Do I Need to Pay Canadian Taxes?

Even if you made no money at all in 2018, filing your income tax return with the CRA is a good idea. In fact, if you don't file a tax return, you could miss out on tax benefits, deductions and credits . . . not just this year, but in future years too!

If you're self-employed or run your own business and made more than $3,500 last year, filing your income tax return is not optional. Everyone must declare all income they make in a given tax year and pay taxes. Failing to do so can result in penalties for not filing, and interest on late payments or overdue amounts from previous years.

The good news is, small business owners will benefit from a lower tax rate this year. There are also many expenses and deductions you can claim to reduce any taxes you owe. As unpleasant as paying taxes can be, a large portion of the amounts we pay go towards the Canadian Pension Plan and funding universal health care.

Am I required to file an income tax return in Canada?

Most Canadians are required to file a tax return. However, there are a few exceptions to this rule. More specifically, you must file a tax return if any of the following apply to you:

• You owe money to the CRA
• You want to claim a tax refund
• If self-employed and have CPP or QPP premiums to pay
• You want to split your pension income with your spouse or common-law partner
• You want to claim the Working Income Tax Benefit (WITB) or you received advanced WITB payments in the last year
• When you or your spouse or common-law partner wants to receive or continue to receive the following benefits:
• GST/HST credits
• Canada Child Benefits (CCB)
• The Guaranteed Income Supplement (GIS).
• The CRA asked you to file a return
• You disposed of capital property (i.e., a house) or had a capital gain in the year
• When you must repay your old age security or employment insurance benefits either in whole or in part;
• You have yet to repay amounts you borrowed from your RRSP to buy a home or fund your education;
• You're self-employed and want to contribute to Canada's employment insurance program;¬†
• After a non-capital loss during the year and would like to use it to reduce your income taxes in a future year
• You want to transfer unused tuition fees to a future year or carry them forward
• You want to report income that would allow you to maximize your RRSP, PRPP, and SPP limits in future years
• Thinking of carrying unused investment tax credits on expenditures forward to a future year

If you're the legal executor, administrator, or liquidator for a person who passed away in 2018, you may have to file a tax return for them. For more information, see Form T4011, Preparing Returns for Deceased persons (2018). The CRA has also prepared a handy article on what to do following a death.

How much can you earn before you have to file an income tax return in Canada?

If you made less than $3,500 in 2018, you don't technically have to file an income tax return. This is because the first $3,500 you earn is not subject to CPP or QPP contributions. In addition, the basic personal amount for 2018 is set at $11,809. The first $11,809 of income that Canadians make in a year aren't subject to federal income taxes.

Why should you file your taxes if you have a low income? If you don't you'll miss out on GST/HST credits, Working Income Tax Credits, and Canada Child Benefits if you are eligible to receive them.

If you worked last year, any employment income you earned will be used to calculate your maximum RRSP contribution limits in future years. Contributing to your RRSP is a great way to lower your income taxes, but you'll need to accumulate contribution room first.

More reasons to file a tax return

If you incurred a business loss last year, you can apply it to a later year to reduce any future tax bills. To do this, you will need to file a tax return for the year in which the loss occurred.

If you're in a low-income situation, filing your tax return isn't complicated. The CRA has a number of programs in place to make the process as painless as possible. In many cases, you can even file a simple return online for free. 

Do you have to pay taxes in Canada if you live abroad?

If you travel a lot or work in another country, whether you will have to pay income tax depends on your residency status. As such, you will need to determine whether you are a factual resident, deemed resident, non-resident, or deemed non-resident of Canada.

Factual residents

Factual residents of Canada are Canadians who live or travel extensively abroad while keeping significant residential ties to Canada. You could be a factual resident of Canada if you:

• Take a temporary job outside of Canada
• Teach or study abroad
• Live in Canada while working in the United States (i.e., you commute daily or weekly)
• Take an extensive vacation outside of Canada (i.e., 183 days or more)
• Spend a long time in another country for medical reasons
  

As a factual resident, you'll be taxed as if you never left Canada. Factual residents must claim all income earned in Canada and abroad, and can claim all deductions and tax credits they are eligible for. They must also pay provincial taxes in the province where they maintain residential ties. They are eligible to keep receiving GST/HST credits and the Canada Child Benefit. 

Deemed residents

In special situations, Canadians may sever their residential ties but maintain their status as a deemed resident of Canada for tax purposes. For example, you could be a deemed resident of Canada if you are a federal, provincial, or territorial government employee who has been posted abroad. The same is true if you're a member of the Canadian Forces.

You may also be a deemed resident of Canada if you live and work in a country that has an agreement, tax treaty, or convention with Canada that exempts you from paying tax in that country.

As a deemed resident of Canada, you:

• Must report all income you earn anywhere in the world for the entire tax year
• Can claim all federal tax deductions and credits that apply to you
• Will need to pay federal tax, but instead of paying provincial tax, you'll pay a federal surtax
• Are eligible for the GST/HST credit

As a deemed resident of Canada, use the CRA's Special Income Tax Benefit Package for Non-Residents to file your tax return.

Canadians who lived in Quebec before cutting residential ties with Canada can also keep their Quebec residency after leaving the country. To avoid double taxation, add a note to your income tax return to let the CRA know that you must pay Quebec taxes.

Non-residents

If you leave Canada and emigrate to a different country, you become a non-resident of Canada for income tax purposes. This status applies if:

• You normally live in another country and are not considered a resident of Canada
• You don't maintain significant residential ties to Canada, AND
• Live outside of Canada during the tax year, OR
• Spend less than 183 days per year in Canada

As a non-resident of Canada, you only need to pay tax on income from Canadian sources, such as:

• Dividends
• Rental income and royalties
• Old age security and pension income
• CPP and QPP benefits
• Retirement allowances
• RRSP and RRIF withdrawals
• Annuity payments
• Management fees

You might also have to pay Canadian income taxes if you live abroad but carry on a business in Canada. The same is true if you transfer or sell property in Canada while living abroad. You can also be taxed on certain scholarships, fellowships, bursaries, and research grants, and any income earned from services performed in Canada outside of regular employment.

Deemed non-residents

This last category applies to Canadians who remain deemed residents or factual residents of Canada while living in a country that has a tax treaty with Canada. For a list of these countries, check out this list by Canada’s Department of Finance.

As a deemed non-resident of Canada, you are subject to the same rules as non-residents. This means you must declare all income from Canadian sources to the CRA.

Do you have to pay taxes in Canada if you are from another country?

If you recently left your home country to live and work in Canada, the CRA considers you a newcomer to Canada for tax purposes.

As soon as you establish significant residential ties with Canada, you become a resident of Canada for tax purposes. The following individuals must file a tax return:

• Protected individuals (including refugees)
• Permanent Canadian residents
• People who are approved to stay in Canada

What does it mean to have residential ties in Canada?

Wondering whether you have significant residential ties with Canada? Ask yourself the following questions:

• Do you have a home in Canada?
• Does your spouse or common-law partner live in Canada?
• Do you have dependents in Canada?

You might also maintain the following secondary residential ties:

• Keeping property in Canada, such as a car or furniture?
• Do you have social ties to Canada? For example, are you a member of any social clubs or religious organizations?
• Do you have economic ties with Canada? This can include bank accounts or credit cards;
• Still have a valid Canadian driver's licence?
• Do you have a Canadian passport?
• Do you have health insurance with a Canadian province or territory?

Each case is unique. Ultimately, your residency status will depend on how much time you spend in Canada in a given year. If you live and work in Canada and maintain some of the residency ties outlined above, chances are you will have to file a tax return with the CRA.

The main takeaway is, if you lived in Canada for most of the year, you must file a tax return and pay the requisite taxes. This is especially true if you owe tax, as the failure to file will result in penalties and interest from the CRA.

Even if you made very little money last year, you won't be able to claim a refund or collect tax credits and benefits unless you file! With tax software that allows you to submit your return online for free, there's no reason to avoid filing your taxes.