Moving from Canada to Japan: Tax and the Canada–Japan Tax Treaty

Moving to Japan from Canada: what Canada taxes

Canada taxes your world income until you stop being a Canadian resident. After that, Canada taxes only Canadian-source income, mostly through withholding. The Canada–Japan tax treaty (signed 1986, amended by a 1999 protocol, in force; Canada also lists it under the Multilateral Instrument, which can add anti-abuse and dispute rules) sets these limits:

A move is not simple when a spouse, children or a home stay in Canada (both countries may then claim you, with no automatic tie-breaker), when you own a Canadian corporation, hold an RRSP, RRIF or pension, or own property, not counting cash and registered plans, worth more than $25,000. Gather your move date, where each family member lives, your Japanese visa and address, account statements on the day you leave, and every Canadian slip you still receive.

When do I stop being a Canadian tax resident after moving to Japan?

You usually become a non-resident on the latest of the day you leave, the day your spouse or common-law partner and dependants leave, and the day you become resident in Japan (CRA). The CRA treats that as the date you sever your residential ties (Folio S5-F1-C1, ¶1.22).

A home, a spouse or partner, or dependants left in Canada are almost always significant ties (¶1.11). Keeping one can keep you a Canadian resident while you live in Tokyo. See Canadian tax residency for how ties are weighed and asking the CRA to decide your residency for an NR73 opinion. Japanese tax law, including when Japan treats you as its resident, is outside this page.

What if Canada and Japan both treat me as resident?

The Canada–Japan treaty has no automatic tie-breaker. Article 4(2) says the two countries' tax authorities "shall determine by mutual agreement" where a dual resident is resident. Paragraph 2 of the protocol says they settle it by applying, in order:

1. Where you have a permanent home available to you.
2. If both, where your personal and economic relations are closest (centre of vital interests).
3. Then where you have a habitual abode.
4. Then your nationality.

Nothing starts until you present your case to a tax authority (Article 23(1)); the CRA says that may mean asking its Competent Authority Services (Folio ¶1.57). Until the authorities agree, each country may keep treating you as its resident. A conflict arises only while you keep ties in both countries; once your Canadian ties are cut, there is usually nothing to settle.

Once the treaty makes you a Japan resident, Income Tax Act s. 250(5) deems you not resident in Canada, and you are taxed like any other emigrant (Folio ¶1.37 and ¶1.45).

What do I owe Canada in the year I leave for Japan?

On your final resident return you report world income up to your departure date and are treated as selling most property, such as shares and funds, at fair market value. Canadian real estate, RRSPs, RRIFs, TFSAs and pension plans are excluded (CRA). Form T1161 is due by your return's filing date, even if you file no return, if your property is worth more than $25,000, not counting cash, bank deposits and registered plans; it costs $25 a day late (Form T1161; CRA). You can elect to defer the tax with Form T1244. See leaving Canada for the return, forms and security rules.

Can Canada still tax my gains after I live in Japan?

Yes. Article 13(1) lets Canada tax gains on real estate in Canada. Article 13(4) lets Canada also tax gains on other property, not covered by paragraphs 1 to 3, "arising in" Canada. The treaty has no special rule for people who used to live in Canada, and no rule treating shares of a company that mainly owns Canadian real estate like the real estate itself.

Canada uses that room only where its own law reaches you. A non-resident pays Canadian tax on a gain mainly from selling taxable Canadian property, such as Canadian real estate or certain private company shares (s. 2(3)). The treaty does not define where a gain "arises," so get cross-border tax help before selling Canadian real estate or private company shares after the move.

How much does Canada withhold on dividends and interest paid to me in Japan?

Canadian dividends are capped at 15%. A company owning at least 25% of the payer's voting shares for the six months before the end of the payer's accounting period gets 5%; that lower rate is for companies, not individuals (Article 10(2)).

Interest is capped at 10% (Article 11(2)). Under s. 212(1)(b), Canada withholds on interest only when it is paid to a non-arm's-length person or is participating debt interest, so ordinary bank and bond interest is paid without Canadian tax. Without a treaty claim, the payer withholds 25% (T4058). A payer applies the treaty rate only once it knows you live in Japan. For rates and forms across all treaties, see non-resident tax rates in Canada.

How much does Canada withhold from my RRSP, RRIF, CPP and OAS in Japan (is there an Article 18)?

Canada withholds its general 25%, because the treaty has no pension article. Article 18 covers pay from government service and excludes pensions. The treaty does not name these payments, so they are treated as other income under Article 20: paragraph 3 lets the country where the income arises tax it, with no rate cap.

Service Canada lists Japan under "all other countries" at that rate for OAS, CPP and QPP (Service Canada); the CRA points to the treaty or its Part XIII calculator for pension rates (IC76-12R8).

A section 217 return can lower that tax when your total income, including income from Japan, is modest (s. 217); it is due June 30. If you receive OAS, you must also file an OAS Return of Income by April 30: Japan is not on the CRA's list of countries whose residents are excused, and without it OAS stops in July (CRA; Service Canada). See non-resident return for pension and RRSP income, and RRSP cash-out before or after leaving for timing a withdrawal.

I keep my Canadian home and rent it out: what does Canada tax?

Canada taxes the rent and any later gain on the home. A Canadian agent who collects the rent withholds 25% of gross rent and is liable if it does not; an individual tenant paying you directly for a home they live in does not withhold, so you remit the tax yourself (s. 215). Either way, you can instead file to pay on net rent under section 216 (T4058). A home kept available to you can also be a residential tie and the first test in a dual-residence case. When you later sell it, the buyer may hold back part of the price until the CRA issues a clearance certificate; see non-residents selling Canadian property and non-resident landlords.

I work in Japan but my Canadian employer still pays me: which country taxes the pay?

Pay for work done in Japan is taxable in Japan once you are a Japan resident; Article 15(1) lets Canada tax it only for work exercised in Canada. Article 15(2) blocks Canadian tax on days worked in Canada only if all three hold: no more than 183 days in Canada in the calendar year, an employer that is not a Canadian resident, and pay not borne by a permanent establishment in Canada. A Canadian employer fails the second test, so pay for days you work in Canada stays taxable there.

For payroll deductions, slips and trips back, see working for a Canadian employer from abroad. For a fixed-term posting, see working abroad for a few years. If you are self-employed and keep Canadian clients, see Canadian clients after moving abroad.

How is double tax avoided between Canada and Japan?

The country of residence gives the credit. Under Article 21(2), Japan credits Canadian tax paid on income Canada may tax, up to the Japanese tax on that income. Under Article 21(1), while you are still a Canadian resident, Canada credits Japanese tax on Japanese income, subject to Canada's foreign tax credit rules.

Keep every NR4 slip and record of Canadian tax withheld; a credit in Japan depends on proving the tax. Article 21(2) credits only tax on income that "may be taxed in Canada" under the treaty, so tax withheld above the treaty rate is recovered from Canada (the payer or the CRA), not through the Japanese credit.

What do I file in Canada each year after the move?

Often nothing, when all your Canadian income had the right tax withheld, since that tax is usually final (T4058). You file a return when you sell taxable Canadian property, work in Canada, choose section 216 for rent or section 217 for pensions, or the CRA asks. See do you file every year after leaving Canada, and non-resident returns and catch-up for missed years.

Example

These examples are illustrative; all figures are in Canadian dollars.

A teacher moving from Halifax to Osaka

She sells her condo before leaving and keeps a C$20,000 TFSA and C$15,000 in bank savings. Both are left out of the T1161 count, so no T1161 is needed. Her bank interest is arm's-length, so Canada withholds nothing on it. Her final return reports world income up to her departure date.

An engineer whose wife stays in Ottawa

He starts a job in Tokyo; his wife stays in their Ottawa house for two years before joining him.

• Year 1: Canada likely still treats him as resident (home and spouse in Canada). If Japan also does, he can ask the tax authorities to settle it under Article 23; until then both may tax him as resident. This is the point to get cross-border tax help.
• Year 2: same position while she stays; credits under Article 21 limit double tax.
• Year 3: she moves to Japan and they sell the Ottawa house or lease it at arm's length. His departure date is then likely the day she leaves, and departure tax applies on that date. If the house stays empty and available to them, it can keep him resident.

A retiree in Kyoto with a RRIF

He draws C$30,000 a year from his RRIF. With no treaty pension cap, the RRIF issuer withholds 25%, or C$7,500. If his total world income is modest, a section 217 return may recover part of that.

Different for you?

• A spouse, children or a home stay in Canada, or both countries claim you: see family stays in Canada while you work abroad and get cross-border tax help before you ask the authorities to decide.
• You draw an RRSP, RRIF, pension, CPP or OAS: compare the 25% withholding with a section 217 return, with cross-border tax help.
• You keep your Canadian home: see non-resident landlords and get cross-border tax help for the rent and later sale.
• You own a Canadian corporation: see paying yourself from your corporation after moving abroad and corporation residency after the owner moves abroad, and get cross-border tax help.
• Your property, not counting cash and registered plans, is worth more than $25,000: see the T1161 list of properties and leaving Canada.
• You missed returns after leaving: see non-resident returns and catch-up.
• You are moving somewhere else: see moving from Canada to South Korea.