Income Tax Information

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 is probably not automatically done by your tax software, if you have foreign non-business income (such as a capital gain) which is not reported on a T-slip. These amounts will probably have to be manually typed into a worksheet in the software.

If an individual has anything more than foreign capital gains and 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 CRA's 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 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. Foreign non-business income is not reduced by net capital losses carried forward from a previous year.

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.

See the CRA Interpretation Bulletins: