Are personal income taxes paid for income for a full year, even when moving from Sweden to Canada mid-year, for a Dutch citizen?

Question

There are a number of questions related to taxes on this site, and Wikipedia has an article on tax residency. This question on varying tax dates seems to imply income might be counted for a full year. It never occurred to me this might be the case, so now I'm confused. The Wikipedia article on double taxation is not helpful. If I simply move abroad to take a new job, can double taxation possibly arise?

Example: in 2014, a Dutch citizen with no taxable property lives in Sweden during January and February, and has income exclusively from local employment. Then, he/she moves to Canada, where he/she lives for the rest of the year, again with income exclusively from local employment.

In my possibly naive understanding, he/she was a Swedish resident with Swedish taxable income January–February, and a Canadian resident with Canadian taxable income March–December, and would pay taxes to Sweden for the first two months, and to Canada for the remaining ten months. Is this correct? If yes, then how could double taxation be a problem? Does the Canadian tax office somehow care about income I had within the year, but before becoming a Canadian resident?

Answer 1

The Canada Revenue Agency has a specific page for newcomers.

In short:

• You become a tax resident of Canada on the day you arrive and intend to settle
• For the part of the tax year that you were NOT a resident of Canada you pay Canadian income tax on Canadian source income (probably none, as you don't have Canadian income yet)
• For the part of the tax year that you WERE a resident of Canada you have to report your world income (income from all sources, both inside and outside Canada) earned after becoming a resident of Canada for income tax purposes on your Canadian tax return.

So, Canada does not care about the non-Canadian income you received before you arrived, even if it falls within the current tax year. That foreign income should not appear on the tax return, and is not taxed in Canada.

There is also a CRA guide to completing tax returns for newcomers. It explains the rules about tax credits for part-year returns, but in the simplest cases it's basically proportional - if you arrive in the country half way through the tax year, you get half the tax credit (in general).

Answer 2

Tl;dr answer: It's complicated; call the Canada Revenue Agency.

According to the CRA's General Income Tax and Benefit Guide for Non-Residents and Deemed Residents of Canada - 2013:

You are a non-resident of Canada for tax purposes throughout any period in which you do not have significant residential ties (see the definition in the following section) in Canada and you are not a deemed resident of Canada.

What income should you report? - Report your income from Canadian sources such as the taxable part of your scholarships, fellowships, bursaries, net research grants, income from a business that does not have a permanent establishment in Canada, net partnership income (limited or non-active partners only), and taxable capital gains from disposing of taxable Canadian property, as shown under the income lines applicable to non-residents of Canada in the guide.

Other types of income are not reported but must be entered on Schedule A, Statement of World Income. For more information see Schedule A, or contact us.

I read that as meaning they don't expect your Nederlander to pay taxes on his Swedish income but they do want him to report it on Schedule A. But if it were me I would call one of the numbers under "contact us" to be sure.

However, the section on "deemed residents" may also be relevant:

Were you a deemed resident of Canada in 2013?

You were a deemed resident of Canada for tax purposes if you did not have significant residential ties in Canada, but you stayed here for 183 days or more in 2013 and, under a tax treaty, you were not considered a resident of another country.

"Deemed residents" appear to have somewhat different tax status from "non-residents" and your Nederlander may have to report that Swedish income as income -- but can take a credit based on Swedish taxes paid:

Tax tip

If you were a deemed resident of Canada in 2013, and you paid foreign taxes on foreign income you received, do not reduce the amount you report by the amount of tax the foreign country withheld. Instead, you may be able to claim a foreign tax credit when you calculate your federal tax. For more information, see Form T2209, Federal Foreign Tax Credits.

So yes, the Canadian tax office does somehow care.

If you're looking for a general answer, unfortunately it depends on the specific tax laws of the country -- although in my experience of three or four first-world countries your "naive understanding" is more common than not. (Note though that the US require their citizens to pay income tax regardless of where they're living, though this can be reduced by tax treaties and there is an exclusion up to a certain amount.)

Answer 3

I think there are two different issues at play here:

• What (if any) taxes do you have to pay at source?
• What (if any) taxes do you have to pay at the end of the year via a tax return?

From the example in your question, if you're living and working and employed in Sweden in January and February, you'll be having tax deducted at source by your Swedish employer on behalf of the Swedish government. The rate of tax of that will most likely be on the basis that you'll spend the whole year earning at that rate in Sweden.

Next, you move to Canada, cease working in Sweden, cease living in Sweden, and start working + living in Canada. At this point, you'll begin paying Canadian taxes at source, having the taxes deducted from your Canadian pay cheque.

Finally, at the end of the year, you will certainly need to complete a Canadian tax return, because you will be deemed to have been a Canadian Tax Resident for the year. On that, you'll list your Canadian income and your Swedish income from the year. You'll also list the Swedish taxes you've already paid - the Canadian-Swedish double tax treaty will allow you to claim those again your Canadian tax bill (within certain rules)

You may also need to complete a Swedish tax return too for the transition year. That will depend on the Swedish rules, and if they considered you to be tax resident there as well for the year, or not. (If you're not sure, either ask a suitable accountant, or ring up the Swedish tax office to check, or both! If you guess and guess wrong, you could be hit with fines/penalties/interest/etc if they later investigate and decide you have underpaid/failed to file/etc)

If you're subject to two tax jurisdictions, you will end up having to pay taxes in two countries, and overall at the higher rate. (eg country A has a 50% tax rate for you, country B has a 40% one, you pay taxes normally in country B at 40%, then complete the A return and give them the other 10%)

Oh, and one other thing - you may have been expecting certain favourable tax treatments on things in Sweden (eg pension contributions, tax free savings schemes etc). The Canadians may or may not accept those as being eligible for the same tax reliefs, it will depend on the Canadian-Swedish agreement. So, you may end up having to pay more tax than planned, if the Canadians don't recognise some Swedish tax breaks.

Answer 4

I don't have any particular counter-example to offer and I do know (pairs of) countries where it works more-or-less as you describe (i.e. only declare income for the part of the year you were resident) but you can't assume it's always like that. Even merely keeping a bank account open could create obligations (at least to continue making a declaration, not necessarily to pay taxes).

Typically, countries have specific forms or procedures to follow (i.e. you can't declare your income in your new country of residence as if it were your only income for the whole year – which could put you in a lower tax bracket compared to your yearly salary or what was retained at the source). For example, in the Netherlands, I think that you were not allowed to use the regular tax return program but had to use a more complex form.

The exact rules about what you have to declare and to pay are going to depend on the local law in each country and on any treaty they might have agreed between them, there is no overarching principle that would regulate this worldwide.