Foreign Income on a Canadian Return and the Tax Credit

Is foreign income taxable if I never bring the money to Canada?

Canadian tax residents generally report worldwide income, including income kept in an account abroad. Moving the money to Canada does not determine whether the income is taxable; tax residence, the income type and any treaty rule do (CRA: residence status).

Report the gross income before foreign tax withheld. Claim a foreign tax credit separately if the tax qualifies. A treaty may instead make some income exempt in Canada: report it, then deduct the exempt part on line 25600. Do not include that part or its foreign tax in the credit calculation (CRA: line 25600; CRA: foreign tax credit).

If you became a Canadian resident during the year, see your first year as a Canadian tax resident for the part-year rule.

Where does each type of foreign income go on my return?

Reportable foreign income goes on the line for its type, after conversion to Canadian dollars. Foreign tax withheld is recorded for the credit calculation; it does not reduce the income reported (CRA: foreign tax credit).

Foreign dividends do not qualify for Canada's dividend tax credit (CRA: line 12100). For rent or a sale of real estate abroad, see property outside Canada; US rental property has its own filing rules.

For the foreign tax credit, a foreign payer does not make wages or service income foreign-source. Employment income generally comes from where you perform the work; for a service business, where you perform the services is a key factor. Check foreign tax withheld on work done in Canada under the applicable treaty before including it in a Canadian credit (CRA: foreign tax credit folio, paragraphs 1.53 and 1.57).

Which exchange rate do I use?

Convert foreign income and foreign tax to Canadian dollars using the Bank of Canada rate for the day the amount arose. For regular payments at different times, the CRA permits an appropriate average rate; use a consistent method and keep the rate calculation (CRA: foreign tax credit; CRA: currency folio).

If the Bank of Canada ordinarily quotes a currency but has no rate for that day, use the closest preceding quoted day. If it does not quote the currency, use an alternate rate only if it meets the CRA's listed conditions, and keep the source. An average can be unsuitable when exchange rates move sharply. For foreign tax withheld on investment income, the CRA says the income's conversion rate should generally also be used for the tax (CRA: currency folio; CRA: foreign tax credit folio).

For a sale in foreign currency, convert the sale proceeds at the sale-date rate, the cost at the acquisition-date rate, and selling expenses when incurred (CRA: capital gains and losses).

How do Forms T2209 and T2036 reduce double tax?

Form T2209 calculates the federal credit, usually limited to the lesser of eligible foreign income tax paid and Canadian federal tax attributable to net income from that country. Calculate business and non-business tax separately. If tax came from several countries, follow T2209's country worksheet instructions and send one T2209 with the total (CRA: T2209 form; CRA: foreign tax credit folio).

The federal and provincial calculations are separate. Form T2036 is specifically for non-business foreign tax, so foreign business income needs the applicable provincial rules checked separately. Manitoba residents who owe minimum tax cannot claim the provincial credit (CRA: T2036 form). Tax paid by someone else, a property tax or a refundable overpayment is generally not an eligible foreign income tax (CRA: foreign tax credit folio).

Why can't I credit all the tax withheld on interest or dividends?

For an individual, foreign income tax on interest, dividends and other property income other than real estate is generally creditable only up to 15% of the gross income. Tax above that limit is generally an income deduction under section 20(11), which reduces taxable income rather than Canadian tax dollar for dollar (CRA: foreign tax credit folio, paragraph 1.22).

Check the applicable treaty before claiming even the capped amount. If withholding exceeds the treaty rate, the excess is not an eligible Canadian foreign tax credit; the CRA says to seek a refund from the foreign tax authority (CRA: foreign tax credit folio, paragraph 1.35).

Foreign tax on income earned inside a TFSA or RRSP is also excluded from the foreign tax credit calculation (CRA: foreign tax credit folio, paragraph 1.69).

What if foreign tax is higher than Canadian tax on that income?

The foreign tax credit cannot exceed the Canadian tax attributable to the matching foreign income. Seek a foreign refund for tax above a treaty limit; for eligible tax beyond the federal credit, calculate any provincial or Quebec credit, then check available deductions. Unused non-business foreign tax cannot be carried to another year; an income deduction under section 20(12) may be available for some uncredited tax on business or property income (CRA: foreign tax credit folio, paragraphs 1.24 and 1.35; Income Tax Act, section 20).

Unused business foreign tax credit can, under the statutory rules, be carried back three tax years or forward ten for the same country. It cannot simply be moved to another country or counted twice (CRA: foreign tax credit folio, paragraphs 1.98–1.102). If the two countries tax an amount in different years, the credit may also fail to line up; that timing needs a separate review.

Is a foreign pension taxable in Canada?

A Canadian resident generally reports the gross foreign pension in Canadian dollars, usually on line 11500. A treaty may exempt some or all of it in Canada, in which case the treaty-exempt part can be deducted on line 25600. Foreign tax on a taxable pension may qualify for a credit; do not subtract the withholding from the pension amount (CRA: line 11500).

The exact result depends on the payment and treaty. Regular pensions, lump sums, annuities and social security can have different rules. If a foreign pension qualifies for income splitting, both spouses must sign Form T1032 by their respective return filing due dates; related foreign tax can split in the same proportion. The CRA may accept a late election requested within three calendar years after the filing due date (CRA: pension splitting; CRA: T2209 form). For US Social Security, see Americans living in Canada; for US retirement accounts, see US retirement accounts in Canada.

What do the China, Hong Kong and Taiwan agreements change?

Canada lists separate tax agreements with China and Hong Kong and a tax arrangement with Taiwan. The applicable text depends on where the income arises and what kind of payment it is; none makes every payment from that place automatically tax-free in Canada (Department of Finance: agreements in force).

For dividends and interest, check Article 10 and Article 11 of the China and Hong Kong agreements, or Sections 10 and 11 of the Taiwan arrangement, before calculating a credit. These provisions can limit source-country tax; the Hong Kong agreement can exempt some arm's-length interest from tax at source (China agreement; Hong Kong agreement; Taiwan arrangement).

Where a treaty makes income exempt in Canada, report the income and claim the line 25600 deduction, then exclude it and its tax from the foreign tax credit calculation (CRA: line 25600; CRA: line 40500).

What proof of foreign tax paid should I keep?

Keep the income statement or foreign slip, foreign return and assessment, proof the tax was paid or withheld, and your Canadian-dollar conversion. A withholding slip is usually enough when the payer remitted the tax; in other cases the CRA generally expects the foreign return plus receipts or other payment proof (CRA: foreign tax credit folio, paragraph 1.45).

For electronic filing, keep the documents for a CRA request. For a paper return, attach T2209, official receipts and a calculation note. The CRA lists extra US records when US tax was paid. A document in another language needs the original and an acceptable English or French translation (CRA: line 40500). If the foreign tax is later refunded or reassessed, update the Canadian claim.

I live in Quebec: how do I claim the credit?

Quebec residents use federal Form T2209 for the federal credit and Revenu Québec Form TP-772-V for the Quebec credit. They do not use federal Form T2036 for the provincial calculation (CRA: line 40500; Revenu Québec: foreign tax credit).

Revenu Québec says its credit can apply to qualifying foreign tax on business or non-business income if you were resident in Quebec at year-end, or when you ceased to reside in Canada. Complete and enclose one TP-772-V per country; enter the credit on line 409 of Schedule E (Revenu Québec: TP-772-V).

Example

Illustrative Canadian dollars only. A Canadian resident receives C$10,000 of foreign dividends, with C$1,000 of foreign income tax withheld. They report C$10,000 on line 12100, not the C$9,000 cash received. The tax is below the property-income cap. Suppose their T2209 calculation shows C$800 of Canadian federal tax attributable to that country's net non-business income. The federal credit is C$800, leaving C$200 of eligible tax for T2036. If provincial tax attributable to that income is at least C$200, T2036 gives a C$200 credit and combined credits equal C$1,000; Quebec residents instead calculate their separate credit on TP-772-V. Any remaining non-business tax is not automatically refundable or transferable to another year. If withholding exceeded a treaty limit, exclude the excess from the Canadian credit and seek its refund abroad; calculate the Canadian credit using no more than the treaty-permitted tax.

Different for you?

• Foreign rental income or a property sale: see property outside Canada; US rental property has additional US filings.
• Foreign accounts or investments: income reporting and foreign property reporting are separate duties.
• You moved to Canada during the year: see your first year as a Canadian tax resident.
• You work for a US employer or across the border: see working across the border.
• You receive money from a US retirement account: see US retirement accounts in Canada.
• You missed foreign income on past returns: see unreported income and voluntary disclosure.
• Several countries, foreign business income, a pension lump sum or substantial withholding: the country, year, treaty and credit limits need a joined calculation. Bring the foreign slips, returns, assessments, payment proof and exchange-rate record to tax preparation.