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Overview: How Employment Income is Taxed in Canada

Under the Canadian Income Tax Act, employment income refers to any income earned from salary, wages, and other forms of remuneration, such as gratuities, that a taxpayer receives during the year.

The Canada Revenue Agency (CRA) expands on this by including salary, wages, commissions, bonuses, tips, gratuities, and honoraria as part of employment income. In some cases, benefits, allowances, or reimbursements provided to an employee may also be considered taxable employment income, depending on the nature of the payment and the context in which it was received.

In general, Canadian tax residents must report their worldwide income—including employment income earned both within and outside Canada—on their Canadian income tax return. In contrast, non-residents are only required to report Canadian-sourced income, and only if they are obligated or choose to file a tax return in Canada.

This means that employment income earned in Canada is typically subject to Canadian tax. However, exceptions exist. If a Canadian taxpayer is employed by a prescribed international organization, a prescribed international non-governmental organization, or a foreign embassy within Canada, that employment income may qualify for an exemption from Canadian income taxation.

As Part II of this special series on unique income tax rules, this article explores the conditions under which income from specific types of international or foreign employers may be exempt from Canadian income tax.

Tax-Exempt Earnings for Employees of Prescribed International Organizations Under Regulation 8900(1)

Under the Income Tax Act, Canadian taxpayers may be eligible to fully deduct employment income earned from a prescribed international organization. According to subsection 8900(1) of the Income Tax Regulations, this includes the United Nations and any specialized agency that has been brought into a relationship with the UN pursuant to Article 63 of the United Nations Charter.

Article 63 is periodically revised to reflect changes in the list of recognized specialized agencies. These currently include organizations such as the World Health Organization (WHO), the World Bank Group, the International Labour Organization (ILO), the Food and Agriculture Organization of the United Nations (FAO), the United Nations Educational, Scientific and Cultural Organization (UNESCO), and the International Monetary Fund (IMF).

Even though employment income from a prescribed International Organization is effectively exempt from Canadian income tax, it must still be reported on the taxpayer’s Canadian tax return. Additionally, if the taxpayer is considered a resident of another country during the relevant period, that taxpayer may be subject to taxation in that jurisdiction.

Other forms of income received from a prescribed International Organization—such as business, investment, self-employment, or pension income—are generally taxable and must be reported accordingly. For more details on the preferential tax treatment available to employees of prescribed international organizations, refer to our article: Tax Deduction For UN Employment Income – Canadian Tax Guidance From A Canadian Tax Lawyer.

Taxability of Employment Income for Non-Resident Foreign Employees of International NGOs and Foreign Embassies: Based on Citizenship and Tax Residence Status

Under subparagraph 110(1)(f)(iv) of the Canadian Income Tax Act, income from employment with a prescribed International Non-Governmental Organization, such as the International Air Transport Association, Société Internationale de Télécommunications Aéronautiques, and the World Anti-Doping Agency, may be exempt from income taxes, provided the taxpayer meets the following conditions:

• The taxpayer was not a Canadian citizen at any point during the year;
• The taxpayer was a non-resident immediately prior to starting employment with the prescribed International Non-Governmental Organization in Canada; and
• If the taxpayer becomes a resident of Canada, it must be solely for the purpose of his or her new employment with the International Non-Governmental Organization.

Under Article 49, Schedule II of the Foreign Missions and International Organizations Act, service staff members are generally exempt from dues and taxes on the wages they receive for their services.

However, employees working at foreign embassies in Canada must meet specific requirements to claim full deductions on their employment income. The Canada Revenue Agency (CRA) categorizes embassy employees into two groups: locally engaged employees and foreign national employees.

A locally-engaged employee is either a Canadian citizen or a Canadian tax resident employed by a foreign embassy in Canada. A foreign national employee, on the other hand, is a non-resident of Canada who comes to Canada exclusively to work at the foreign embassy.

Locally-engaged employees are subject to the regular Canadian income tax laws and must file a Canadian income tax return, declaring and paying taxes on all income earned from the foreign embassy.

A foreign national employee’s income from working at a foreign embassy in Canada is exempt from Canadian income taxes. Additionally, the foreign national employee is not required to file a Canadian income tax return unless he or she has earned other types of income from Canada.

If the foreign national employee’s spouse, who accompanied him or her to Canada, is later hired by the foreign embassy, he or she may also qualify for the same tax exemption. However, if the spouse works for a Canadian employer or becomes self-employed, he or she will be subject to Canadian income tax and must file a Canadian income tax return.

Tax Pro Tips—Understanding the Different Definitions of “Resident” for Immigration and Tax Purposes

In Canada, similar terms are used in both immigration and tax law, with the term “resident” being a key example.

When Immigration, Refugees and Citizenship Canada (IRCC) assesses whether an individual is a resident of Canada, they consider the person’s physical presence in the country—whether as a temporary resident, permanent resident, or Canadian citizen. The IRCC’s focus is on the individual’s physical presence, which can affect their immigration status. To retain permanent residence, an individual must be physically present in Canada for at least 730 days within the past five years.

The Canada Revenue Agency (CRA) uses the term “resident” to refer to a natural person, corporation, or trust that is considered a tax resident in Canada. The definition of tax residency is not solely determined by the physical location of the taxpayer. To learn more about Canadian 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 tax residence and immigration residence are related but not always aligned.

For instance, John, a Canadian permanent resident since January 1, 2021, has lived outside of Canada for the entire year of 2023 and 2024. He has no dependents, spouse, or any other ties to Canada. However, he still meets the immigration requirement to maintain his Canadian permanent resident status because he has resided in Canada for at least 730 days within the past five years.

For tax purposes, however, John was likely considered a non-resident of Canada for the 2023 and 2024 taxation years. Therefore, from 2023 to 2024, he was a Canadian permanent resident for immigration purposes but a non-resident for tax purposes.

For a newcomer to Canada, understanding Canadian tax residence status and determining tax and reporting obligations can be challenging. Consulting with one of our expert Canadian tax lawyers who specialize in personal and business tax matters can help clarify tax residence status and provide legal advice on addressing any potential non-compliance.

Frequently Asked Questions (FAQs)

What Defines Prescribed International Organizations?

Under subsection 8900(1) of the Income Tax Regulations, prescribed international organizations include the United Nations, along with any international organization that is a specialized agency linked to the United Nations in accordance with Article 63 of its Charter.

Article 63 of the Charter is periodically updated to include or modify the list of specialized agencies. For instance, on December 23, 2003, the United Nations General Assembly recognized the World Tourism Organization as a specialized agency of the United Nations. Other well-known agencies include: the World Health Organization (WHO), the World Bank Group, the International Labour Organization (ILO), the Food and Agriculture Organization of the United Nations (FAO), the United Nations Educational, Scientific and Cultural Organization (UNESCO), and the International Monetary Fund (IMF).

Am I exempt from income taxes in Canada on my employment income if I am a Canadian citizen working for a prescribed International Non-Governmental Organization?

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 exempt from income taxes if, during the year, the taxpayer was not:

• A Canadian citizen;
• A non-resident immediately before starting employment with the prescribed International Non-Governmental Organization in Canada; and
• A resident of Canada, or became a resident of Canada solely for the purpose of that employment.

Therefore, a Canadian citizen employed by a prescribed International Non-Governmental Organization in Canada must report the income earned from the organization, and it will be subject to the standard 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 articles. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.