The 90% rule in Canada is an important guideline for determining eligibility for certain tax credits, benefits, and deductions. While the concept may sound complicated, it is designed to clarify how much of a taxpayer’s income must come from Canadian sources to qualify for full tax benefits. Knowing this rule greatly assists Canadian residents and non residents to fully understand what their tax responsibilities are pertaining to Canada.
Definition of the 90% Rule in Canada
The 90% rule states that if 90% or more of your total income comes from Canadian sources, you may be eligible for full federal tax credits, such as the Basic Personal Amount or other refundable and non-refundable credits. Income that counts as Canadian-sourced includes:
- Employment income earned in Canada
- Business or professional income earned in Canada
- Certain investment and rental income from Canadian properties
If less than 90% of your income is from Canadian sources, the available tax credits may be reduced proportionally, affecting your overall tax liability.
Who Does the 90% Rule Apply To?
The 90% rule is particularly relevant for:
- New residents who have recently moved to Canada
- Part-year residents who earned income in multiple countries
- Non-residents who still have Canadian income
For example, a U.S. citizen moving to Canada mid-year who earns income both in Canada and the U.S. must calculate the percentage of Canadian-sourced income to determine eligibility for Canadian tax credits.
How It Affects Tax Credits and Benefits
The rule impacts both federal and provincial tax calculations:
- Full credits are applied if 90% or more of income is Canadian-sourced
- Partial credits are applied if Canadian income is below 90%
- No credits may apply if Canadian income is minimal
By following the 90% rule, taxpayers ensure they are claiming credits correctly and avoid issues with the Canada Revenue Agency (CRA).
Why the Rule Matters
The 90% rule helps the CRA differentiate between taxpayers who are primarily earning in Canada and those whose income is mostly foreign-sourced. It ensures fairness in distributing credits and benefits, while preventing misuse by individuals who may not have significant Canadian economic ties.
If your income comes from both Canada and abroad — and you’re unsure how the 90% rule affects your credits — Dimov Tax can calculate your Canadian-source percentage & optimize your claims and keep you fully compliant with both CRA and IRS rules. Reach out to us today for full compliance.