If you earned foreign business income from a business located outside of Canada and/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 also 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
- 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
Generally, the foreign tax credit you can claim for each foreign country is the lower of the following amounts:
- The foreign income tax you actually paid or
- The tax otherwise due in Canada on your net income from that country
- 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 paid foreign business income tax to 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.
Is there any foreign business income that’s not eligible for this tax credit?
Yes. Any foreign business income that falls into one of the following categories doesn’t qualify for this tax credit:
- Foreign business income that’s tax-exempt in Québec or in Canada under a tax agreement
- Foreign business income that’s tax-exempt from foreign income tax or
- Foreign business income that’s been allocated to a beneficiary (like a trust)
If you paid tax on foreign business income, the portion of the tax that can’t be deducted as a foreign tax credit might qualify as an unused foreign tax credit. You can carry forward your unused foreign tax credit up to 10 years from the year in which you received your foreign business income (for tax years ending after March 22, 2004) or carry it back 3 years.
To determine the amount of your unused foreign tax credits available for use on your 2018 return, refer to your previous tax return(s) and use the following formula to calculate the amount:
(Line 12 of form T2209) – (Line 405 on Schedule 1) = Unused foreign tax credit
Example: If on your 2017 return, your federal foreign tax credit (line 12 of form T2209) is $5,000 and the amount that transferred to line 405 on Schedule 1 was $3,000. Using the formula above, your unused federal foreign tax credit for that year is $2,000.
Similarly, if you’re a resident of Québec, you can also carry forward your unused foreign tax credit up to 10 years from the year in which you received it or carry it back 3 years. You can find your unused credit amount on line 95 of your TP-772-V form from previous years.
Note: To complete the Foreign business income page, you’ll need to add line 95 from your TP-772-V form for each of the previous 10 years. You’ll also need to indicate how much of this amount has been claimed on previous tax returns.
Where do I claim this?
Follow these steps in H&R Block’s 2018 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 business income (T2209) then click Continue.
- When you reach the Foreign business income page, enter your information in the tax software.