If you have earned abroadnon-business income(from employment, interest and/or dividends, or pension) or if you have paid tax on this income to a foreign government, you can avoid paying full tax to both Canada and the source country byforeign tax credit(provided Canada has a tax treaty with this country).
To be eligible for this tax credit, you must have been a resident of Canada on:
- December 31 of the current tax year
- The last day of your stay in Canada (if you stopped living in Canada during the tax year) or
- The date on which you died
Your income tax payment qualifies for the tax credit if:
- The payment is 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 is not dependent on the availability of a foreign tax credit in Canada or a deduction for a dividend received from a foreign subsidiary.
- It is an income or profit tax.
The foreign tax credit that you can claim per foreign country is usually thelagerof the following amounts:
- The foreign income tax you 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 Revenue Québec requests access. If you paid foreign income tax in the US, you'll want to keep a copy of your income tax returnsW-2information slip, yourForm 1040from the Internal Revenue Service (IRS) and any other documents that support your claim.
- If you have foreign employment, pension or investment incomemore than three countries, you cannot NETFILEEN your return. Instead, you must print the hard copy of your declaration and send it to the CRA and/or Revenu Québec.
Canada has signed tax treaties with many countries to prevent double taxation and prevent tax evasion. Tax treaties are agreements with other countries that:
- determine what taxes are covered and who is resident and eligible for the benefits of that country
- determining when the income of persons residing in one country is 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 another country
- may provide exemption for certain types of organizations or individuals
Refer to theCRA-websiteto see which tax treaties are currently in effect.
Do I have to report these amounts in Canadian dollars?
Yes. Before including these amounts on your tax return, you must convert both the foreign income you earned and the foreign income tax you paid into Canadian dollars. You can use the exchange rate provided by theBank of Canadait was valid on the day you received these amounts. If you received foreign income at different times during the year, you can use the average annual rate on the Bank of Canada website.
Foreign pension income
If you have paid income tax to a foreign government on your foreign pension income, you are entitled to theforeign tax credit. Do not deduct the taxes you paid from your income when you declare it on your Canadian tax return.
If Canada or Québec has a tax treaty with the country where the pension comes from, you are entitled to adeduction for the part of the pension that is tax-free.
The two most common types of foreign pension income are:
Foreign labor income
Foreign earned income is the amount you earned outside of Canada with a foreign employer. If you have paid foreign income tax, do not deduct it from your foreign income when you declare it on your Canadian tax return.
Remark: If the amount is on your United StatesW-2slip is less contributions to a "401(k), 457 or 403(b) plan, US Medicare and Federal Insurance Contributions Act (FICA)", add these contributions to your foreign earned income. Maybe you candeduct these contributionson your return.
Foreign investment income
Your foreign investment income includes interest and dividends received from foreign investments (e.g. stocks and bonds). When filing your tax return, do not deduct your income from the foreign taxes you paid on your foreign investment income.
H&R Block's tax software automatically reports your foreign interest and dividends on the T1 tax return worksheet, under the Statement of investment income, ongoing charges and interest expense section.
Remark: You are not entitled to the dividend tax credit for foreign dividends you received during the year.
That's necessarycontact the CRAif any of the following applies to you to find out what amounts (if any) must be declared as income on your return:
- You have an interest in a foreign investment entity
- You have an interest in a foreign insurance policy
- As a shareholder of a foreign company, you received certain shares in another foreign company
If you have sold your foreign investment property (such as a building, house or land), you must declare the country in which the property is located so that your capital gains can be properly allocated.
Remark: You must also report your capital gains from the sale or disposal of your foreign property on theCapital gains and losses (schedule 3)page. You can theSchema 3page belowRetirement plans and investmentson theCredits and deductionstab. Be sure to include only the capital gains on this page. H&R Block's tax software automatically calculates the taxable portion of the profit.
To determine the location where you sold your property (land and buildings), an important factor to consider is the geographic location of the property. For example in the case ofstocks and bonds, the location of the property would be the stock exchange or exchange where it is being sold, regardless of the location of the securities issuer's transfer office. If you did not sell your stocks or bonds through a stock exchange or exchange, consider the following factors to determine the location:
- the location, place of residence or place of business of:
- the issuer
- the transfer office of the issuer
- the owner of the collateral
- the owner's sales agent
- where the title is transferred
- where the contract is negotiated, signed and executed
- where the shares are located
- where is paid and
- all relevant provisions in the applicable company statutes
*A capital gain is the profit you received from the sale of a property or an investment. For tax purposes, you may have a capital gain even if you exchanged or donated (which is assumed to have been sold) the property or investment. Refer to theCRA-websiteFor more information.
If you received rental income from your foreign home, you may be entitled to a tax credit for the foreign taxes you paid on this income. Please note that you must also declare your foreign rental income on theT776: Statement of rented immovable propertypage.
Important: While theT776page is only for rental properties in Canada, on this page you can report your foreign rental income. Be sure to enter your Canadian mailing address belowOwnership datainstead of the address of your foreign property so you can NETFILE your return.
Where do I claim this?
Follow these steps in H&R Block's2022tax software:
- In the left navigation menu, under theCredits and deductionstab, clickOther.<![CDATA[ ]]>
- Below theFOREIGN INCOMEheading, check the box labeledForeign tax credit (T2209 & TP-772-V)one clickGet on.
- When you use theForeign tax credit (T2209 & TP-772-V)page, enter your information into the tax software.