The Federal Foreign Tax Credit

Residents of Canada must declare and pay taxes on their  gross world income. However, many countries also tax income for which they are the source. For example, interest earned in a foreign country will often have income tax withheld at the source and may also be taxed in Canada on the full amount of interest, rather than the net payment received. While Canada’s international tax treaties seek to lessen these conflicts, the Federal Foreign Tax Credit helps ensure that Canadians do not pay double taxes on their income.

You must report all revenue earned abroad on your federal income tax return. Keep proof of any foreign taxes paid and any filings made abroad since these may be required by the Canada Revenue Agency. For example, if you paid taxes to the United States, keep your W-2 information slip and U.S. 1040 return. If the country where the income is earned does not provide you with official documentation, it is your obligation to report your income and any taxes that were withheld at the source to the CRA.

When preparing your tax return, any income earned or taxes paid in a foreign currency must be converted to Canadian dollars. Ensure that you use the Bank of Canada’s exchange rate that was in effect on the day you received or paid these amounts. These rates are available on the Bank of Canada’s website. If you receive periodic payments, such as a monthly pension or corporate dividends, or if you received several payments throughout the year, you can use the average annual exchange rate. This rate is also published by the Bank of Canada.

The Foreign Federal Tax Credit (FFTC) can be claimed by using the T2209 tax form when you file your return. The amount of the credit depends on whether the income earned abroad is business income or non-business income. The form has separate sections for these two calculations.

Once calculated, the FFTC can be applied to lower the federal income tax that you would otherwise pay. The FFTC exists to help prevent double taxation and the Canadian government will not refund you taxes paid to a foreign government. Therefore, while this credit can reduce your taxes to zero, it is a non-refundable credit and cannot generate a tax refund. However, any unused portion of the FFTC is not lost since it can be carried back up to three years and forward up to ten years.

There is a provincial equivalent to the FFTC that must also be claimed when preparing your federal tax return, with the exception of residents of the province of Quebec. To claim this credit, use Form T2036, Provincial or Territorial Foreign Tax Credit. Note that the provincial component of the FFTC applies to non-business income only. Residents of the province of Quebec must file their provincial income taxes separately with Revenue Quebec.

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