots stand for the assets and fruits stand for income from the assets. Limiting our discussion to Canadian NRIs, let us try and understand the reporting requirements for the upcoming tax filing season in respect to your income earned or to be earned outside Canada.

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Fundamentally, as a non-resident tax assessed(filer) your Indian income i.e. nonCanadian income will not be taxed in Canada. First and foremost, requirement for filing taxes is to ascertain the residential status for taxation purposes and it is not a tall linked your visa. However, non-residents tax assessed must declare its worldwide income on its tax return for claiming the correct social benefits given by the Government of Canada like Childcare, HST, Climate Action etc. as per your province requirements and it affects your non-refundable tax credits. It is very important to understand this requirement when you are filing your first tax return in Canada which may or may not be as tax resident of Canada. Many tax filers do not understand the requirements and have recoveries done by CRA on a later date.

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New Tax Residents of Canada i.e. Newcomers moving into Canada during the year will also be taxed on Foreign Income only from the date you became a resident of Canada. In simple words, the income earned after the landing in Canada will be taxed in Canada and any income earned up to date of landing should only be declared, but the same won't be taxed in Canada. Another important aspect to understand is related to the proportionate allowability based on the number of days of stay in Canada for the threshold beyond which income becomes taxable known as non-refundable tax credit. In 2023 the maximum income which is not subject to tax was $15000 under the Federal Tax Return (T1) *.

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*The amount of non-refundable tax credit may vary in your provisional tax return.

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The tax year in Canada runs from January 1st to December 31st and is the same as the calendar year. However, it may differ from the tax year followed in the other country, but the tax return filed in Canada must include the following for the said period:

• Foreign Employment Income
• Foreign Interest & Dividend
• Foreign Pension
• Foreign Rentals from Investment Property
• Gain on Sale of Foreign Assets

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All the reporting in the tax return is required to be done in Canadian Dollars. Hence, the taxpayer is required to convert the foreign currency amounts in Canadian Dollars using the exchange rate provided by Bank of Canada for determining the sale of assets, dividend, interest, pension, and adjusted cost base of assets sold. This is very important to note that the said rule regarding conversion of amount into Canadian Dollars especially for those investors who make investments in US or US equities and other financial products denominated in US Dollars.

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Another vital point to be noted by tax filers is related to the transfer of foreign assets from non-registered accounts to registered accounts like TFSA, RRSP,FHSA. According to the provisions of law, the difference between the adjusted cost price and market value of the investments on the date of investments are transferred is required to be included in the income and it is considered as deemed disposition(in kind transfers). These transactions are not reported by the broker in T5008 issued so they need to be calculated by the taxpayer and accordingly reported in the tax return.

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As mentioned above one must declare any income earned outside of Canada in its Canadian tax return and it will be taxed Canada. A question which arises in the mind of the investor is what happens to the tax which is paid by the taxpayer or deducted from the income in the other country. The answer to it in simple words will be that the Government of Canada allows the foreign tax credit for the tax paid in the other country, but it is not a refundable, however it will reduce your tax payable in Canada.

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The maximum amount of each foreign tax credit that the taxpayer may claim with respect to either foreign non-business-income tax or business-income tax is essentially equal to the lesser of two amounts:

• the applicable foreign income or profits tax paid for the year; and
• the amount of Canadian tax otherwise payable for the year that pertains to the applicable foreign income.

The amount of foreign tax credit is calculated for each country in which tax is paid by the taxpayer and it may not exceed 15% of the income.

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The tax residents of Canada holding any foreign assets or investments exceeding $100,000 Canadian Dollars are required to report the details of these assets in Form T1135 along with their tax return. Through Form T1135, a taxpayer furnishes information regarding foreign assets costing more than $100,000 Canadian Dollars owned at any time during the year. The market value of the foreign assets is not required to be reported in Form T1135. Also, in case of joint owners of foreign assets, the threshold limit in respect to reporting requirements is applicable to each owner independently. Foreign assets do not include:

1. US Dollar Account in Canada.
2. Assets held in a Registered account such as an RRSP or TFSA.
3. Any property used mainly for personal use and enjoyment, such as a vehicle, vacation property, jewellery, artwork, or any other such property.

This form is crucial may help and reduce future tax liabilities and ensure compliance with Canadian Tax Laws.

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Lastly, let us see why is important to file your tax returns correctly. According to the Canadian Tax Laws, CRA may review your tax return within a period of 6 years after the issuance of Notice of Assessment (NOA). The review can be made based on the information made available to tax authorities by the tax authorities of other country based on the various information exchange agreements being executed.

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Therefore, one must report non-Canadian income and maintain records and copies of tax payment receipts and income tax returns filed in other country.

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