Understanding Tax Implications for NRIs in Toronto: What You Should Know

For Non-Resident Indians (NRIs) in Toronto, dealing with finances can be a challenge, particularly taxation. Tackling tax legislation between two nations—Canada and India—means getting familiar with tax treaties, residency requirements, and the Double Taxation Avoidance Agreement (DTAA). On this blog, let’s explore the most important tax implications for NRIs in Toronto and how to improve your financial standing.

Defining NRI Tax Status

To begin with, let’s see how India defines your tax status as an NRI. If you remain outside India for 182 days or more during a financial year, you are considered a Non-Resident Indian for tax purposes. This categorization affects what income is taxable in India and what can be exempted.

Fact: More than 1.4 million NRIs reside in Canada, with a high concentration in Toronto.

What Income of NRIs is Taxable?

1. Income Received in India NRIs are taxed in India only on income earned or accrued in India. These include:

• Rental income from Indian properties
• Capital gains on sale of property, shares, or other assets
• Interest income from Indian bank accounts
• Any income received outside India, like salary for a job in Toronto, is not taxable in India.

  Fact: The Indian government has updated tax regulations in 2023 to allow for more hassle-free reporting for NRI earnings, with an aim to limit tax controversies.

1. Earnings in Canada Canada charges its residents with taxes on worldwide income. What this implies is that your global income, which includes any amount earned in India, will have to be paid taxes in Canada. Hence, it is imperative to keep Canadian as well as Indian tax issues in mind.

   Fact: The top federal tax rate in Canada is 33%, and there is an extra provincial tax rate of up to 13.16% in Ontario, so tax planning is essential for NRIs.

Double Taxation Avoidance Agreement (DTAA)

The DTAA between Canada and India prevents NRIs from paying tax on the same income twice in both nations. The DTAA enables NRIs to claim relief from tax by:

• Exemption: If your income is taxed in Canada, you are exempt from Indian taxes on the same income.
• Tax Credit: If your income is taxable in India and Canada, you can claim a tax credit in Canada for the Indian taxes paid.

Using the DTAA, you can minimize your tax liability and prevent double taxation.

Example: If you receive rental income from Indian property and are taxed thereon, you may be able to claim tax paid in India as a credit against your Canadian tax burden.

Important Tax Issues for NRIs in Toronto

1. Tax Residency Rules Your tax residency determines your obligation to pay taxes in Canada and India. While NRIs are taxed merely on income earned in India, Canadian residents must pay taxes in Canada on their worldwide earnings. You may want to take advice from a tax consultant to ensure that you qualify as a resident under the appropriate laws and file taxes accordingly in both nations.
2. Reporting Foreign Income Canada has strict reporting requirements for foreign income. NRIs holding significant assets in India, e.g., real estate, bank deposits, or investments, need to report these assets to the Canada Revenue Agency (CRA). Non-reporting of foreign assets may lead to penalties.

   Fact: The CRA doubled the penalty for non-reporting of foreign income or assets in 2024 to CAD 25,000.

3. Tax Filing Deadlines Make sure you file your taxes in Canada and India on time. The Canadian deadline is typically April 30th, and the Indian deadline for individuals is July 31st. Failure to file on time may lead to penalties and interest on outstanding taxes.

   Tip: Filing your taxes using tax software or employing a tax consultant can ensure timely filing and compliance.

Tax Benefits and Deductions for NRIs

1. Deductions in India NRIs are eligible to claim tax deductions under specific sections of the Indian Income Tax Act, including:

• Section 80C: Tax deductions on investments such as Public Provident Fund (PPF), National Savings Certificates (NSC), or life insurance premiums, up to ₹1.5 lakh per year.
• Section 24(b): Tax deduction on home loan interest for rental houses in India, up to ₹2 lakh per year.

1. Tax-Free Investments Certain investments, such as NRE (Non-Resident External) account interest, are exempt from tax in India for NRIs. This is a tactical means of accumulating wealth without the burden of taxes.

   Fact: Interest on NRO (Non-Resident Ordinary) accounts, on the other hand, is taxed under TDS (Tax Deducted at Source) in India. How to Maximize Your Tax Status as an NRI in Toronto

2. Appoint a Tax Advisor Consult a tax consultant familiar with Canadian as well as Indian tax regulations to maximize your returns. Consultants will advise you on how to avail DTAA provisions, avail tax credits, and minimize your overall tax outgo.
3. Plan Your Investments Investing in tax-efficient schemes like NRE accounts or PPFs in India will minimize taxes and increase your wealth in the long run.
4. Stay Updated on Tax Laws Tax regulations in India and Canada keep changing. Being updated on the changes keeps you compliant and helps you enjoy new deductions or exemptions.

Conclusion

For NRIs in Toronto, it is important to know the tax implications of income earned in Canada and India to be financially successful. By taking advantage of tax treaties, remaining compliant with tax regulations, and planning ahead, you can maximize your tax returns and protect your wealth. You can also make it easier by consulting a professional tax advisor and ensuring that you utilize all the benefits available.

FAQs

1. Do NRIs in Toronto need to pay tax in India?
   Ans- NRIs are taxed only on income earned or accrued in India, e.g., rental income or capital gains.
2. What is the DTAA between Canada and India?
   Ans- The Double Taxation Avoidance Agreement avoids double taxation of the same income in both nations for NRIs.
3. How does Canada tax NRIs?
   Ans- Canada taxes its residents on their global income, including income from India.
4. Are NRIs entitled to deduct tax in India?
   Ans- Yes, NRIs are eligible for deductions under Section 80C, Section 24(b), and other provisions of the Indian Income Tax Act.
5. Is interest on NRE account taxable for NRIs?
   Ans- No, interest accrued on NRE accounts is exempt from taxation in India.
6. What if I fail to report foreign income in Canada?
   Ans- Failure to report foreign income or assets may lead to hefty fines and penalties imposed by the CRA.
7. When is the tax filing date in Canada?
   Ans- The tax filing date is April 30th, but it can be different depending on your income type or residence status.
8. Can NRIs in Toronto invest in Indian shares?
   Ans- Yes, NRIs can invest in Indian shares, but they need to abide by the regulations given by the Reserve Bank of India.
9. What is the rate of tax on rental income for NRIs in India?
   Ans- Rental income is liable to TDS in India, normally at 30%.
10. Can double taxation be avoided by NRIs in Canada and India?
    Ans- Yes, with the help of DTAA, NRIs can avail tax exemption or credits for avoiding double taxation.

Disclaimer: The information provided here is for educational and informational purposes only and should not be construed as financial, legal, or tax advice. Consult with a qualified professional before making any investment decisions. We do not accept any liability for errors or omissions in this information nor any direct, indirect, or consequential losses arising from its use.