Why do I owe taxes as a non-resident?
A very simple, basic look at reasons why you owe taxes
This information only applies to the situation of a "non-resident for tax purposes"
With every new job, every employee must complete tax forms for their employer. Specifically, these are known as the TD1 – Personal Tax Credits Return forms. In fact, there are two versions: one federal form and one provincial form, based on the province where you will be working.
These TD1 forms are essential because they allow employers to determine how much income tax to deduct from your wages. Once calculated, the employer then submits the deducted amount as an advance payment to your tax account at the Canada Revenue Agency (CRA). Therefore, the payroll taxes withheld from your wages essentially serve as a partial prepayment for the entire tax year.
Subsequently, when you file your tax return the following year, your overall tax situation is assessed. At that point, it will be determined whether the amount of tax you paid throughout the year was sufficient.
If you have overpaid, the excess will be refunded to you. On the other hand, if not enough tax was deducted, you will be required to pay the outstanding balance.
Why don't employers deduct enough taxes?
There are several reasons why this issue arises. Firstly, some of the responsibility lies with employers who fail to assist their employees in properly completing tax forms. Even more concerning is that many employers do not request these forms at all.
As a result, most IEC participants end up filling out the forms to the best of their knowledge, often under the assumption that their answers are correct. Typically, they complete the forms as “residents for tax purposes”, which then prompts employers to apply the full annual tax credits when processing payroll.
Furthermore, employers who neglect to request the TD1 forms often default to treating all workers as tax residents, regardless of whether they are Canadian citizens or temporary residents, such as participants in the International Experience Canada (IEC) program. Consequently, the full annual tax credit is applied to each employee’s pay slip by default.
Another contributing factor is that many employers are either unfamiliar with the tax rules for non-residents or rely on payroll software that isn’t configured to handle such cases. As a result and similar to the situation described earlier, all employees are once again taxed as residents, with full annual tax credits applied automatically.
Ultimately, all these missteps lead to the same outcome: less tax is deducted from wages than may be required, which can cause issues when filing a tax return. In fact, a significant number of IEC participants are impacted by this every year.
There is, however, a positive side to this situation, and understanding it from this perspective can make a big difference.
Because less tax was deducted from your pay, you had more take-home income available throughout your time in Canada. This extra money likely helped cover essential expenses such as rent, groceries, and transportation, or even allowed you to save for a road trip.
During your Work and Travel experience, having immediate access to those funds was likely far more beneficial than waiting for a tax refund months later. Had your employer deducted the correct amount of tax from the beginning, that extra cash wouldn’t have been available when you needed it most.
But why an amount owing? Are non-residents taxed more?
There is only one tax system in Canada and the tax brackets are the same for every worker in Canada, regardless of whether you are a Canadian citizen, a temporary foreign worker, an international student, or a non-resident. However, where differences do arise is in the area of tax credits. The specific tax credits you are eligible to claim depend on your individual tax situation.
For example, non-residents might not be able to claim certain credits that residents can, which directly affects how much tax you pay or get back in a refund.
An amount owing as a non-resident only occurs if you
- had foreign income outside Canada in the tax year
- and you do not meet the 90% rule
Foreign income includes all types of income, i.e. regular wage income, and unemployment benefits, or in many countries it’s called job seekers benefit.
It is important to note, that the foreign income before and after Canada is not taxed in Canada. It is only reported in an extra form to calculate if tax credits can be claimed in the tax return.
The 90% non-resident rule: To be eligible for the full amount of tax credits, the Canadian income must be more than 90% of the total worldwide income in the tax year.
World Income = Income in Canada + Foreign Income
- If the Canadian income is over 90%, you can claim the full personal tax credits.
- If the Canadian income is below 90%, you cannot claim the personal tax credits.
Non-resident example
Federal basic personal amount 2024 = $15,705
You meet the 90% rule
Tax credits: $15,705
You do not meet the 90% rule
Tax credits: $0
Typically, the amount you owe in taxes results from missing tax credits and because the employers didn’t deduct enough tax from your wages. If employers had deducted the correct amount of tax (i.e., deducted more with each paycheck), you wouldn’t have ended up owing any money at tax time.
Let’s break it down with a simple example:
If your employer had deducted $50 extra from each bi-weekly paycheck, that would total $1,300 a year. You likely wouldn’t even notice the $50 deduction in each paycheck. However, if that $50 isn’t deducted throughout the year, it will show up as $1,300 owed when you file your tax return. And at that point, the large amount of tax due is much more noticeable.
As you can see, the total tax you pay remains the same. The difference is that paying it all at once feels much harder than having it spread out over the course of the year.
Unfortunately, there’s not much you can do about this. It’s simply how the Canadian tax system works for non-residents.
Answers to many Work and Traveller questions
How does the CRA know my foreign income if I don't report it?
To put it bluntly, intentionally omitting income in the tax return is a criminal offense in Canada. It is called “tax evasion“.
Surely no one can ever track how much you received in cash.
However, any income officially reported to your home country’s tax authority (for example through the payroll of your employer) can be shared with Canada, and vice versa. That’s because many countries, including Canada, have tax treaties that allow them to exchange financial and tax data upon request.
Do I have to file a tax return? What happens if I don't file one?
Basically, it is mandatory to file a tax return in Canada if you owe taxes.
If you don’t, in the worst case, you will receive a request from the CRA (‘Demand to File’ letter), then you will have no other choice and will have to file the tax return and pay the taxes owing and a late-filing penalty.
What is the late filing-penalty?
The late-filing penalty is 5% of your balance owing, plus an additional 1% for each full month that you file after the due date, to a maximum of 12 months.
How high is the risk of a 'Demand to File' letter?
There are a few possible scenarios that come to mind:
If you filed a Canadian tax return before, the CRA can contact you at any time within 6 years and ask you to file a tax return. When you filed your taxes, and you registered for the online CRA Account they have all your data. A filing request is ‘likely’.
If you never filed a Canadian tax return, you are not registered with a CRA Account, so there is no online CRA data.
In theory, the CRA can still track you down by accessing tax information from your home country, especially if a tax treaty is in place. However, in practice, the CRA is unlikely to pursue low-income earners due to the effort and resources involved. So while the chance of receiving a request letter does exist, it’s generally ‘very low’ in these cases.
If you plan to file a tax return in your home country, you may need to report the income you earned in Canada, depending on your home country’s tax rules. If your country has a tax treaty with Canada, the two governments can exchange tax information upon request.
In most cases, your home country’s tax authority will ask for proof that you paid taxes in Canada. In this scenario, it’s ‘very likely’ that you’ll need to file a Canadian tax return to provide the necessary documentation.
How does the CRA reach me?
Officially, you have to change your address at the CRA every time you move. More information here.
Many Work and Travellers who never filed a tax return and left Canada leave it at that and do not change their address.
However, if you already filed a Canadian tax return for previous years, you must change the address in your CRA Account. If you want, you can register for the CRA account. Registration from outside Canada is very complicated and might involve a call to the CRA.
> Here is a helpful guide how to register for the online CRA Account <<
Please note that you can only register for the CRA account after you filed a tax return in Canada.
To change the address:
- Online: in your CRA account if you have one
- Call:
- Within Canada: 1-800-959-8281
- Outside Canada: +1-613-940-8495
- By mail: Using Form RC325 to the address mentioned in the form.
- Social Insurance Number
- Full name and date of birth
- Complete address
- Assessed return, notice of assessment or reassessment, other notices or tax documents.
I didn't change my address; how will I get the Demand to File letter?
When you applied for your Social Insurance Number (SIN) at a Service Canada location after arriving in Canada, you provided an address. The CRA might use this address to contact you regarding your tax matters.
Will I have problems entering Canada later if I don't file a tax return?
Yes and no. Therefore, here are two scenarios as well.
No: If you don’t file a tax return, the CRA won’t know whether you’re due for a tax refund or if you owe taxes. In this case, the CRA will not communicate with the border or immigration agencies about your taxes.
Yes: Problems can arise if you file a tax return, owe taxes, but fail to pay and ignore reminder letters from the CRA. This could eventually lead to legal action. Depending on the severity of the situation or the amount of tax debt involved, this could be reported to the border agency.
If I decide to file a tax return, how do I make the payment of the taxes owing?
The CRA does not accept cash by mail.
If you still have a Canadian account, it’s easy and you can make a payment via online banking.
>> instructions here <<
If you no longer have a Canadian account, there is a third-party provider where you can pay by credit card. PaySimply is recommended by the CRA for tax payments. The provider charges a small processing fee.
If you use the Canadataxback service for the tax return, you will receive instructions as a PDF (how you make the payment) together with the documents of the tax return.
What if I cannot pay the total amount because it is very high?
In this case you can call the debt collection department to arrange a monthly repayment plan after you received the notice of assessment or notice of debt with the repayment amount.
- Within Canada or the U.S.: 1-888-863-8657
- Outside Canada: +1-613-221-3002
When you call, you will need to have your:
- Social Insurance Number
- Full name and date of birth
- Complete address
- Assessed return, notice of assessment or reassessment, other notices or tax documents.
> Here are all other phone numbers if you have to repay other benefits to the CRA.