Canadian Tax Treaties: What to Know

A globalized world means international travel, trade, and abroad work opportunities. Surely, you’ve heard of the digital nomad movement of freelancers and work-from-home employees globetrotting to reap lifestyle and cost benefits from living abroad. But how do they deal with taxes if they work for a Canadian company but live in a completely different country with its own separate tax laws? Or, if you’re self-employed or a business owner, what country do you pay taxes in? Our vetted roster of wealth management companies often get these questions from investors living abroad. But for now, we’ve covered the basics with this article. Ultimately, Canadian tax treaties lay out the answers. We’ll walk through everything you need to know about Canadian tax treaties, countries Canada has them with, and how they translate to your taxes. Keep reading to learn more!

What is a tax treaty?

The Canadian government describes tax treaties as conventions or agreements between Canada and other countries. The gist? They lay out tax rules that help Canadians and citizens of countries with Canadian tax treaties avoid paying taxes twice. In other words, tax treaties help people and businesses avoid double taxation in Canada and another country. This facilitates globalization and helps Canadians operate in other countries without having to worry about heavy tax burdens. Additionally, they support governments in preventing tax evasion.

Looking for more specifics? Keep reading on sample items covered in a Canadian tax treaty.

Related Reading: General Tax Avoidance Rule

How do Canadian tax treaties work?

Canadian tax treaties lay out legally binding rules for a variety of tax issues that could come up for citizens residing in different countries. Here’s how they work for various types of taxable income like pension, employment income, self-employment income, and business income:

• Outline residency and benefits criteria
• Identify taxes to be withheld from interest, dividends, and royalties paid by one country’s resident to another country’s resident
• Declare business income of one citizen taxable only in the country they either reside in or are a citizen of
• Define circumstances where one country’s citizen would be taxes as another country’s resident
• Highlight any exemptions for certain people or organizations
• Include rules for enforcement and dispute resolution

Sounds reasonable, right? If you live in one country but have citizenship in another, it would feel too burdensome to pay taxes in both countries on the same income. That would be double taxation, which is something everyone wants to avoid.

While Canadian tax treaties prevent just that, some countries don’t have these treaties with certain countries or in general. For example, Americans are one of the only countries that establish taxation based on citizenship and not residency. Meaning? An American citizen residing in Mexico would always have to pay American taxes, regardless of that resident’s tax obligation to Mexico.

On the contrary, Canada’s tax system is based on residency, not citizenship. There are many rules of residency in Canada, which we’ll cover in depth below. But in summary, if you’re not a resident of Canada, but still a citizen, you would not be required to pay tax on certain income in Canada. However, you would probably have to pay tax in the country you are living in. This means you can reside abroad and maintain your Canadian citizenship while not being a resident of Canada. Don’t worry, we’ll go over more details in the coming sections!

Related Reading: Living Inheritance Canada

How many income tax treaties does Canada have?

Canada has 94 income tax treaties with other countries that are currently active. Additionally, they have 9 Canadian tax treaties currently in negotiation, as well as 3 treaties that are signed but not yet officially in full force. We’ll jump into the list shortly, but keep this important note in mind. If you reside in a country outside of this list of Canadian tax treaties, one risks being forced to pay taxes twice, both in Canada and the country which you reside.

Which countries have treaties with Canada?

Here’s a list of countries with Canadian tax treaties, broken out into the 3 sub-sections, as mentioned above, in alphabetical order:

Canadian tax treaties with countries active; in force:

1. Algeria
2. Argentina
3. Armenia
4. Australia
5. Austria
6. Azerbaijan
7. Bangladesh
8. Barbados
9. Belgium
10. Brazil
11. Bulgaria
12. Cameroon
13. Chile
14. China
15. Colombia
16. Croatia
17. Cyprus
18. Czech Republic
19. Denmark
20. Dominican Republic
21. Ecuador
22. Egypt
23. Estonia
24. Finland
25. France
26. Gabon
27. Germany
28. Greece
29. Guyana
30. Hong Kong
31. Hungary
32. Iceland
33. India
34. Indonesia
35. Ireland
36. Israel
37. Italy
38. Ivory Coast
39. Jamaica
40. Japan
41. Jordan
42. Kazakhstan
43. Kenya
44. Korea
45. Kuwait
46. Kyrgyzstan
47. Latvia
48. Lithuania
49. Luxembourg
50. Madagascar
51. Malaysia
52. Malta
53. Mexico
54. Moldova
55. Mongolia
56. Morocco
57. Netherlands
58. New Zealand
59. Nigeria
60. Norway
61. Oman
62. Pakistan
63. Papua New Guinea
64. Peru
65. Philippines
66. Poland
67. Portugal
68. Romania
69. Russia
70. Senegal
71. Serbia
72. Singapore
73. Slovak Republic
74. Slovenia
75. South Africa
76. Spain
77. Sri Lanka
78. Sweden
79. Switzerland
80. Taiwan
81. Tanzania
82. Thailand
83. Trinidad & Tobago
84. Tunisia
85. Turkey
86. Ukraine
87. United Arab Emirates
88. United Kingdom
89. United States of America
90. Uzbekistan
91. Venezuela
92. Vietnam
93. Zambia
94. Zimbabwe

Canadian tax treaties with countries that are signed; not yet in full force:

1. Belgium
2. Lebanon
3. Namibia

Finally, Canadian tax treaties with countries currently in negotiation:

1. Australia
2. Brazil
3. China
4. Germany
5. Malaysia
6. Netherlands
7. San Marino
8. Switzerland

Let’s say you have a one-way ticket to Sweden and don’t plan to come back to Canada anytime soon. Does that mean you pay Swedish or Canadian taxes? We’ll cover taxes abroad shortly.

Related Reading: List of Countries by Tax Rate

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

Our wealth management partners shared that clients found taxes in 2023 particularly difficult. This was because of all the travelling and living abroad that became so commonplace in the last couple of years with the pandemic. The short answer? No, if you’re not a resident of Canada because you live abroad, you wouldn’t have to pay taxes in Canada. However, you’d probably have to pay taxes in the country you’re living in presently.

What is the 183-day rule in Canada?

The 183-day rule in Canada speaks to the 183 days (6 months or more) you need to remain in the country to be considered a resident of Canada. This is also known as Canada’s threshold for tax residency, meaning anyone who meets this requirement is required to pay taxes regardless of their citizenship.

For example, let’s say you’re a foreign citizen that spent over six months working in Canada. Then you’d need to pay Canadian taxes because you are a resident of Canada. But what if you spent over six months studying at a Canadian college? Same thing? Yes, the same rule applies for all these scenarios, unless you’re a citizen of a country with a tax treaty with Canada.

But the 183-day rule gets tricky even for Canadian citizens. What if you own property, like a cottage or vehicle, in your home country of Canada, yet spend most of the year abroad? Or what if your spouse, common-law partner or children still live in Canada while you’re abroad? The 183-day rule could be overruled if you spend more time in a country with a more permanent home or closer working or economic relationships. In that case, assuming that secondary country has a tax treaty of Canada, you might not be considered a resident of Canada for tax purposes. As you can see, residency can get tricky!

Now, if you’re a tax resident in Canada but spend most of your time abroad? Here’s what you’re obligated to do:

• Report all income in and outside of Canada
• Claim deductions and non-refundable tax credits that apply to you
• Pay federal tax and the federal surtax instead of province or territory tax
• Apply for GST credits when applicable
• You cannot claim province or territory tax credits

Related Reading: Considerations for Canadian Investors: Year-End Tax Tips

How do Canadian tax treaties help the rich?

Tax tricks (well, not really tricks; they’re just guidelines that savvy individuals optimize) are great tools for wealth preservation, and tax treaties are no different. In this case, financially secure Canadians could benefit from living in lower-cost countries and thus decreasing expenses without having to pay taxes in both countries. Otherwise, Canadian tax treaties don’t really help the rich, but they can definitely utilize these treaties to benefit their finances, but so can anyone else!

And if you aren’t living somewhere that has a tax treaty with Canada? If you’re a foreign property investor, you can still access a foreign tax credit up to 15% for property income.

Canadian Tax Treaties in Summary

Canadian tax treaties support globalization while ensuring citizens aren’t unfairly burdened with multiple tax obligations. Are you thinking of living, working, or retiring abroad? You might have a savvy investment background whether you use asset location strategies, contrarian investing, or other types of strategies to preserve and build wealth. But if you’re thinking of living, working, or retiring abroad? A smart financial move for your portfolio is to pick from countries with Canadian tax treaties. Book a call with a wealth manager today and get ahead in preserving your wealth!

Read More: Canadian Retiring Abroad: What to Know