The age of remote work makes it easier than ever to earn income in foreign countries without ever leaving Canada. But how do you report that income on your taxes? And how do you avoid getting taxed twice?
Here’s everything you need to know about earning and reporting foreign income as a remote worker in Canada.
Note: These guidelines apply to all Canadian remote workers, whether you’re a contractor or employee. However, since every individual’s situation is different, it’s best to get help from a qualified tax professional when filing.
Convert your income to Canadian dollars
For the purpose of filing taxes, you need to convert everything you earn to Canadian dollars. The Canada Revenue Agency (CRA) requires you to use Bank of Canada exchange rates for all conversions.
There are two ways to convert your foreign income to Canadian dollars:
- Use the exchange rate on the day income was earned. So, if a client pays you $1000 USD one day, and pays you another $1000 USD a week later, you must use two different exchange rates; your CAD income on each of those days will be slightly different, thanks to the exchange rate changing.
- Use the average annual exchange rate for the year in which the income was earned.
If your client or employer paid you in Canadian dollars—for instance, by using Deel’s automatic conversion feature—there’s no need to do further calculations. Report the income in CAD, as you earned it.
Report 100% of your income
Even if you’ve paid taxes to a foreign country on money you earned in that country, you must report your gross income.
For instance, if you were paid $15,000 by a US corporation, but $3,000 of that was withheld, you wouldn’t report $12,000 on your Canadian tax return—you’d report the full $15,000, before taxes.
Don’t worry, there’s a good chance you’ll be paid back those taxes. But in order to qualify for compensation from the CRA, you must report the full amount on your tax return.
Avoid double taxation
The Government of Canada has tax treaties with over 80 countries. When you pay taxes on income earned in those countries, you can have the expense effectively reimbursed.
In order to avoid double taxation—being charged again on your income by the CRA—you have two options: Claiming a section 20(12) deduction, or claiming a foreign tax credit (FTC).
How to qualify for section 20(12) or the FTC
So long as the country where you earned your income has a tax treaty with Canada, you qualify for section 20(12) or the FTC if:
- You’re a Canadian resident.
- The amount you paid was a tax. According to the Canadian tax courts, a tax must be:
- Enforced by law
- Imposed, under legislative authority, by a public institution
- Compelled—that is, it isn’t a voluntary payment
- Collected for a public purpose
Payments for social security—unemployment insurance, pension, etc.—do not qualify as taxes.
- The tax must be paid on income or profits. In other words, if you wouldn’t have paid Canadian taxes on the income if you’d earned it in Canada, you won’t qualify.
Avoid double taxation with a section 20(12) deduction
To claim the section 20(12) deduction, report the foreign tax you paid on line 23200 of your T1 General.
Avoid double taxation with the Canadian foreign tax credit (FTC)
Filing your taxes
Your foreign income is included in your tax filing as part of your total income—there’s no separate section. They both go on your T1 General.
Keep in mind, the company you work for may not send out tax forms at the end of the year telling you the total income you earned from them. It’s up to you to keep track of how much you earned. Deel makes it easy to keep an ongoing record of all income you earn from foreign entities during the year.
Getting professional support
A final word of advice: International income tax can become complicated, especially if you’re a contractor who works for different companies in multiple foreign countries.
Whenever you’re reporting foreign income on your tax return, get help from an accountant or tax advisor with a background in cross-border income. They can help you avoid making costly mistakes on your tax return, and help you choose the best way to avoid double taxation.
Working with foreign companies? Deel gives you everything you need to invoice clients, pay contractors, convert currencies, and track all of your income.