Why do I owe taxes as a non-resident?
A very simple, basic look at the 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 fill out the tax forms for the employer. They are called “TD1 – Personal Tax Credits Return“. There are two. A federal form and a form for the province where you will be working.
Employers need these TD1 forms to calculate how much tax to deduct from your wages. Employers then simply submit the deducted taxes as an advance payment to your tax account at the CRA (Canada Revenue Agency). The payroll taxes that are deducted from the wages are therefore only a down payment for the tax year.
When you file your tax return the following year, your tax situation will be evaluated and it will be calculated whether you have paid enough tax for the tax year or whether you have paid too little.
An overpayment will be refunded and if not enough tax was deducted, you will have to pay the difference.
Why don't employers deduct enough taxes?
There are a few reasons for this. You can blame employers for not helping their employees fill out tax forms. Or even worse, many employers don’t even request these forms.
Every Work and Traveller fills out these forms ‘to the best of their knowledge’, assuming it would be correct. Everyone fills out these forms as a “resident for tax purposes”. This way, employers know to claim the full annual tax credits when doing the payroll.
Many employers who do not request the TD1 forms, automatically tax the entire workforce as “tax residents”, regardless of whether Canadians work there, or temporary residents, like the IEC participants. For all employees, the full annual tax credit is applied in every pay slip.
Another problem is that most employers are not familiar with the tax rules for “non-residents” or the payroll software is not programmed for this. In this case, too, as explained in the second step, they tax all employees as “residents” with full annual tax credits.
The result of all this is the same: less tax is deducted from wages which can have consequences in the tax return. Actually, many IEC participants are affected by this.
The positive for you, and if you approach it with this attitude, you will understand:
Because less tax was deducted, you had more money available for rent, living expenses and could save it for a road trip immediately after each pay slip. You needed the money much more urgently during your Work and Travel time in Canada. If the employers had deducted taxes correctly, you would not have this money at that time.
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, no matter if they are a Canadian citizen, a temporary worker, a student or a non-resident. However, there is a difference which tax credits can be claimed, depending on your tax situation, for example if you are a non-resident.
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
Usually, due to the missing tax credits, a tax amount owing is the result because employers didn’t deduct enough taxes. If the employers had deducted the correct amount of taxes from the wages, (i.e. deducted more taxes with each pay check), there would not have been any amount owing.
Just as a simple example:
- If the employer deducted $50 more from each bi-weekly pay check, that’s $1,300 a year. You wouldn’t even notice the $50 deduction in the pay check.
- If that $50 isn’t deducted, it will be $1,300 taxes owing at tax time. And you notice that more because the total amount is so high.
As you can see, the amount you pay for taxes is the same, but owing in one amount hurts more.
Unfortunately, you can’t change that and you have to accept it. It is how Canadian taxes work 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.
But all sources of income that are officially reported via your home country’s tax authority are visible on request to many other countries. These are all countries that have a tax treaty with each other. On request, both countries can exchange tax data with each other.
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, the CRA created an online CRA Account for you and they have all your data. A filing request is ‘likely’.
If you never filed a Canadian tax return, you are not registered in the system and there is no online CRA data.
Theoretically, the CRA can track you down via your home country’s tax data if they want to. In practice and with very low incomes, the CRA might not do it because of the amount of required effort. So the risk of a request letter is there, but I estimate this risk to be “very unlikely”.
If you are going to file a tax return in your home country, you might have to report the foreign income earned in Canada in your tax return (this depends on the tax rules in your home country).
If your country has a tax treaty with Canada, both countries can exchange tax data with each other upon request. Your home country’s tax authority will ask for proof of taxes paid in Canada anyway. So, in this scenario, it will be ‘very likely’ you have to file a Canadian tax return.
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?
The CRA has an address in the system from when you applied for the SIN at a Service Canada location after you arrived in Canada. The CRA will use this address.
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’ll get a tax refund or owe taxes. This means that the CRA does not communicate with the border agency or immigration agency about your taxes in this case.
Yes. Problems could arise if you file a tax return and have to pay back, but do not do so and ignore all reminder letters from the CRA. This could lead to legal actions, which could also be reported to the border agency, depending on how serious or how high the tax debt is that must be collected.
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.