Income Tax Act s. 20(11), 20(12), s. 126(1), s.
126(9)
Foreign non-business income tax
and foreign tax credit
Canadian residents who have had withholding taxes
deducted from foreign non-business income may
claim a foreign tax credit. This should not be
confused with the separate calculation for a foreign tax
credit for business income.
The calculation of this non-refundable
tax credit may not be automatically done by your tax software, if you have foreign
non-business income which is not
reported on a T-slip. These amounts may have
to be manually typed into a worksheet in the software.
If an individual has anything more than withholding taxes
from foreign dividends, the
foreign tax credit can be a complex calculation.
It becomes more complex when the individual wants to deduct
a portion of the foreign tax from income as well as using
the foreign tax credit, because the portion deducted
from income must be excluded from the foreign taxes in the
tax credit calculation. A detailed description of the
foreign tax credit calculation can be found in the Canada Revenue Agency (CRA)
bulletin IT-270,
Foreign Tax Credit.
The foreign non-business tax credit is
calculated separately for each foreign
country. However, if the total foreign taxes are less
than $200, CRA will usually allow a single calculation.
When the
tax credit has to be calculated separately for more than one country,
the tax return is no longer eligible for NetFile.
The calculation for the tax credit uses the total foreign
non-business income, such as pension income, employment income, director's
fees, commissions, interest, dividends, and some taxable capital
gains in excess of allowable capital losses. Capital gains and
losses on publicly traded securities are generally considered foreign
income if the securities were traded on a foreign stock
exchange. However, if
any of the foreign income is exempt from income or profits tax in the foreign
country due to a tax treaty with that country, then it is not
included in the calculation of the foreign tax credit. Foreign non-business income is not reduced
by net capital losses carried forward from a previous year.
When Canadians trade securities on US stock exchanges, the
capital gains are exempt from tax in the US due to the tax treaty, so there
should be no withholding tax deducted from proceeds of sale, and the gains from
these sales should not be included in the foreign tax credit calculation.
If the account is actually held with a brokerage in the US, an IRS W-8Ben form
must be filed with them to ensure there are no withholding taxes on sales
proceeds. If your trade confirmation for US securities shows a small
amount titled "US tax", usually for a fraction of 1%, this amount is
actual a securities exchange fee, not withholding tax.
When foreign property income (other than from real
property) has had withholding tax in excess of 15% deducted,
the excess can be deducted from income on line 232 of the
personal tax
return, "Other deductions", as a s. 20(11)
deduction. Only the 15% tax amount is included in
calculating the foreign tax credit, and the excess reduces
the amount of foreign non-business income.
If the federal foreign tax
credit is less than the foreign tax you paid, you may also
be able to claim a provincial or territorial tax
credit. For territories, and provinces other than
Quebec, form T2036
Provincial Foreign Tax Credit is used.
The foreign taxes are often not
completely recovered by the foreign tax credits.
Non-business foreign taxes which are not recovered as a tax
credit may be deducted from income on line 232 of the
personal tax
return, "Other deductions", as a s. 20(12)
deduction. When this is
done, the foreign tax credit calculation is then revised, by
reducing both foreign non-business income and foreign tax
paid by the amount of foreign tax deducted on line 232.
