Do I have to pay taxes on income earned outside Canada?

Canada's tax system is based on tax residency, not citizenship. If you actually live in the country, have a family or a home there, you're considered a resident for income tax purposes and have to report your worldwide income, no matter where you got it — in Canada or abroad. Non-residents, on the other hand, pay taxes only on Canadian sources of income. This article explains when income from outside Canada is taxable, how to avoid double taxation, and what forms and rules govern foreign income.

The “worldwide income” principle: what it means for residents

When the CRA recognizes a person as a resident, they fall under section 2 of the Income Tax Act: all earnings, dividends, interest, rental payments, royalties, and capital gains from any country are included in the Canadian T1 return. Income received before the date of becoming a resident (typically the date of arrival in Canada) is not taxable, but the amount is still reported under “non-resident income” for the correct calculation of non-refundable credits.

How the CRA determines tax residency

Residency is determined based on facts:

• Substantial residential ties — permanent residence, spouse, or children in Canada.
• Days of presence — 183 days or more during a calendar year automatically make a person a “deemed resident,” even with minimal ties.
• Additional factors — Canadian bank accounts, driver's license, health insurance.

If there are few ties and the person has lived in Canada for less than 183 days, they will most likely be classified as a non-resident and will only be taxed on their Canadian income.

Why foreign income is taxed again

The federal government considers a resident's worldwide income to be part of a single tax base. Therefore, salary from an American contract, dividends from European stocks, or income from renting an apartment in Poland are included in line T1 in Canadian dollars at the Bank of Canada exchange rate on the date of receipt or at the average annual exchange rate.

Double taxation and Foreign Tax Credit

To prevent residents from paying twice — in the source country and in Canada — the government applies the Federal Foreign Tax Credit (Form T2209). The credit is equal to the lesser of the two amounts: the foreign tax actually paid or the Canadian tax attributable to the same income. If the foreign tax exceeds the limit, the difference can be carried forward for 10 years or backward for 3 years.

Steps:

• enter foreign income and tax in the “Foreign income & property” section of the tax return;
• the software generates T2209 and, if necessary, provincial credits (T2036);
• The credit amount appears in line 40500 of T1.

Role of international tax treaties

Canada has over 90 double taxation treaties that allocate the primary right of taxation between countries. The agreement with the US, for example, allows Washington to withhold no more than 15% of dividends paid to a Canadian resident, with the remainder being taxed in Canada, taking into account the credit.

Specific features of different types of foreign income

Foreign salary

Salary payments that are not reflected on T4 are recorded in line 10400 “Other employment income”; the currency is converted at the official exchange rate. Tax withheld abroad is not deducted from the amount; it is indicated separately for T2209.

Self-employed or freelance

Consulting, design, or IT services provided by a Canadian resident to a foreign client are considered Canadian foreign self-employment income. Income is reported on Form T2125, and taxes paid abroad are again credited.

Investments and dividends

Investors declare interest and dividends in lines 12100/12000; the standard withholding tax is usually 15%. The same percentage automatically becomes the basis for T2209.

Foreign pensions

Most pensions are included in line 11500 in full; double taxation is mitigated by either a credit or benefits added to agreements (e.g., 15% US-Canada rate).

Capital gains

Canada currently includes 50% of gains in the taxable base; from 2026, for gains > CAD 250,000, an increase in inclusion to two-thirds is planned.

T1135: mandatory “foreign asset declaration”

A resident who holds specified foreign property worth > CAD 100,000 at any time during the year must file a T1135 Foreign Income Verification Statement. The form does not assess tax, but gives the CRA a control tool; the penalty for late filing is CAD 25/day up to CAD 2,500, and for deliberate non-compliance, up to CAD 12,000 plus 50% of the tax payable.

Newcomers: first “partial” year

If you arrived on, say, August 10, all income up to that date is taxable only by the source country; Canada asks you to report it in the information section, but does not tax it. From August 10 to December 31, all worldwide income is subject to Canadian tax and credit for foreign taxes paid.

When Canada is not interested in your foreign money

Non-residents of Canada pay only on Canadian sources — dividends, rent, pensions, gains from the sale of Canadian real estate. If you have left Canada and lost significant ties, your new foreign earnings are not subject to Canadian tax.

Penalties and control

The CRA actively uses automatic information exchange through the OECD CRS and FATCA standards, so it is virtually impossible to hide an offshore account: penalties for failing to file a T1135 or failing to report income can reach 50% of the unpaid tax plus criminal liability in the event of fraud.

Practical algorithm for declaring foreign income

1. Collect payment and tax information from each country.

2. Convert the amounts to CAD at the Bank of Canada exchange rate on the date of receipt or the annual average.

3. Enter the income in the appropriate lines of T1 (salary — 10400, dividends — 12000, interest — 12100, business — T2125, etc.).

4. Complete T2209, indicating separately the tax paid to each jurisdiction.

5. If the value of foreign assets exceeds CAD 100,000, file T1135.

6. Keep the documents for 6 years in case of an audit.

Common mistakes

• Failure to convert currency at the date of receipt, resulting in additional charges by the CRA.

• Confusion between credit and deduction: Foreign Tax Credit reduces tax, not taxable income.

• Ignoring small bills outside Canada; if the total value exceeds CAD 100,000 even for one day, T1135 is mandatory.

• Not clarifying non-resident status and continuing to declare worldwide income after departure.

Conclusion

Canadian residents are required to declare and pay tax on all income earned abroad. At the same time, Canadian law offers protection from double taxation through the Foreign Tax Credit and a wide network of international treaties. The key to correct calculation is careful determination of residency, correct currency conversion, completion of forms T2209 and T1135, and collection of supporting documents. Compliance with these rules minimizes tax risks and ensures transparent interaction with the CRA.