When it comes to taxes, especially for newcomers, there is a lot of misconceptions out there. In this article, we will try to elucidate one of the most mysterious and often least understood tax rules: the 90% rule.
Although this rule might be a bit technical, once assimilated, it can avoid any unpleasant surprises.
The basic amount
Any tax resident of Canada is entitled to a tax exemption on the first $12 000 earned in Canada and $15 000 in Quebec (The principle is much more complex, but we will sometimes address it as an exemption instead of the base amount for better understanding of the concept).
The 90% rule
If you arrived in Canada during the year, the 90% rule applies in one of the two following ways:
- If your Canadian income represents more than 90% of your worldwide income (Canada + Previous country of residency), you are exempt from taxes on the first $12 000 federal revenue and $15 000 provincial revenue.
- If your Canadian income represents less than 90% of your worldwide income, your basic amount will be proportional to the number of days you have resided in Canada during the year.
Let’s take two situations to better illustrate the concept.
Situation 1: Lucie moved to Montreal on July 1st, 2018. Her income in her home country of France was €2 000 ($3 064). Since her arrival, Lucie has earned $9 500.
Situation 2: Abdel also moved to Montreal on July 1, 2018. His income in Belgium was €0. Since his arrival, Abdel has earned the same salary of $9 500 as Lucie.
Step 1: Portion of Canadian income VS global income
First, we must calculate the Canadian portion of global income for each:
- Lucie: Lucie’s Canadian income represents 76% of her worldwide income ($3 064 earned in France / (total income ($3 064 + $9 500)).
- In the case of Abdel, 100% of his income comes from Canadian sources.
Step 2: Calculate the base amount
Considering these facts, we can guess that Lucie’s tax situation will be slightly less advantageous than Abdel’s because we will have to calculate the proportion of her base amount according to the number of days of residency in Canada.
- Knowing that she arrived on July 1, 2018, Lucie lived for 184 days (July 1 to December 31) in Canada and thus her base amount will be $6 050 in Canada ($12 000 x 184d / 365d) and $7 562 in Quebec ($15 000 x 184d / 365d).
Lucie will be taxed on $3 450 of her income at the federal level ($9 500 – $6 050) and $1 938 ($9 500 – $7 562) at the provincial level.
- Meanwhile, Abdel’s accountant does not have to go through this puzzle, because 100% of his income in 2018 is Canadian and his entire income will be exempted from tax.
Step 3: Tax calculation
We already know that Abdel’s return will be more optimistic than Lucie’s. Knowing that they have already each paid 15% tax to each government when withdrew on each payroll and without considering the multitude of deductions and credits that exist, here is the result of each statement:
- By being exempt from his entire income, Abdel will be entitled to a refund of $2 850.
- Lucie will receive a refund of “only” $2 351.
An impressive difference of $500.
Feel free to make an appointment now with our advisors for your tax return. There are a lot of subtleties in the newcomer tax and we can help you.