How to Avoid Double Taxation in Canada?

If you’re a Canadian resident or company that earns income outside of Canada, double taxation should be a top concern. After all, this form of taxation can have a costly impact on your yearly profits, and in many instances, it’s fully or largely avoidable. 

To improve your understanding of double taxation and how to avoid it, here is some information from Masone and Company, a Calgary accounting firm specializing in individual and corporation tax services.

What is double taxation?

Simply put, double taxation is when you pay income taxes twice on the same source of income. This issue typically arises when an individual or corporation engages in business outside of their country of residence. For instance, a Canadian resident who teaches English in China or an American marketing firm that hires Canadian freelance writers.

Canada’s tax treaties

To avoid subjecting its residents and businesses to double taxation, Canada has tax treaties with many foreign countries. Designed to prevent tax evasion and disputes over income earned outside of Canada, these agreements outline reductions and exemptions for Canadians engaged in business dealings abroad.

While an individual or company may still need to pay a certain amount of taxes to the foreign country, having a Canadian tax treaty in place generally reduces the owed amount.

For Canadians, one of the most important tax treaties is the United States-Canada Income Tax Treaty. By filling in a W-8BEN form and submitting it to America’s Internal Revenue Service (IRS), many individuals and small businesses are fully exempted from paying any income taxes to the IRS. Instead, payments on income tax owed on revenue earned in the U.S. are submitted to the Canada Revenue Agency (CRA).

Federal foreign tax credit

If a tax treaty is in place, you can claim a foreign tax credit on line 405 of your federal income tax form. This amount must be listed in Canadian dollars and correspond to the Bank of Canada exchange rate that was in effect when you earned the amount.

For individuals or companies doing business with more than one nation, you must submit a separate foreign income tax credit form for each country.

As you can see, this process can quickly become complicated, and many individuals and companies request the assistance of an accounting firm when completing their CRA tax forms.

Corporation tax services in Calgary

For Calgary residents and companies looking to avoid double taxation, turn to the professional accountants at Masone and Company. With over 25 years of industry experience, our dedicated team will work tirelessly to ensure you save more money at tax time. Contact our office today to learn more about our individual and corporation tax services.