If you earned foreign non-business income (from employment, interest and/or dividends, or pension) or paid tax on this income to a foreign government, you can avoid paying full tax to both Canada and the source country by claiming the foreign tax credit (provided Canada has a tax treaty with this country).
To claim this tax credit, you must have been a resident of Canada on:
- December 31 of the current tax year
- The last day of your residence in Canada (if you stopped living in Canada during the tax year) or
- The date on which you passed away
Generally, the foreign tax credit you can claim for each foreign country is the lower of the following amounts:
- The foreign income tax you paid or
- The tax otherwise due in Canada on your net income from that country.
A payment of income tax qualifies for the tax credit if:
- The payment was made to the government of a foreign country or to the government of a state, province or other political subdivision of a foreign country
- It isn’t conditional on the availability of a foreign tax credit in Canada or a deduction for a dividend received from a foreign affiliate and
- It is an income or profits tax
- Be sure to keep all your supporting documents in case the Canada Revenue Agency (CRA) or Revenu Québec asks to see them. If you paid foreign income tax in the U.S., you’ll want to retain a copy of your W-2 information slip, your Form 1040 from the Internal Revenue Service (IRS), and any other documents supporting your claim.
- If you have foreign employment, pension, or investment income from more than three countries, you won’t be able to NETFILE your return. Instead, you’ll need to print and mail-in the paper version of your return to the CRA and/or Revenu Québec.
Do I report these amounts in Canadian dollars?
Yes. Before entering these amounts into your return, you’ll need to convert both the foreign income you earned and the foreign income tax you paid into Canadian dollars. You can use the exchange rate posted by the Bank of Canada that was in effect on the day that you received these amounts. If you received foreign income at different times in the year, you can use the average annual rate on Bank of Canada’s website.
Foreign pension income
If you paid income tax to a foreign government on your foreign pension income, you can claim the foreign tax credit. Don’t subtract the taxes you paid from your income when you report it on your Canadian tax return.
If Canada or Québec has a tax treaty with the country the pension is from, you can claim a deduction for the portion of the pension that is tax-free.
The two common types of foreign pension income are the:
If you received amounts from IRA or converted it to Roth IRA, you’ll need to contact the CRA or Revenu Québec (if you are a Québec resident).
Foreign employment income
Foreign employment income is the amount you earned outside of Canada from a foreign employer. If you paid income tax to a foreign country, do not reduce it from your foreign income when reporting it on your Canadian tax return.
Note: If the amount on your United States W-2 slip has been reduced by contributions to a "401(k), 457 or 403(b) plan, US Medicare and Federal Insurance Contributions Act (FICA)", add these contributions to your foreign employment income. You might be able to deduct these contributions on your return.
Foreign investment income
Your foreign investment income includes interest and dividends that you received from foreign investments (e.g. shares and bonds). When you report your income on your tax return, do not subtract the foreign taxes that you paid on your foreign investment income.
Note: You can’t claim the dividend tax credit for any foreign dividends you received during the year.
You’ll need to contact the CRA if any of the following applies to you to find out what amounts (if any) need to be reported as income on your return:
- You own an interest in a foreign investment entity
- You own an interest in a foreign insurance policy
- As a shareholder of a foreign corporation, you received certain shares in another foreign corporation
Foreign capital gains
If you sold your foreign investment property (such as a building, house, or land), you’ll need to indicate in which country the property is located so that your capital gain* or loss can be correctly allocated. In determining the location where you sold your property (land and buildings), the major factor to consider is the geographic location of the property. For example, in the case of stocks and bonds, the location of the property would be the securities or stock exchange in which it is sold, regardless of the location of the security issuer’s transfer office. If you didn’t sell your stocks or bonds through a securities or stock exchange, consider the following factors to determine the location:
- the location, residence, or place of business of:
- the issuer
- the issuer’s transfer office
- the owner of the security or
- the owner’s selling agent
- where the title is transferred
- where the contract is negotiated, signed, and executed
- where the shares are located
- where payment is made and
- any relevant provisions in the governing corporate statutes
*A capital gain is the profit you received from the sale of property or an investment. For tax purposes, you might have a capital gain even if you exchanged or gifted (considered to have sold) the property or investment. Refer to the CRA website for more information.
What is a tax treaty?
Canada has tax treaties in place with many countries to avoid double taxation and to prevent tax evasion. Tax treaties are agreements with other countries that:
- define which taxes are covered and who is a resident and eligible to the benefits of that country
- define when the income of individuals resident in one country will be taxed in the other country, including salary, self-employment, pension, and other income
- often reduce the amounts of tax to be withheld from interest, dividends, and royalties paid by a resident of one country to residents of the other country
- might provide for exemption of certain types of organizations or individuals
Refer to the CRA website to see which tax treaties are currently in place.
Where do I claim this?
Follow these steps in H&R Block’s 2017 tax software:
- Under the PREPARE tab, click the OTHER icon. You’ll find yourself here:
- Under the FOREIGN INCOME heading, select the checkbox labelled Foreign tax credit (T2209 & TP-772-V) and click Continue.
- When you reach the Foreign tax credit (T2209 & TP-772-V) page, enter your information in the tax software.
Note: You can also find the Foreign tax credit page under the MOST POPULAR icon on the PREPARE tab.