If you are a Canadian resident and make foreign income, you are subject to tax duty to the CRA. Wait, but I’ve already been taxed by the country where the income is made! How is it fair?…as some of you would ask. Relax, reporting your foreign income to the CRA doesn’t mean double taxation. Rather, it is to inform the Canadian government of your sources of income to avoid causing unnecessary confusion or suspicion, not to mention the benefits of claiming the federal foreign tax credits that will help reduce some of your other tax obligations.
So, what is Federal Foreign Tax Credit?
If you pay business or non-business taxes on an income made in a foreign country, you can claim the Federal Foreign Tax Credit once you have reported the income. If such taxes are paid to multiple countries, each tallying more than $200, you need to calculate the tax to each source of income separately before reporting them together on the T2209 form.
Does contribution to foreign public pension plans qualify for Federal Foreign Tax Credit?
Yes, and they are considered non-business income tax as per the CRA given the concern that you will never benefit from that sum of money made while you work temporarily under foreign legislation. This rule of thumb applies to the Federal Insurance Contributions Act (FICA), which dictates that under U.S. law, all employees are subject to payroll tax regardless of residency status. If you contribute to the FICA, you’re eligible for Federal Foreign Tax Credit.
Is it the same with all other countries?
Unfortunately, no. The credit varies between countries that have signed tax treaties with Canada and those that haven’t. Please consult us for details if you aren’t sure.
Is there a provincial foreign tax credit?
By the same token that you pay both federal and provincial income taxes, foreign tax credit is also applicable province-wide, on the caveats that first, your federal foreign tax credit on non-business income is less than the tax you have paid to a foreign country, and two, you do not reside in Quebec. You can claim Provincial foreign tax credit by filling out the T2036 form.
Last but not least, given that you are reporting your taxes to the CRA, be sure to apply the conversion rate at the time of the transaction, not the day you file your taxes when you calculate them in Canadian dollars.