If you earn income from a foreign country as a Canadian resident, you are required to report it to the CRA and pay taxes on it. This may seem unfair, especially if you have already paid taxes on that income in the country where it was earned. However, reporting your foreign income to the CRA does not mean you will be taxed twice. The purpose is to inform the Canadian government of your income sources to avoid any confusion or suspicion, and also to claim federal foreign tax credits that can help reduce your other tax obligations. So, it’s a beneficial step that can help you save some money on your taxes.
What is the Federal Foreign Income Tax Credit and How Does it Work?
The Federal Foreign Tax Credit is a credit you can claim if you pay business or non-business taxes on an income made in a foreign country. Reporting your foreign income is necessary to claim this credit. If you paid taxes to multiple countries, each totalling more than $200, you will need to calculate the tax for each source of income separately before reporting them together on the T2209 form. This credit can help reduce your tax obligations, making it an important consideration for Canadians with foreign income.
Can contributions to foreign public pension plans qualify for the Federal Foreign Tax Credit?
Yes, they can. According to the CRA, contributions to foreign public pension plans are considered non-business income tax, as you may never benefit from that money earned while working temporarily under foreign legislation. This applies to the Federal Insurance Contributions Act (FICA) under U.S. law, which requires all employees to pay payroll tax regardless of residency status. If you contribute to FICA, you are eligible for the Federal Foreign Tax Credit.
Is the Federal Foreign Tax Credit the same for all countries?
No, it varies depending on whether a tax treaty has been signed between Canada and the foreign country. If you are unsure about the specifics of the credit for a particular country, it is recommended to seek further details and clarification.
Can you claim a provincial foreign tax credit in Canada?
Yes, you can claim a provincial foreign tax credit in Canada as long as your federal foreign tax credit on non-business income is less than the tax you paid to a foreign country, and you do not reside in Quebec. You can claim the credit by filling out the T2036 form. It’s also important to note that when calculating the credit, you should use the conversion rate at the time of the transaction, not at the time of filing your taxes in Canadian dollars.