3 Tax Tips for Canadian Digital Nomads

When Alina McLeod decided to turn her YouTube travel channel into a full-time job as a content creator, it opened the world to her — literally. McLeod, a 33-year-old digital nomad from Calgary, has worked abroad in Europe, Southeast Asia and South America over the last five years.

As a digital nomad, McLeod, currently based in Bulgaria, says she’s learned some important financial lessons, especially when it comes to filing her annual income tax bill.

Many people think that if they live outside their home country for long periods of time, they’re not liable for taxes there, McLeod says. But that’s not necessarily true.

Dani Nelson, originally from Toronto, has a similar story. The self-employed financial educator and content creator is currently based in Málaga, Spain, with her partner, but she’s worked abroad previously and loved it.

After being laid off in 2023 from her full-time tech job in Canada, Nelson says it was the right time to make her dream of digital nomadism a reality.

“The easiest way for me to do that was to get the youth mobility visa and the working holiday visa,” says Nelson, adding that she still maintains residential ties to Canada and pays Canadian income taxes. “We chose to live in Málaga, Spain, because the cost of living is about 38% less than Toronto. The winters are significantly warmer. The food is fresher. It’s a walkable city, we’re getting a lot more exercise.”

McLeod and Nelson aren’t alone.

Forty million people around the world consider themselves digital nomads, with Canadians accounting for 4% of this figure, according to statistics published recently by DemandSage, a data analytics platform. About 83% of all digital nomads say they are self-employed.

Digital nomads still have to follow Canadian tax laws based on their residency status. Plus, if you want to live and work abroad for an extended period, you have to get special permission to do so through your destination country, such as a tourist, work or digital nomad visa.

How taxes work as a Canadian digital nomad

Before becoming a digital nomad, you first need to decide if you’ll maintain your Canadian residency ties. Your choice directly impacts your tax obligation and how you’ll file your tax returns.

For tax purposes, you’re considered a “factual resident” of Canada if you keep significant residential ties in Canada even while travelling or working abroad, according to the Canadian Revenue Agency (CRA). If you spend more than 183 days in Canada in a given tax year, the CRA will likely consider you a resident for tax purposes.

Digital nomads typically benefit from maintaining Canadian residency if they:

Plan to return to Canada within two years.
Keep significant residential ties, such as property or family.
Want to maintain their Canadian social benefits and health care coverage.
Need to continue contributions to registered accounts like RRSPs.

If you remain a tax resident as a digital nomad, you’re required to:

Report worldwide income.
Declare foreign property worth more than $100,000 using Form T1135.
Maintain proper documentation of time spent abroad (and ensure you have the appropriate work permits/visas).
File tax returns in countries where physical labor is performed.

If you’re planning to leave the country but you’re unsure of your residency status for tax purposes, fill out Form NR73.

Leaving Canada permanently

Ultimately, if you decide to emigrate to another country and leave Canada behind, you’ll file your last income tax return, and may have to pay a “departure tax” on certain types of property, according to the CRA.

Many digital nomads opt to change country residency to take advantage of lower costs of living while minimizing their tax burden.

For instance, The Bahamas, Cayman Islands and Brunei have zero income taxes. Other countries — Costa Rica, Panama, Nicaragua and Thailand — only tax income earned while you live there and don’t tax global assets.

Tax planning strategies for digital nomads

Before taking the leap into digital nomadism, consult with a tax professional who can help you determine your Canadian tax residency status and the best tax-planning strategies specific to your situation.

1. Pay attention to international tax treaties

Many digital nomads should be aware of the tax treaties Canada has with more than 90 countries to avoid double taxation on their earned income.

2. Claim a foreign tax credit, if you can

Canadian tax residents paying taxes to another country can claim a foreign tax credit to reduce their tax burden.

The foreign tax credit lowers your taxes payable in Canada based on how much you’ve paid to another country’s tax authority. In addition to filing taxes in Canada, you might also have to file a tax return in the country you’re working in.

The CRA notes that you cannot claim a foreign tax credit for taxes you paid to another country on any income you earned while living in Canada.

3. Choose the right business structure

Many digital nomads work and file taxes as sole proprietors. But incorporating a small business in Canada can offer certain tax advantages.

For example, the small business deduction allows Canadian-controlled private corporations to pay a reduced tax rate on the first $500,000 of business income. Incorporating a small business also provides legal protection against liability that a sole proprietorship doesn’t have.