By Hank T. Bulmash
Mel Connelly is an engineer who has overseen the development of several mines. Although he's worked hard, he's had trouble saving money. Now that he's nearing 50, that's become a major concern."I've b...
Mel Connelly is an engineer who has overseen the development of several mines. Although he’s worked hard, he’s had trouble saving money. Now that he’s nearing 50, that’s become a major concern.
“I’ve been offered a new job,” Mel told me, “and it looks pretty good. It will be hard living away from my family, but the pay should let me build up a decent nest egg. I’ll be in Australia for 18 months working for a U.K. company. The pay is $150,000 per year. That’s about 50% more than I normally earn. I recall that working abroad, I don’t have to pay any taxes — so that’s a real benefit for me.”
“I don’t understand the tax angle,” I said.
“About 15 years ago after I divorced my first wife, I managed a job in Saudi Arabia. I lived there for four years and I didn’t pay any taxes. The Saudi’s gave me a tax exemption, and because I earned the money abroad, I didn’t pay taxes in Canada. I figure the same deal will operate in Australia.”
“I remember now,” I said. “Unfortunately, you won’t qualify for the same arrangement you had years ago. When you were in Saudi Arabia, you didn’t pay taxes in Canada because you became a non-resident. You weren’t sure that you’d ever return to this country and severed your ties with Canada. If you take the job in Australia, that won’t be true. You will remain a resident of Canada since you’re leaving for a fairly brief period and your family is here. That means you’ll be subject to Canadian taxation on your world income. You’ll be subject to Australian taxes in any year that you are there for more than 183 days. Because the Australian tax year begins on July 1, you may be able to avoid Australian taxes for one of the two tax years you are there. But generally you will be subject to Australian taxes as well as Canadian taxes.”
“Do you mean I’ll be taxed double?“
“No. You’ll have to file an Australian tax return. Once your Australian tax liability is confirmed, you will be able to get a tax credit in Canada for the taxes you pay there. But you can assume that your tax rate will be at least as high as the Canadian rate.”
“I thought there was a tax credit for working abroad as long as you were gone more than six months.”
“That’s the overseas employment tax credit,” I said. “It might help, but probably less than you think. The OETC was designed to help Canadian companies compete with foreign firms in bidding for overseas work. It’s available to Canadian residents working for specified Canadian employers such as engineering and construction companies, who work abroad for a continuous period of more than six months. The credit applies to 80% of your overseas income up to a maximum of $100,000. It’s prorated for the number of days you are abroad in the year.
“If you were abroad for a full year and you earned $100,000,” I continued, “the OETC would apply to $80,000 of your income — and you’d be subject to tax in Canada on only $20,000. But if you earned $150,000 the OETC would still apply to $80,000, and you’d be subject to Canadian taxes on $70,000.”
“It’s not as good as I’d hoped,” Mel said. “But it’s better than nothing.”
“True, but you have a couple of difficulties in benefiting from the credit. First, an English company may not qualify as a specified employer for the credit. If it does qualify, your second problem is that you will be subject to Australian taxes for at least a portion of the period you work there.”
“I thought you said I’d get a tax credit in Canada for the taxes I pay in Australia.”
“That’s right. But you cannot get an OETC and a foreign tax credit on the same income. If you owed Australia $60,000 tax on $150,000 and Canada about the same, it wouldn’t matter very much if you claimed the OETC or the foreign tax credit — you would end up owing roughly the same amount of tax worldwide in either case. The OETC really helps only if the taxes in the foreign jurisdiction are lower than Canadian taxes.”
“So, is there any financial benefit in me taking this job?”
“To figure that out, you will have to give me the actual dates you would be away. If you qualify for the OETC and you don’t pay taxes for a portion of the time you’re in Australia, there would be a win. You also win because, as you told me, you’re earning a premium for going abroad. You may be subject to higher Australian taxes if the contract is extended and you remain longer in the country, so you might want to deal with that contingency in negotiating your contract. Whether or not the prospective tax saving is worth living away from your family is up to you.”CCE
Hank T. Bulmash C.A. is with Bullmash Cullemore, Chartered Accountants, Toronto.