I've had enough people ask me about the tax implications of what I do that it would make an interesting, albeit lengthy post. And I'll preface it with a *humongous* caveat:
I. AM. NOT. A. LAWYER.
I have never been a lawyer. I have no aspirations of being a lawyer. Until I decided to write this post, I couldn't even spell lawyer. I have taken a single course in commercial law over ten years ago which is enough to make me laugh at some of the contracts I've had to sign but that's it. Any advice implied here is based on my aimless meanderings through the Canada Revenue Agency and dealings with other people. If you follow it, that's your fault, not mine. Like I often say, "You can't save everybody."
Here's the scenario: I am a Canadian citizen but a Bahamian resident. Often I will work in Canada for a period on a contract, then make up some excuse to go home. (More on effective excuses in another post.) Then I work remotely from the Bahamas for the remainder of the contract.
There are three areas to consider: Income tax, GST, and CPP/EI. I'll start with the one people ask most about.
Short version: Non-residents pay fifteen percent income tax on any income earned while on Canadian soil.
That is what I've learned from both the CRA website and from a fairly respectable tax accountant firm. While you are physically in Canada taking advantage of Canadian roads, sewers, and brothels, you must pay taxes to someone. If you can prove that you have to pay taxes to some other country, they won't tax you twice. Unfortunately, there is no tax treaty 'twixt Canada and the Bahamas, likely because there is no income tax in the Bahamas.
The person that's paying you is required to withhold the 15% income tax and remit it to CRA on your behalf. At the end of the year, they need to give you either a regular T4 slip or a T4-NR slip, depending on who you ask.
Can I deduct expenses to reduce my tax?
Maybe. My opinion is that you'll make less waves if you keep it simple. Unless you're going to be in Canada a long time (in which case, you will be a resident anyway), any "deductions" you think you might be able to claim won't be worth the aggravation. Plus then you'd need to file a return. Which brings me to...
Do I need to file an income tax statement?
Not sure. Have received conflicting opinions on this. If you think you should be paying more or less than 15%, then yes, you definitely do. Otherwise, I've had at least one CRA person claim you need to fill out a regular income tax form just as if you were a Canadian resident. Everyone else says you don't need to bother. Having said that, the fact that you get a T4 slip at the end of the year suggests otherwise...
What if you come back to Canada and work for a short period on the same contract?
Use your judgement. When I come back for a few days or a week, I don't generally notify the contracting agency. If I'm back for the summer, it's reasonable to assume I'm hunkering down for a while and should pay the government their due.
GST is handled completely separately than income tax, despite the fact that you call the same number to ask questions. There are different rules regarding residency status for GST. Meaning you may be a non-resident for income tax purposes but a resident for GST purposes. And residents need to collect and remit GST.
The rules here are a little easier to follow. If you expect to make more than CDN$30,000 in a given year while in Canada, then you need to charge GST. For most consultants, that's 'twixt two and four months worth of work so chances are, you'll need to file.
To collect GST, you need a Business Number which is easy enough to get. Call up CRA at 1.800.959.5525 and they should be able to give it to you over the phone. Here is the gist of what to tell them:
- I am not a Canadian resident but I *am* a Canadian citizen. I will be working in Canada for a period of X months and expect to make over $30,000 during that time. I'd like to apply for a Business Number for GST for the period that I am in Canada.
- You will file GST annually
- I do not need a payroll account
- I am a sole proprietor
They may try to tell you that you need to call the International Tax Office but that's wrong. The International Tax Office doesn't deal with GST at all.
Should I keep my Business Number active after I leave the country?
Probably not. In my experience, it's pretty easy to deactivate and reactivate it so it's worth the phone call to deactivate it when you leave. And that's all you need to do. There's no paperwork involved. And you do *not* charge GST for any work you perform outside Canada.
Should I incorporate?
My opinion is no, you shouldn't. The major advantage of incorporation is to lower your taxes which isn't really an issue for non-residents. More importantly, with you as the major shareholder, it constitutes a major residential tie to Canada, something you should avoid.
I normally wouldn't add this section but my most recent adventures warrant mentioning. Until then, I would have said you don't need to pay CPP or EI, nor does the company who pays you. This is based on conversations with both CRA and a fairly confident-sounding international tax accountant. As a non-resident, you aren't entitled to EI so it makes sense that you shouldn't have to pay it. CPP is more of a grey area but by most accounts, you shouldn't need to pay into that either.
The sole dissenting voice in this is the contracting agency I currently go through who is rather insistent that they have to charge me for it as well as pay their share. They claim that there are different rules for contracting agencies which could be the case but I suspect they just want to cover their asses and not do anything that may trigger an audit. In any case, I've sent numerous e-mails quoting international tax accountants and linking to relevant CRA sites, all of which have gone ignored. So I'm letting them have their way partially because I'm in the country only for another month and partially because I think their share of the EI/CPP payments cost more than the commission they're charging me.
Which reminds me: CPP and EI are charged only while you are in the country, assuming they should be charged at all, which I doubt.
Residency means different things for income tax than for GST. For GST, if you earn $30,000 while in Canada, you are a resident for GST purposes. Otherwise, you have to consider the many other scenarios on their website.
For income tax, the rules are not nearly as concrete. If you are physically in Canada for 183 days or more (whether you work or not), you are a Canadian resident.
There are some dire ramifications if you are considered a Canadian resident for income tax. Namely, you are taxed on your entire worldwide income for the year, regardless of where you earned it. Unless, of course, you pay tax on your external income in another country, in which case, Canada does not double-tax. But since there is no income tax in the Bahamas, this is a situation I generally like to avoid.
Even if you are in the country less than 183 days, you still may be considered a Canadian resident. And this is where it gets iffy. There is nothing that says, "If you meet this set of criteria, you are a Canadian resident". Rather, CRA will look at a combination of factors and essentially make a judgement call. Some of the questions they'll consider:
- Do you own a home in Canada?
- Do you have a registered vehicle in Canada?
- Do you have bank accounts and credit cards in Canada?
- Do you have family and other personal ties to Canada?
- Do your spouse and/or children live in Canada?
Answering yes to any of these questions is a mark against you but again, it doesn't mean you're a resident. For example, maybe you own a home but rent it out. Then it becomes more of an investment than a residential tie.
All in all, it's kind of wishy-washy so the more you can do to wedge yourself into the country to which you're moving, the better.
Final note on residency: when you leave Canada, I believe there is a formal process to follow to claim you are no longer a resident. I haven't followed it. I just left and stopped paying taxes (which was easy to do because I didn't earn money in Canada for the first two years after I left). You could do the same thing but the underlying theme I'm picking up from my dealings with CRA is that they are fairly practical, at least in the tax department. As long as you act in a relatively reasonable manner, they should leave you alone.
Seriously, the Canadian Revenue Agency website is really good at publishing pretty much anything you need to know about Canadian taxes. Not only do they have the actual laws, but there is a virtual cornucopia of questions and answers covering most scenarios, all in relatively plain, if not quite queen's, English. And pretty much all forms are available in fillable and printable formats. You shouldn't need to fill any of them out but they're a good reference for when you call CRA so you can expect which questions they'll ask.
The main phone number for CRA is 1.800.959.5525. As a call centre, they are better than Expedia but worse than Go Daddy (who, admittedly, gets a few bonus points for having the best on-hold music ever). For the most part, you aren't on hold *too* long and the agents are friendly and seem knowledgeable enough even if they give conflicting advice.
Note that it's still hard to get concrete answers to some questions, even if you call them up but this is still the best resource I've found short of paying someone a lot of money for advice. And speaking of paid advice, if you are serious about this scenario, you should seek it out. After you've gleaned all you can from the CRA website. I used KPMG in Calgary and am happy with the advice I got, if not the price I was charged. I also talked with someone at Continental Tax and I wish I remembered his name because he was amazing. Gave me a ton of free advice over the phone and I will not hesitate to engage their services in the future.
The overriding rule when negotiating the Canadian tax system is the same is it is in software development: Favour maintainability over all else. That means: don't rock the boat. Get into the country, pay what's owed, and leave. If you want to minimize the amount of tax you pay as a non-resident, the best way to do it is to minimize the amount of time you're physically in Canada. If you start looking for shortcuts, you're more likely to be audited. And worse yet, you're in a worse position to defend yourself in the event you *do* get audited.
In my opinion, the Canadian tax system is based on fairness (with respect to eligibility, not necessarily the percentage you have to pay). If you're in Canada, you pay tax to the Canadian government. If not, you don't. If you act according to this, you should be okay.
But just in case, it's best not to leave a forwarding address.
Kyle the Deductible
*EDIT: October 17, 2007*
After clearing up some communication issues, the contracting agency consulted their own accountants and has confirmed
my position. If you are *not* a Canadian resident, you do not pay EI, CPP, or income tax while you are working outside Canada. Ditto for collecting GST. This applies only if you are regularly based outside Canada so don't be plannin' any extended business trips to the Caribbean expectin' your tax savings to cover your bar tab.