Canadian residents are taxed on income earned worldwide. The income can be from employment earnings, business or rental income, investment income, a pension from another country. In most cases, you must pay taxes in the country where you earned the income.

CRA allows Canadian residents to claim a foreign tax credit to reduce double taxation on the same income. The tax credit offsets the taxes paid to a foreign country, provided a tax treaty is in place with that particular country.

Federal Foreign Tax Credit

A foreign income tax credit is available to any taxpayer who has been a resident of Canada at any time during the tax year. To claim your tax credit, you are required to disclose the country where you earned the income, and your profits, losses and gains.

If you have income form more than one country, you need to submit a separate foreign income tax credit form for each country. If you have business income and non-business income from foreign countries, you need to submit it using separate forms.

The amount of foreign income tax you claim is equal to the lesser of the foreign income or profits tax you paid or the amount of Canadian income tax you would otherwise pay on the foreign income. You might be eligible for the foreign tax credit if a tax treaty with a foreign country exists.

Tax Treaties

Canada has tax agreements, or treaties, with many foreign countries. The purpose of these treaties is to avoid double taxation and to prevent tax evasion on foreign-earned income.

Tax treaties provide criteria for Canada and other foreign countries in the enforcement of any dispute over foreign income. Such treaties set out possible resolutions and define residency and eligibility. They can reduce the amount of tax on dividends, royalties, and interest.

Tax treaties also cover exemptions for certain people and organizations and outline taxation of income such as salaries, pension, self-employment, and other taxable income.

Canada — U.S. Tax Treaty

Due to the proximity of the two countries, perhaps one of the most common tax treaties of interest for Canadians is the one with the United States. This treaty has been in effect since 1980 and has had five protocols added to it since, the most recent in 2008.

Foreign income tax credits may apply in several key areas of the treaty including income earned in the United States, self-employment income of a Canadian who owns a U.S.-based business, and income earned from U.S. annuities and pensions.

Provincial or Territorial Foreign Tax Credit

Provincial or territorial foreign tax credits may apply to non-business income earned in another country with which a tax treaty exists.

After calculating your federal foreign income tax credit, you find that the foreign income tax you paid on non-business foreign income is more than the federal income tax credit you are allowed, you can claim a tax credit from the province or territory where you live.

The non-business taxes must add up to more than $200, and you need to fill out a form for each foreign country where you earned income. If you live in Manitoba or Québec, the application of this tax credit varies.

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