If you receive income from a foreign country, some of that income may be exempt from taxes due to a tax treaty between Canada and the country where your income originated. The Canada Revenue Agency determines your exempt foreign income based on the type of income you received, the country of its origin, and several other factors.
Reporting Foreign Income
If you declare foreign income on a Canadian tax return:
- You must indicate the country the funds came from.
- You must declare the full amount of any income before foreign taxes were withheld.
Declaring Exempt Foreign Income
If all or a portion of your foreign income is non-taxable due to a tax treaty, declare that amount on line 25600 of your income tax return. The exempt portion of foreign income varies based on the terms of the relevant tax treaty, and the Canadian Department of Finance maintains copies of all current tax treaties on its website.
Different types of income, such as business income and pension income, may all be taxed differently, even if they are from the same country. In some cases, even the same type of income from one country may be treated differently based on the dates that the payments started or other factors.
Determining Exempt Portion of U.S. Social Security Benefits
- If you receive U.S. Social Security benefits – one of the most commonly reported types of exempt foreign income – you may claim a deduction equal to 15 percent of those benefits you are reporting on line 11500.
- If you have continuously received Social Security benefits since 1996 or if you receive benefits from a spouse who resided in Canada from 1996 to his death, you may claim a 50 percent deduction if you resided in Canada since the death.
For example, if you report $10,000 worth of U.S. Social Security income, you may claim a deduction of $1,500 on line 25600. That reduces the portion of your taxable income to $8,500. However, if you reported $10,000 worth of Social Security income and have been receiving it since 1996, $5,000 is tax-exempt, lowering that portion of your taxable income to $5,000.
Reducing Foreign Tax
If the country issuing your payment is taking out too much tax based on the terms of the relevant tax treaty, you may write to the payer and request an adjustment to your tax rate.
Claiming Foreign Tax Credits
If your foreign income is not tax-exempt due to a tax treaty, you may be eligible for a credit of the foreign taxes you paid.
- To calculate your credit, complete Form T2209 Federal Foreign Tax Credit and enter the amount from line 12 on line 40500 of your income tax return.
- If you paid more than $200 in foreign taxes, complete a separate form for each country.
- You must complete separate forms to calculate provincial or territorial credits.
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