How should a family living apart in Canada file their taxes?

Toronto CPA Service
2 days ago
3 min read

Today we'll analyze a tax filing case for a family living apart in different locations.

Assuming a family living apart in different locations files a tax return

My wife lives in Canada, and my child studies in Canada with her.
My husband works overseas;
Both spouses have status (such as PR/work visa);

Scenario 1: Spouse maintains tax residency status

If a husband works overseas but maintains close ties to Canada (with status, assets, spouse, and children in Canada), the CRA will consider him a Canadian tax resident.

Tax filing processing

Both spouses file personal income tax returns as tax residents;
The gentleman's overseas income must be declared as Global Net Income in Canada.
You can use the Foreign Tax Credit to offset taxes already paid in other countries to avoid double taxation. If the taxes paid in other countries are lower than the Canadian tax bracket, you will need to pay the difference.

Advantages

RRSP and TFSA limits increase as income increases;
You can enjoy various income-related benefits (such as GST/HST Credit, Child Benefit, etc.).
You can get more tax deduction opportunities.

Risks and disadvantages

If you have high overseas income but a low tax rate in the country where you are living, you may need to pay a large amount of back taxes in Canada.
Income from various overseas investments (stocks, bonds, etc.) is also included in global net income, increasing the tax burden.

Scenario 2: Spouse is considered a non-tax resident

If the husband holds a work permit, has no assets in Canada, and has a spouse and children living in Canada but can prove through other means that their ties to Canada are not strong, he may be considered a non-resident for tax purposes.

Tax filing processing

The gentleman does not need to declare his foreign income in Canada;
Only the wife needs to file her personal income tax return in Canada, but her tax return still needs to include the couple's total income.
A spouse's income directly affects the total family income and indirectly affects family welfare.

Advantages

The gentleman does not need to pay Canadian taxes on overseas wages or investment income.

Risks and disadvantages

Loss of RRSP and TFSA credit limit increases;
Loss of available tax credits and welfare benefits.

Total household income and benefits

Regardless of whether a spouse is a tax resident, their overseas income is included in the total household income, affecting benefits in Canada such as:

Canada Child Benefit (CCB)
GST/HST Credit
Dental welfare
Other subsidy programs

Note: Excessively high total household income may lead to a reduction or cancellation of benefits.

How to calculate net overseas income

Net Income = Total Income Before Tax – Compliant Deductible Items

Note: Net income is not the same as actual after-tax income.
Salary: Use gross income before tax.
Foreign taxes already paid: credited via Foreign Tax Credit
Deductions are allowed for: Mandatory social security contributions (similar to Canada's CPP/EI).
Direct deductions are not permitted for: housing provident fund or individual investment tax.

Spouse income and RRSP/TFSA

RRSP: The limit is calculated solely based on the income of the tax resident individual; the spouse's income does not directly increase the limit.
TFSA: Fixed annual allowance for tax residents, does not affect spouse's income;
Benefits: Spouse income will affect GST/HST Credit, CCB, etc., but will not affect TFSA/RRSP.

Example description

Assumption:

As a tax resident, the gentleman reports his global net income and uses foreign tax credits to offset taxes already paid overseas.
Both RRSPs and TFSAs allow for increases based on actual income, and wives can also apply for spousal benefits.
If the husband is deemed a non-resident for tax purposes, he will not need to pay taxes in Canada, but his TFSA/RRSP increases will be invalidated, and the wife's benefit calculations will be affected by the family's total income.