Dealing with foreign business income as a Canadian-based business

Are you an Ontario resident with business ties in Germanic countries? Do you have income from Germany, Switzerland or Austria? Then you might have concerns and questions about double taxation. Did you know that Canadian residents who are sole proprietors or who are in partnerships must convert any foreign income into Canadian dollars before it is included as part of their overall income?

Gaining knowledge of the cross-border tax treaties between Canada and the other countries in which you do business might help you to optimize the tax provisions for your situation. You would naturally want to avoid paying both domestic and international taxes on the same income.

System of residency

Canada's tax system uses residency as a basis. This means that you must declare any income you earn from doing work in a foreign country or for a company abroad in your tax return in Ontario. This applies to those who qualify as Canadian residents by having significant residential ties to the country, which can include any or all of the following:

  • Home ownership in Canada
  • Owning personal property like furniture, vehicles and other assets within the country
  • A spouse and/or children residing in Canada
  • Bank accounts, investment accounts, credit cards and other financial accounts
  • Health insurance in Ontario or another Canadian province or territory

Your tax duties regarding foreign income

If your circumstances deem you a resident of Ontario, the income you declare must include both foreign and domestic income. However, if the foreign country taxed you on your earnings abroad, Canada might credit the foreign tax when you file your Canadian return. If the tax rate in Canada is higher than the rate paid abroad, you might have to pay additional taxes in Canada.

How does the process of reporting foreign income work?

To report foreign income on your tax return in Canada, you treat it in a similar fashion to your domestic business income. You must declare all your professional income on the appropriate form, which is a Statement of Business or Professional Activities.

There are two ways in which to determine the income value in Canadian dollars. One way is to convert a foreign payment into Canadian currency when you deposit it into your Canadian bank account, based on the Bank of Canada exchange rate on that day. Another option is to base the value on the average annual rate of exchange. You must then record this income as a part of your total business income.

Where to find support for international taxation?

You might find comfort in learning that resources are readily available to answer all of your questions and concerns and carefully guide you through the process of reporting taxes for your international business. With appropriate experience and the ability to communicate in Germanic languages, legal counsel can help you avoid unnecessary double taxation along with many other potential pitfalls associated with this complex matter.

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