The term digital nomad has existed since the late 1990s, but it only became popular after the pandemic made remote work widely possible. A digital nomad is a person who uses the internet to conduct business, take work from clients worldwide, and travel to a different country where the cost of living is relatively cheaper than their homeland. Many countries even welcome digital nomads as they earn foreign income and spend it in the country, boosting their economy. They give special visas and offer tax benefits to digital nomads.
While the life of a digital nomad is of independence and adventure, their tax obligations are not. The way taxes work in Canada is about where you live and not where you earn. Hence, you have to report your worldwide income and pay taxes in Canada as long as you are a tax resident.
Digital Nomads Should Identify Their Tax Residency
When you become a digital nomad, the first step is to establish your tax residency. If you are living and working in another country but are still a tax resident in Canada, you could face double taxation.
Do not confuse tax residency with citizenship. The Canada Revenue Agency (CRA) determines your residency status depending on your primary and secondary ties with the country.
- Primary ties include having a house and family (dependents, spouse, or common-law partner) in Canada.
- Secondary ties include social and economic ties like owning personal property (car, furniture), passport, driving license, bank account, credit cards, health insurance, or social group membership.
If you spent more than 183 days in the country in a given tax year, you are a Canadian tax resident. There are three types of tax residencies:
- factual resident (temporarily living abroad for work, schooling, or vacation)
- non-resident (a factual Canadian resident who has become a resident of a country which has a tax treaty with Canada)
- An emigrant (who cuts residential ties with Canada and establishes a permanent home abroad)
Digital Nomads Who Are Canadian Tax Residents
As a Canadian tax resident or a factual resident, you will be taxed on your worldwide income. You will continue to enjoy tax deductions and other benefits like the Canada Child Benefit. While you have to file and pay taxes in Canada, you may also have to file and pay taxes in another country, depending on their tax laws.
If the other country you reside in has tax treaties with Canada, you can claim a foreign tax credit to avoid double taxation. It means you will have to file taxes in both countries. However, if you paid tax on the income earned from the foreign country in that country, then you can deduct that tax from your Canadian tax liability. And for any income earned from or in Canada, tax has to be paid in Canada.
Digital Nomads who Are Non-Residents in Canada
But if you are a Canadian non-resident (who has become a resident of another country), you only need to pay taxes to your resident country. You may still be required to pay tax on certain types of Canadian income mentioned in Part I or Part XIII tax. These incomes include dividends, rent, royalty, pension, old age security pension, Canada Pension Plan payout, retiring allowances, annuity, RRSP payments, and management fees.
Digital Nomads Who Become Emigrants
If you want to cut all ties with Canada and become an emigrant permanently, you have to shift to another country with your spouse and dependents. You must inform all social and economic organizations, like banks and insurance companies, about your intent to permanently leave Canada. However, you can retain your driver’s license if that applies in the foreign country.
Once you become an emigrant, you file your last income tax with the CRA in April, wherein you pay a departure tax, which includes the deemed disposition of your property and any pending taxes. Many people might want to shift their residency to another country to avail themselves of other country’s benefits. For instance, Greece attracts digital nomads who want to become residents by charging them income tax on only 50% of the income earned over seven years.
A digital nomad should understand the tax consequences before shifting to another country, temporarily or permanently. Establishing your tax residency could be confusing as every person’s situation is different. It is better to consult a tax expert to understand your tax situation and file your returns regularly. Failure to file returns and pay taxes when due could attract fines and late fees.
Contact Glenn Graydon Wright LLP in Oakville to Help You with Tax Planning
A professional tax consultant can help you plan your journey to becoming a digital nomad and make informed decisions on your tax residency. To learn more about how Glenn Graydon Wright LLP can provide you with your tax planning, contact us online or by telephone at 905-845-6633.