Published: January 16, 2025
Introduction: Taxability of Employment Income Earned in Canada
The Canadian Income Tax Act defines income from employment, or employment income, as any income that derives from salary, wages, and other remuneration, including gratuities, received by a taxpayer in the year.
The Canada Revenue Agency (CRA) provides a slightly more detailed definition of employment income to include salary, wages, commissions, bonuses, tips, gratuities, and honoraria. Under certain circumstances, benefits, allowances, and/or reimbursements received by an employee may also be taxable as employment income.
Generally speaking, a Canadian tax resident must report their worldwide income, including employment income earned in Canada and elsewhere, on a Canadian income tax return. A non-resident is required to report only Canadian income on the Canadian income tax return, if the non-resident taxpayer is required to or wants to file a tax return in Canada.
In other words, employment income earned in Canada is ordinarily taxable in Canada. However, if a Canadian taxpayer works for a prescribed International Organization, a prescribed International Non-Governmental Organization, or a foreign embassy in Canada, the taxpayer’s employment income may be exempt from Canadian income taxes.
As Part II of this series of Special Income Tax Rules, this article discusses the tax exemption status of income from certain types of international organizations/foreign employers in Canada.
Employees of Prescribed International Organizations: Tax-Free Income from Employment with a Prescribed International Organization Pursuant to Regulation 8900(1)
Under the Income Tax Act, a Canadian taxpayer may fully deduct employment income earned from a prescribed International Organization. Under subsection 8900(1) of the Income Tax Regulations, prescribed international organizations include the United Nations, and each international organization that is a specialized agency brought into relationship with the United Nations in accordance with Article 63 of the Charter of the United Nations.
Article 63 of the Charter of the United Nations is periodically updated to include or modify the list of specialized agencies, which currently includes the Food and Agriculture Organization of the United Nations (FAO), International Labour Organization (ILO), International Monetary Fund (IMF), World Health Organization (WHO), World Bank Group, and United Nations Educational, Scientific and Cultural Organization (UNESCO).
Although a taxpayer’s employment income from a prescribed International Organization is essentially exempt from Canadian income taxes, the taxpayer cannot omit the employment income from a Canadian tax return. In addition, the taxpayer may be subject to taxes in another jurisdiction if the taxpayer establishes tax residence in that jurisdiction during the relevant period.
A taxpayer receiving other types of income from a prescribed International Organization – such as business, investment, self-employment or pension income – is likely required to report and pay taxes on this income. If you would like to learn more about preferential tax treatment for employees at a prescribed International organization, you can read our article on this topic: Tax Deduction For UN Employment Income – Canadian Tax Guidance From A Canadian Tax Lawyer.
Non-resident Foreign Employees of Prescribed International Non-Governmental Organizations and Foreign Embassies: Taxability of Employment Income Depends on the Employees’ Citizenship and Tax Residence Status
Under subparagraph 110(1)(f)(iv) of the Canadian Income Tax Act, a taxpayer’s income from employment with a prescribed International Non-Governmental Organization, including the International Air Transport Association, the Société Internationale de Télécommunications Aéronautiques; and the World Anti-Doping Agency, can be exempt from income taxes if the taxpayer satisfies all of the requirements below:
- The taxpayer was not, at any time in the year, a Canadian citizen;
- The taxpayer was a non-resident person immediately before beginning to work for the prescribed International Non-Governmental Organization in Canada; and
- If the taxpayer is a resident in Canada, or the taxpayer became resident in Canada solely for the purpose of that employment.
Under Article 49, Schedule II of the Foreign Missions and International Organizations Act, members of the service staff should be exempt from dues and taxes on the wages which they receive for their services.
However, for individuals working at foreign embassies in Canada, a set of requirements applies before these employees can claim full deductions of their employment income from the foreign embassies. The Canada Revenue Agency (CRA) divides employees at foreign embassies in Canada into two categories: locally-engaged employees, and foreign-national employees.
A locally-engaged employee is a Canadian tax resident or a Canadian citizen who is hired to work at a foreign embassy in Canada. A foreign national employee is a non-resident of Canada who came to Canada solely to work at the foreign embassy.
A locally-engaged employee is subject to the usual income tax in Canada and is required to file a Canadian income tax return and to declare and pay tax on all of the income earned from the foreign embassy.
A foreign national employee’s employment income from the foreign embassy is exempt from Canadian income taxes. A foreign national employee is also not required to file a Canadian income tax return unless the employee has received other types of income from Canada.
A foreign national employee’s spouse, who accompanied the employee to Canada, can qualify for the same tax exemption status if the spouse is later hired by the foreign embassy. However, if the spouse is hired by a local Canadian employer or becomes self-employed, then he or she is subject to Canadian income tax and has to file a Canadian income tax return.
Pro Tips – How Does The Meaning Of “Resident” Differ For Immigration And Tax Purposes?
There are similar terms used in Canada for immigration and tax purposes. For example, the term “resident” is commonly used in both immigration and tax law.
When Immigration, Refugees and Citizenship Canada (IRCC) determines whether an individual is a resident of Canada, IRCC refers to whether this person physically resides in Canada, either as a temporary resident, a permanent resident, or a Canadian citizen. The IRCC focuses on the physical presence of an individual, which can impact the individual’s immigration status. To maintain an individual’s permanent residence status, the individual needs to be physically present in Canada for at least 730 days within the most recent five years.
The Canada Revenue Agency (CRA) uses the term “resident” to describe a natural person, a corporation, or a trust that is tax resident in Canada. The definition of a tax resident is not simply based on the physical location of the taxpayer. If you would like to learn more about your tax residence, you can refer to the following articles:
- Tax Residence in Canada: Part-Year Residence – A Canadian Tax Lawyer’s Analysis
- Timing of Residence Change – Income Tax Residence – Toronto Tax Lawyer Guide
- Tax Residence in Canada – Are Significant Residential Ties Less Significant for Immigrants to Canada than for Emigrants from Canada? A Canadian Tax Lawyer’s Analysis
The concepts of a tax resident and a resident for immigration purposes are intertwined but are not necessarily correlated.
For example, John, a Canadian permanent resident since January 1, 2021, has been living outside of Canada for the entirety of 2023 and 2024. John has no dependents, spouse, or any ties to Canada. He nevertheless met the immigration requirement to remain a Canadian permanent resident, since he has resided in Canada for at least 730 days within the most recent five years.
However, for tax purposes, John was likely a non-resident in Canada for the 2023 and 2024 taxation years. As such, from 2023 to 2024, he was a Canadian permanent resident for immigration purposes and a non-resident for tax purposes.
If you are a newcomer in Canada, you may find it difficult to understand your tax residence status and difficult to determine your tax and reporting obligations. We recommend that you engage with one of our expert Canadian tax lawyers with experience in personal and business tax matters, who can assist you with determining tax residence status and provide legal advice on remedying any potential non-compliance.
FAQ
What Are Prescribed International Organizations?
Under subsection 8900(1) of the Income Tax Regulations, prescribed international organizations include the United Nations, and each international organization that is a specialized agency brought into relationship with the United Nations in accordance with Article 63 of the Charter of the United Nations.
Article 63 of the Charter of the United Nations is periodically updated to include or modify the list of specialized agencies. For example, on December 23, 2003, the United Nations General Assembly recognized the World Tourism Organization as a specialized agency of the United Nations. Other more commonly-known specialized agencies of the United Nations include: Food and Agriculture Organization of the United Nations (FAO), International Labour Organization (ILO), International Monetary Fund (IMF), World Health Organization (WHO), World Bank Group, and United Nations Educational, Scientific and Cultural Organization (UNESCO).
I am a Canadian Citizen Working for a Prescribed International Non-Governmental Organization. Is my employment income from the organization exempt from income taxes in Canada?
Under subparagraph 110(1)(f)(iv) of the Income Tax Act, a taxpayer’s income from employment with a prescribed International Non-Governmental Organization can be exempted from income taxes if the taxpayer was not, at any time in the year:
- a Canadian citizen;
- was a non-resident person immediately before beginning working for the prescribed International Non-Governmental Organization in Canada; and
- if the taxpayer is a resident in Canada, or the taxpayer became resident in Canada solely for the purpose of that employment.
As such, a Canadian citizen working for a prescribed International Non-Governmental Organization in Canada must report the employment income from such an organization, which will be subject to the regular Canadian income tax rules.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
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