Anecdote and advice dealing with CRA and International Tax Office
In Jan 25 2005 to Jan 24 2006, I worked for UNDP in Malawi under a UN contract. At the time that I filed my tax for the 2005 period I included a cover letter explaining the fact that I had a UN contract for the specified period. I also included a copy of the contract with my tax filing. Since I had no earnings for the period from Jan 1 2005 to Jan 24, 2005 my tax requirement was only based on my UN earnings which were not taxable. Now I can't remember if I paid any money to cover my CPP. It's possible that I did but I have the feeling that I didn't because CPP is based on your taxable earnings but that might catch up with you later when you get to retirement and find that you haven't got enough money set aside in your CPP.
In the following year (2006) tax filing the residual amount that I earned with the UN was not taxable either. I recommend that you contact the International Tax Office. They will provide you with a definite ruling on your situation. They are much better than the regular tax advisors of Revenue Canada but even if you contact a tax specialist at RC and are not satisfied ask to speak to a more senior advisor - the tax advisor might not like the inference but in some cases they just don't know the technical answer and they will be happy to put you through. There system is structured on the basis of a tier system, every level up reaches a person with more experience and more technical tax knowledge until you reach the level of RC tax lawyers.
Another issue that you should be concerned about if you move offshore for a long-term period of time, where you move your belongings offshore and sell your car, and you are designated a resident of the other country, but not necessarily earning money from the UN or World Bank, you may still qualify for a different tax treatment where your offshore income would not be taxed by Canada but it is something that requires a ruling by the International Tax Office. There are two different forms that you have to fill out. Form 73 is for an outbound determination of your Canadian residency status and Form 74 is for you inbound determination of residency status. I thought that I had to fill out just one form at first because both forms look pretty much the same. The International Tax Office will determine if you are a non-resident when you leave and when you come back. If they say no, then you will have to declare all of your international taxable income relevant to the tax filing year. If you are determined to be a non-resident, which can still be possible if you have a home in Canada but you have a residence in the country in which you are living but most of your belongings and ties with Canada have been severed. Usually you have to be paying taxes in the other country because Canada has dual taxation agreements with most countries but not all of them. If you are in a country that is not taxing you...lucky you.
Do not make the mistake that I made. It was the first time that I was filing income tax during a year that I was out of the country with residency status in another country. I declared all of my Canadian and International income in that year when I filed my taxes, being the honest guy that I am....then I asked the International Tax Office to rule on whether I was determined to be a resident or a non-resident. Late in the Fall of that year they sent me a letter telling me that I was a non-resident. Great news, I was not going to have to pay tax on my Sri Lankan earnings. I figured Revenue Canada would make the proper adjustments automatically to my tax filings and remove the money that I had earned in Sri Lanka and recalculate the tax owning. They didn't do that. At the time I filed my taxes I had not included a cheque for taxes and informed them I would pay up once my residency status had been determined because I was pretty sure that I would be declared a non-resident and not owe anything except for interest income on my Canadian bank accounts.
I was living in Quebec at the time. I had to file with Revenue Quebec as well - a big headache which doubles the work compared to when you are living in Ontario or another province. I called Revenue Quebec and informed them that the International Tax Office had determined that I was a non-resident and not required to include my foreign earnings from Sri Lanka. I faxed the fellow a copy of the letter from the International Tax Office. The guy told me that Quebec didn't have an international tax treaty with Sri Lanka, that it was not governed by the tax laws of Canada and that I would have to pay the taxes. I was heading overseas at that moment and I could not appeal the decision immediately because I had already shipped my belongings overseas including my tax records. I was going to try and file an objection from overseas.
To make a long-story short my belongings were on a boat that sank off the coast of England. I came back later that summer, earlier than expected. Because I had not paid taxes on my international earnings in Sri Lanka but no adjustments had been made to my tax filings, Revenue Canada and Revenue Quebec emptied my bank accounts - everything well over $40,000. It was a big blow. It has taken more than 2 years to get that mess sorted out with Revenue Canada. They paid me back the money. The issue with Quebec has not yet been resolved. I am not sure it will be resolved because the 3 month appeal lapsed while my belongings were swimming in Davey Jone's locker.
My advice is:
1. If you are single or a double income couple, unless you have young kids and you need day-care you or you need to buy a bigger house at an affordable price, live in Ontario rather than Quebec. Even if you have to pay taxes on annual income of $100,000 the savings by living in Ontario will be in the order of $10,000 to $15,000...the cost of a decent apartment or half the cost of a good mortgage.
2. If you are going to work overseas contact the International Tax Office before you go and query them about the likelihood of you being a resident or non-resident. Explain your situation.
3. File the appropriate form 73 to get a formal determination of your residency status before you file your taxes for the first relevant year in which you were earning money overseas. If you are deemed a non-resident by the International Tax Office and you have a letter that says so, do not include your foreign income in your tax filings for that tax year.
4. It is up to you to determine what you should file in the foreign country in which you are living. You may be able to avoid a heavy tax situation in the country where you are working depending on who is paying you (an international agency or national government or NGO) and who you are working for (government or non-profit agency) -those two are not necessarily the same. Consult with other international development people working in the country. Ask for the name of a good local account/tax lawyer if you have to.
5. You should do your best to clear out of Canada...sell your car, ship your personal goods overseas.
6. Don't let the International Tax Office hassle you about having Canadian Bank Accounts and credit cards with Canadian financial institutions. You can always explain that as a personal choice because keeping your money in Canadian financial institutions is the safest thing you can do. Tell them you are worried about the international banking system and your savings are insured when they are in Canadian accounts. Overseas banks are not as reliable. Tell them you like to move money to your Canadian accounts from your accounts in the country in which you are working to maintain your financial security. Tell them that you have had a long-term banking relationship that you depend upon because they know you and it is critical for you to sort out financial issues should they arise, that is particularly true for dealing with your credit cards or a personal or business line of credit. Same thing about your retirement savings plans. You have to plan for your retirement like everyone else. You are self-employed without a pension and you want to put your money with a reliable financial institution ????
7. When you get back to Canada file the Form 74 to re-establish your Canadian residency. you will only have to pay the money earned in Canada in the tax year in which you return.
8. Get a good accountant who really understands international tax situations. I didn't do that and wished I had but now that I have been through the wringer and have learned the ropes I will continue to file my taxes on my own.
Hope this helps.