Are you now a fulltime remote worker? Congrats! You’re a Digital Nomad. What does it mean for your taxes?
May 18, 2022
We all know someone who, before the pandemic worked out a deal with their employer so that they didn’t have to work from the office. You’d speak to them on calls and learn of the exotic and far-away places they were reporting in from and daydream about taking a client call from a hammock between two palm trees. They were once called telecommuters, but given the reliance we have on email and video calls for work, we saw the birth of a new moniker to describe these office ghosts: digital nomads.
The pandemic thrusted many Canadians across various industries into the new age of digital nomads. Now, working remotely has become more of a norm to working in an office. With the ability to work just as well from outside the office as inside the office, Canadians find themselves able to take extended trips away from home where they can continue to work during the day and explore during the evenings. Instead of one-week vacations away, some people are going away for months at a time and creating hybrid vacation and remote working scenarios. In fact, in early 2022, both Spain and Italy introduced new digital nomad visas to encourage tourists to spend more time in their respective countries.
The digital nomad life looks different to everyone, but how does it impact tax filing?
The question on everyone’s mind: if you’re earning income in another country, do you have to pay taxes in that country?
The answer to this question is, it depends on which country you’re working in.
We all know that most countries want to tax people who are working within their borders, but Canada has tax treaties with most countries which limit their ability to do this. For example, most of our treaties contain a clause which says that if you’re not in the other country for more than 183 days, you’re working for a Canadian employer, and your employer doesn’t have a permanent establishment in that country, you’ll be exempt from paying taxes in that country. Food for thought – we have this deal with the U.S., Spain, and Italy if you’re thinking about your next working holiday!
Some tax treaties also provide a tax exemption if your wages don’t hit a threshold amount – regardless of whether your employer is a resident or non-resident of that country. For example, if you make less than $16,000 in Mexico (or the equivalent pesos), you won’t have to pay employment taxes there. If you’re working in Jamaica, the threshold is $5,000.
If you still have residential ties to Canada, you’ll continue to pay taxes here.
If you have something called “residential ties” to Canada, you’ll continue to pay taxes in Canada on your worldwide income, including any income earned in another country. Residential ties are major things like a house, a spouse, or children still in Canada. There are also secondary residential ties, such as health insurance, a drivers license, bank accounts or club memberships that can qualify you as a resident.
And regardless of whether we have a tax treaty with the other country, you’ll be able to claim federal and provincial foreign tax credits for any tax you’re liable for in the other country – to the extent that it doesn’t exceed the Canadian tax payable on that income.
But be aware: The Canada Revenue Agency (CRA) will only allow your claim for a foreign tax credit if you can prove the amount of foreign tax you paid. Typically, they require a copy of your foreign tax return and a Notice of Assessment issued by that country’s tax authorities. In other words, if you don’t file a foreign tax return to determine your final income tax burden to another country, you might not be able to claim a foreign tax credit on your Canadian return.
If you worked in the U.S., you’ll need to file Form 8833 with your 1040-NR tax return to disclose your treaty-exempt income. If you received income from self-employment sources wherever you were located, you’ll probably need the help of a tax expert.
Some digital nomad situations are more straightforward. For those living and working in Canada, home office expenses can be claimed, either using the temporary flat rate method, which provides $2 per business day to those who worked from home, or the detailed method, which requires authorization from your employer and calculations to determine how much you can claim.
There is no one-size-fits-all approach to taxes. H&R Block can help Canadians abroad with their unique tax situation, from wherever they’re located in the world through our Remote Tax Expert service.
Have questions? We’re here to help. Ready to file? H&R Block can help there, too. Choose from one of four convenient ways to file: File in an Office, Drop-off at an Office, Remote Tax Expert, or Do It Yourself Tax Software.