Foreign tax credit

Who can claim it and how it is limited

Generally, you can claim the credit if you were a resident of Canada at any time in the year and included foreign-source income on your Canadian return that you paid foreign business or non-business income tax on. A tax treaty may affect whether you qualify, because treaty-exempt income is handled separately.

The credit is capped. In most cases, for each country, you claim whichever is less: the foreign tax you actually paid, or the Canadian tax otherwise payable on your net income from that country. The federal credit is calculated on Form T2209 and entered on line 40500. Residents of provinces other than Quebec also complete Form T2036 for the provincial credit, which carries to the Ontario form ON428.

An illustrative example

Suppose, with round numbers, you report $10,000 of foreign dividends and the other country withheld $1,500. If the Canadian tax on that income works out to $2,500, the limit is not reached, so the foreign tax of $1,500 can generally be credited and you pay the remaining Canadian tax. If the foreign country had instead withheld $3,500, the credit would be limited to the Canadian tax on that income, and the extra is not simply refunded by Canada. These figures are illustrative only and do not describe a real calculation.

Details that trip people up

Foreign income and foreign tax must be converted to Canadian dollars. The CRA says to use the Bank of Canada rate on the day the amounts arose, or the average annual rate when you received a monthly pension or several payments at different times in the year.

Do not claim the credit on income that a treaty makes exempt in Canada and that you deducted on line 25600. Also note that a credit does not remove the need to report the income. For less routine situations the CRA points to Income Tax Folio S5-F2-C1, Foreign Tax Credit.

Records and what to discuss with your accountant

Keep official receipts or statements showing the foreign tax paid. If you filed on paper, the CRA asks you to attach Form T2209, the receipts and a note explaining your calculation. For United States tax, it also asks for items such as your W-2, your U.S. 1040 return and your U.S. tax account transcript. Documents in another language need an acceptable translation.

Ask your accountant which country each amount belongs to, whether a treaty exempts any of it, and whether the credit is the right relief. Bring foreign slips, exchange rates used and any foreign assessment.