Canadian expats in Mexico are generally required to pay income tax, value-added tax (VAT), capital gains tax, annual property tax, and property transfer tax. Those working as employees must also contribute to social security. The amount owed depends on factors like residency status, income level, and the type of transactions or assets involved, with some exemptions and reduced rates available under the Canada-Mexico tax treaty.

Mexico’s warm climate, vibrant culture, and affordable cost of living attract many Canadians each year, but understanding tax obligations is essential before relocating. Knowing which taxes apply, how residency is determined, and what rates or exemptions may affect you can help ensure compliance and avoid unexpected financial surprises.

This article offers a general overview and in no way constitutes legal or tax advice. For tax matters, a qualified tax professional is to be trusted for personalized advice, just like we are the name you can trust for sound advice on matters related to health insurance in Mexico.

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Main Taxes Canadian Expats Owe in Mexico

Income tax, value-added tax (VAT), capital gains tax, annual property tax, and property transfer tax are the key taxes that Canadian expats in Mexico have to pay. Moreover, Canadian expats who work have to make social security contributions, which works like a tax even though it is not called one.

Income Tax Rules for Canadian Expats

Canadian expats living in Mexico are subject to income tax based on their residency status and income level. The tax rates and brackets vary depending on whether they are considered residents or non-residents for tax purposes.

Tax Residency Rules for Canadians in Mexico

According to the Federal Tax Code, an individual is considered a resident for tax purposes in Mexico when they establish a home within the country. If the individual has a home in another country, their residency is determined based on where their center of vital interests is located.

Under Mexican tax law, an individual’s center of vital interests is considered to be in Mexico if either:

• More than 50% of their income comes from Mexican sources in a calendar year, or
• Mexico is the main location for their professional activities.

For Canadian expats who are residents of Mexico for tax purposes:

• They are subject to graduated tax rates and brackets that apply to all Mexicans.
• Their Mexican income tax is calculated based on their worldwide income.
• The tax brackets are based on the concept of a “Family Unit” (Unidad Familiar), which includes the taxpayer, their spouse, and dependent children under 18 who rely on them financially.

The income tax payable by a Canadian expat can be worked out as follows:

Tax Rules for Non-Resident Canadians in Mexico

Non-residents of Mexico for tax purposes are taxed only on their income derived from Mexican sources. The income tax payable by a Canadian expat who is a non-resident of Mexico for tax purposes can be calculated as follows:

The tax brackets for Mexican tax are subject to change each year, so staying up-to-date with any changes is crucial for accurate tax calculation and compliance with the law.

Canadian expats can minimize their tax liability, such as by taking advantage of deductions and credits, and utilizing the tax treaty between Mexico and Canada. Thorough records and receipts should be kept to benefit from these deductions and credits.

Further Reading: Income Tax in Mexico for Canadian Expats

Understanding Mexico’s Value-Added Tax (VAT)

The VAT in Mexico is an indirect tax, meaning it is charged on consumption rather than wealth or income. It is generally levied at a rate of 16% on the value of goods and services, hence the term “value-added tax”.

However, there are instances where specific products or services may have different VAT rates, such as 8%. Some goods and services may even be exempt from VAT.

Who Is Required to Pay VAT in Mexico

Almost all commercial activities within Mexican territory are subject to VAT. Whether you are a company or an individual engaged in selling goods, leasing goods, providing independent services, or importing products or services, you are generally required to charge and pay VAT.

Businesses or individuals conducting these activities are responsible for collecting VAT from their customers and remitting it to the tax authorities. This ensures that VAT is effectively collected throughout the supply chain.

VAT Exemptions in Mexico

While most goods and services are subject to VAT in Mexico, there are certain exemptions aimed at ensuring affordability and accessibility for essential goods and services, including:

• Basic foodstuffs
• Certain medicines
• Specific education services
• Some financial transactions

Capital Gains Tax Rules for Canadians in Mexico

Under Mexican income tax law, income derived from the sale of shares by Canadian expats who are non-residents of Mexico for tax purposes is considered to be of Mexican source, and therefore subject to taxation in Mexico. There are two main scenarios when this tax is applicable:

• When the shares are issued by a Mexican company, or
• When the shares derive more than 50% of their accounting value from immovable property located in Mexico.

Generally, capital gains derived by non-residents for tax purposes are subject to a tax rate of 25% on the gross proceeds, with no deductions allowed. However, an optional ‘net basis’ regime exists, allowing taxpayers to apply for a 35% tax rate on the net gain.

Who Is Liable for Capital Gains Tax

The responsibility for withholding and remitting the capital gains tax differs depending on the tax residency status of the purchaser:

• If the purchaser is a Mexican tax resident or a non-resident for taxes with a permanent establishment in Mexico, they are required to withhold the tax and remit it to the tax authorities.
• If the purchaser is a non-resident for taxes without a permanent establishment in Mexico, the seller is responsible for directly paying the tax through a return filed within 15 business days of receiving the proceeds.

Capital Gains Tax Exemptions in Mexico

Certain exemptions may apply to the capital gains tax in Mexico. For instance, the law provides for a reduced tax rate of 10% or exemption for non-residents for tax purposes selling public stock listed on recognized markets, subject to specific requirements.

Moreover, the tax treaty between Canada and Mexico allows for reduced tax rates and access to the net basis regime for Canadian expats who are Mexican non-residents for tax purposes, provided they meet the relevant residency and legal representative appointment requirements.

Annual Property Tax for Canadian Property Owners

For Canadian expats who own property or land in Mexico, an annual tax is required to be paid, which is levied at the municipal level. This tax is not substantial (approximately 1%), and its rate varies between states and is based on the values indicated in the property tax records.

Property Transfer Tax in Mexico

When purchasing or inheriting property in Mexico, the local property transfer tax becomes payable. This municipal-level tax is directly based on the value of the property as recorded in the municipal land registry.

The rate of this tax varies depending on the property’s location. Typically, the tax percentage falls within the range of 2% to 5%. The responsibility of collecting and remitting this tax to the government lies with the notary public engaged for the transaction.

Social Security Obligations for Canadian Expats

Canadian expats employed in Mexico are required to pay social security contributions. As an expat, if you have formal employment in Mexico, your employer will deduct the social security contribution from your salary and handle the remittance process on your behalf.

Self-employed Canadians in Mexico, including freelancers and independent contractors, are also obligated to make social security contributions. In such cases, the individual is responsible for calculating and remitting their contributions directly to the relevant institution.

While social security contributions are generally mandatory for most Canadians employed in Mexico, some exemptions may apply. These exemptions are typically specific to certain categories of individuals or situations. Here are some examples:

• Canadian Expats: Under the tax treaty between Canada and Mexico, Canadian expats may be exempt from paying social security contributions in Mexico if they continue to contribute to the social security system in Canada.
• People on Short-term Assignments: Canadian expats on assignments in Mexico lasting less than one year may be exempt from social security contributions in Mexico, if they maintain their employment with their employer in Canada and continue to contribute to the social security system of Canada.
• Canadian Diplomatic Personnel: Embassy staff, consular officers, and other diplomatic officers of Canada may be exempt from social security contributions in Mexico. However, this exemption is subject to specific regulations and should be confirmed with the relevant authorities.

While this article contains a comprehensive overview, it is not intended to provide professional tax advice. Tax professionals or qualified accountants should be approached for personalized guidance to make sure relevant laws are complied with and tax strategies are optimized.

Frequently Asked Questions

What are the key taxes that Canadian expats in Mexico have to pay?

Income tax, value-added tax (VAT), capital gains tax, annual property tax, and property transfer tax are the key taxes that Canadian expats in Mexico have to pay. Moreover, employed Canadian expats have to make social security contributions, which works just like a tax.

How to tell if a Canadian expat in Mexico is a resident for tax purposes there?

Under Mexican tax law, an individual is a resident for tax purposes if they establish a home in the country. If the individual has a home in another country, their tax residency depends on where their center of vital interests is.

Does Canada have a bilateral tax treaty with Mexico?

Canada and Mexico have signed a tax treaty for preventing double taxation and evasion of taxes on income. This treaty applies to persons who are residents in one or both of the countries.

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Conclusion

In this article, we introduced the key types of taxes for Canadian expats in Mexico, and explained under what circumstances Canadians in Mexico must make social security contributions. We believe you are now reasonably well informed about the Mexican tax system as it relates to Canadian expats.

On top of learning about the Mexican tax system, it’s equally important to secure sufficient travel insurance, expat health insurance, or international health insurance from among the top insurers in Mexico to sufficiently protect yourself and give yourself peace of mind.

It is always advisable to secure insurance through a reputable brokerage like Pacific Prime. Our 20+ years of experience and intimate familiarity with insurance products allow us to find the best plan for you that also offers the best value for money.

And for the cherry on the cake, you can have our advice and support at no extra cost than going directly to an insurer! This support is most valuable when our client makes a claim because we will be there to help level the playing field and secure a fair outcome for our client.

So, contact us today for a consultation or quote, or a FREE, no-obligation plan comparison!

If you are considering relocating to Mexico, you may also be interested in learning about the cost of living in Mexico as compared to in Canada. And if you have friends in America also thinking about moving to Mexico, they may be wondering whether they can carry their Medicare coverage with them.

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Martin Lee

Content Creator at Pacific Prime

Martin is a writer and translator with over 10 years of experience. He writes articles and blog posts, creates infographics and videos, translates between Chinese and English, and more. Skilled at explaining complicated concepts in layman’s terms, Martin believes the gold standard of translation is attained when the translated text is not only accurate, but also reads like an original text. Martin holds a degree in Economics from the University of London, UK.

Since joining Pacific Prime, Martin has become even more aware of the gap between the true value of insurance products and most people’s appreciation of it, and developed a passion for demystifying and simplifying matters, so that more people get the protection they need at a cost they can easily afford.

In his free time, Martin attends concerts of various genres, and plays the violin with piano accompaniment he pre-recorded himself or played live by his niece.

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