Owning a Company Abroad While Living in Canada

Does Canada tax my overseas company's profit before I withdraw it?

Canada generally taxes a Canadian tax resident on dividends received from a non-resident company, not on every dollar of its undistributed active business profit. The major exception is foreign accrual property income (FAPI) of a controlled foreign affiliate, which can enter the Canadian shareholder's income before any cash is paid (Income Tax Act, sections 90 and 91).

If your company is a US LLC, see Canadian owner of a US LLC; if it is a US corporation, see moving across the border with a company.

This assumes the overseas entity is a corporation for Canadian tax purposes and the owner is resident in Canada. The first question after a move is where the company is actually managed, not when money is withdrawn.

When is the company my foreign affiliate or controlled foreign affiliate?

A non-resident corporation is generally your foreign affiliate when your equity percentage is at least 1% and your percentage plus those of related persons is at least 10%. A controlled foreign affiliate is one you control directly or would control under the Act's share-aggregation test (Income Tax Act, section 95(1)).

The control test counts more than shares registered in your own name. It can aggregate holdings of people who do not deal at arm's length with you, and, under a separate rule, holdings of a small group of other Canadian-resident shareholders and people who do not deal at arm's length with them. Voting rights, share classes, indirect ownership and changes during the year matter (section 95(1)).

Form T1134 can be required for a foreign affiliate whether controlled or not (section 233.4). An individual who first became resident in Canada during the year has a first-year exception to T1134, but that exception does not itself exempt income from Canadian tax; it does not cover a former resident returning to Canada (section 233.7). For the filing test, due date and method, see foreign property and affiliate reporting.

What is FAPI, and when is profit active business income?

FAPI is a statutory calculation that generally captures a foreign affiliate's income from property, certain non-active businesses and certain gains. Ordinary profit from an active business carried on abroad is generally outside that calculation (Income Tax Act, section 95(1)).

The service rule in section 95(2)(b) can apply even when customers are abroad: work performed by the Canadian shareholder, wherever performed, or certain related people may turn the relevant income into FAPI. Classifying an entire company as active or passive from its name or bank balance is unsafe; identify each income stream and who performed the work. The section 91 participating percentage is nil if the affiliate's FAPI for its year is $5,000 or less (section 95(1)).

If FAPI was included and the affiliate later pays a dividend from that taxed amount, section 91 provides a deduction mechanism to address a second inclusion. The amount requires tracking the prior inclusion and share basis; a later payment should not simply be ignored (Income Tax Act, section 91(5)).

How do I report a dividend from my foreign company?

An individual resident in Canada generally includes a dividend from a non-resident corporation in income when received, reports the gross amount before foreign withholding in Canadian dollars on line 12100, and cannot claim the Canadian dividend tax credit on it (section 90; CRA: line 12100).

Keep the dividend statement, payment date, exchange-rate calculation and proof of tax withheld. A withdrawal may be a dividend, salary, loan repayment, shareholder loan or benefit. A pro rata payment from a foreign affiliate is deemed a dividend even if labelled a return of capital, except on liquidation or share redemption or cancellation. A paid-up capital reduction can also qualify as a return of capital if the shareholder elects in writing by the filing due date for the year in which the affiliate's distribution year ends; connected shareholders may need to elect jointly, by their earliest applicable filing due date (section 90(2) and (3); Regulation 5911(6)). A new loan or benefit can also be taxable (section 15). Salary for work done in Canada has separate rules; see remote work for employers and clients abroad.

What changes if my Canadian corporation owns the overseas company?

If your Canadian corporation owns the foreign affiliate, the corporation normally includes any FAPI, reports its foreign dividend, and files T1134 when required. Section 113 may let it deduct some or all of the dividend based on tracked pools of earnings and taxes called surplus accounts (Income Tax Act, sections 91 and 113). A later payment from your Canadian corporation to you is a separate transaction.

For T1134, an individual's ownership through a Canadian corporation is not counted as an indirect foreign-affiliate interest (section 233.4(2)(a); CRA: foreign affiliate information returns). Before taking a dividend, gather the affiliate's annual accounts, foreign tax assessments, dividend history and surplus calculations. The amount of foreign corporate tax does not by itself tell you the Canadian deduction.

Could running my overseas company from Canada make it owe a Canadian T2?

Yes. Corporate residence under common law follows where central management and control is actually exercised, which can be Canada even when the company was incorporated abroad. Board-meeting location is evidence, but actual decision-making controls the factual question. An applicable treaty can instead deem a dual-resident company non-resident in Canada (section 250(5); CRA: residency of a corporation).

Review who approves budgets, contracts, financing, distributions and strategy; where they make those decisions; and whether directors abroad genuinely decide or merely sign documents. If the company is resident in Canada, it generally files a T2 even with no tax payable (CRA: who files a T2). A company first becoming resident when you move, while still incorporated abroad, generally cannot be a Canadian-controlled private corporation or claim the small business deduction (sections 89(1) and 125). A non-resident company can also have a T2 filing duty if it carries on business in Canada. Residence and treaty status need review before treating the company as a foreign affiliate.

Does family-held control change the tax result?

Yes. A small personal stake can meet the foreign-affiliate test once related persons' stakes are counted, and family or other non-arm's-length holdings can make the company a controlled foreign affiliate under the statutory test (Income Tax Act, section 95(1)).

Map each person's residence, relationship, direct and indirect equity, voting rights and ownership dates. Related and non-arm's-length holders count even if they live abroad; only the separate small-group control test requires Canadian-resident holders. Check these for each Canadian shareholder separately: a family member's percentage is relevant to status, while each person's actual participating percentage governs their own FAPI inclusion (sections 91(1) and 95(1)). Family control does not automatically put the whole company's profit on one person's return.

I missed T1134 filings. What should I review first?

First establish which years actually required T1134, then reconcile the company's income, dividends and residence for those years. A missing information return may coincide with missed FAPI or dividend income; the correction is more than sending a blank form (Income Tax Act, sections 91 and 233.4). Foreign-affiliate amounts can be reassessed for three years beyond the normal period; negligent or fraudulent misrepresentation can permit reassessment at any time (section 152(4)).

T1134 is due 10 months after the reporting entity's tax year (section 233.4(4)). The ordinary late-return penalty is $25 a day, subject to a $100 minimum and $2,500 maximum. Knowing or grossly negligent non-filing can cost $500 a month, up to $12,000, less the ordinary penalty; after a CRA demand it can be $1,000 a month, up to $24,000 (section 162(10)). If non-filing reaches a 25th calendar month, counting the month T1134 was due, an additional penalty may be based on 5% of the greatest cost amount of your shares and debt in that affiliate during the year, reduced by earlier penalties (section 162(10.1)). A knowing or grossly negligent false statement or omission in a filed T1134 can cost at least $24,000 (section 163(2.4)). Check the precise provision and facts before estimating a liability. For correcting returns or considering a disclosure, see reviews, audits and voluntary disclosure.

T1134 reports foreign affiliates; T1135 concerns specified foreign property. Shares or debt of a non-resident corporation that is your foreign affiliate are excluded from specified foreign property. If the company is not your foreign affiliate, its shares and debt can instead count toward T1135's $100,000 total-cost threshold, subject to the first-year resident exception (sections 233.3 and 233.7; foreign property and affiliate reporting).

Can I credit foreign corporate tax or dividend withholding?

Foreign tax withheld from your own dividend may support a personal foreign tax credit, subject to Canada's country-by-country limits. Tax legally paid by the overseas company on its profit is generally the company's tax, not a personal tax credit for its shareholder (CRA: foreign tax credit folio).

Keep separate proof of the company's tax and the tax withheld from your dividend. A tax refund available abroad, a treaty limit, or income taxed in a different year can change the credit; see foreign income on a Canadian return for the personal calculation.

Example

Illustrative amounts are in Canadian dollars. A Canadian resident owns all the shares of a non-resident company that is genuinely managed abroad. The company earns $100,000 from an operating business abroad and $10,000 in net investment income during its year. It pays the owner a $30,000 dividend from the operating profit, with $3,000 withheld abroad.

Assume the $10,000 net investment income is FAPI with no adjustment. The $100,000 operating profit is not added to the owner's return merely because the company earned it. The owner includes $10,000 of FAPI for the affiliate's year and reports the $30,000 gross foreign dividend on line 12100: $40,000 of income before deductions or foreign tax credits. The $3,000 withheld is tested separately for a personal foreign tax credit; tax paid by the company is not automatically the owner's credit. If the owner's actual decisions are made from Canada, resolve company residence first.

Different for you?

• You moved to Canada this year: the first-year T1134 exception and the start of Canadian income reporting need separate checks. See first year as a Canadian tax resident.
• You need the T1134 or T1135 filing rules: see foreign property and affiliate reporting.
• You missed several years or are weighing a disclosure: see reviews, audits and voluntary disclosure.
• You do the company's client work yourself, wherever you are, or its board decisions happen in Canada: service income, corporate residence and T2 filing may all change. See corporate tax.
• A Canadian corporation owns the affiliate and plans a dividend: surplus and foreign-tax records need review before the payment. See corporate tax.
• Your company is a US LLC or US corporation: see Canadian owner of a US LLC or moving across the border with a company.