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Tips and tricks for Canadian tax filers at every stage of life from UFile's tax expert Gerry Vittoratos



Conducting your business remotely or planning a working holiday? Make sure you understand the tax liabilities

by UFile Team Équipe ImpôtExpert | Apr 02, 2019   Comments:

UFile Blog - Working holiday taxes

You’re self-employed, you travel extensively and you work while on holiday. There’s nothing better than sipping refreshments on the beach while working on your passion, but are there any tax consequences to these types of holidays?

The tricky question of residence

If you’re travelling for an extended period, does that cause you to lose your Canadian residency income tax-wise? The short answer is no. When it comes to income taxes, your residency status is not necessarily linked to your current location. What determines your residency in Canada is what the government calls “residential ties.” Significant residential ties are your dwelling (permanent home) and your family (spouse and children). If one or both are currently in Canada, you will be considered a Canadian resident regardless of where you are in the world. Other residential ties that link you to Canada are your driver’s licence, medical insurance, bank accounts and personal items such as a car or furniture. The same rules apply when determining your province of residence.

The above rules only apply to your income taxes; they are not necessarily applicable to programs such as your provincial medical insurance, where the days you are present in Canada are taken into account.  

The importance of a permanent establishment

You might be considered a resident of Canada, but what about your business? For example, if you’re a digital nomad with no fixed place where you conduct your business, is your income considered Canadian business income? To find out, you must determine what the government calls your “permanent establishment.” At its base, your permanent establishment is a fixed place where your business is conducted.

That’s an easy definition for a home-based business, but what about a digital nomad? In this case, the permanent establishment is the principal place where the business is conducted. This can mean that if you are conducting your business mainly from locations other than Canada, your income might be deemed as foreign business income. You should also check the local income tax laws of your vacation destinations to find out if you are subject to tax in those countries. In that case, you might have multiple permanent establishments in Canada and abroad, and be subject to tax in several jurisdictions.

The myth of double taxation

As we saw above, it is possible to have multiple permanent establishments. Does this mean that you would be double taxed on your income? No, it doesn't. If your income is spread among several provinces in Canada, you will allocate your income to these provinces through the multi-jurisdiction form (T2203) on your tax return, and you will be taxed proportionately in each province. The same goes for your foreign business income, if any; you will use form T2203 to allocate your income to the foreign jurisdiction and avoid being taxed provincially for that income.

What happens if your foreign business income was charged foreign taxes? In that case, the Foreign Tax Credit (FTC) comes to the rescue! This credit allows you take into account the taxes already paid in the foreign jurisdiction when determining the federal/provincial taxes payable on your foreign business income. In other words, the FTC will give you a credit for the foreign taxes you already paid, thereby preventing any double taxation.

Would you like to learn more about the fiscal aspect of earning foreign business income? Connect with us on Facebook and Twitter for news and updates on the 2018 tax return and UFile online tax software. Visit Tax & U to get accurate answers to all your questions about your 2018 tax return.

 

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