Foreign Tax Credit
The Foreign Tax Credit (FTC) prevents double taxation when you earn income in another country that has already been taxed by that country's government. Canada taxes its residents on worldwide income, but allows you to claim a credit for foreign taxes paid, so you don't pay full tax in both jurisdictions.
The FTC is generally limited to the lesser of the foreign tax paid and the Canadian tax that would apply to the foreign income. You calculate the credit separately for "non-business income" (investments, employment) and "business income." If the foreign tax exceeds the Canadian tax on that income, the excess can be carried back 3 years or forward 10 years for business income.
Common situations where the FTC applies: US withholding tax on dividends from US stocks (typically 15% under the Canada-US tax treaty), rental income from foreign property, and employment income earned while working abroad. The FTC is claimed on Schedule T2209 of your T1 return.
How it works
The foreign tax credit calculation runs separately for 'non-business' foreign income, such as investment and employment income earned abroad, and 'business' foreign income, because the carry-over rules differ between the two categories. In both cases, the credit you can claim is capped at the lesser of the actual foreign tax you paid and the amount of Canadian tax that would otherwise apply to that same income — the FTC can never exceed your Canadian tax liability on the foreign-sourced amount.
If the foreign tax you paid on business income exceeds what the FTC allows you to claim in the current year, the excess can be carried back 3 years or forward 10 years, similar to how business losses are handled. Non-business foreign tax generally doesn't have that same carry-over flexibility, so if withholding tax on investment income exceeds the Canadian tax on that income in the year it's paid, the excess portion is typically not recoverable.
Tax treaties matter directly to the size of your credit. Under the Canada-US treaty, US withholding tax on dividends paid to a Canadian resident is generally capped at 15%; if a payer over-withholds beyond the treaty rate, the excess isn't eligible for the Canadian credit and needs to be recovered from the foreign tax authority instead, not through your Canadian return.
Example: claiming the FTC on US dividend withholding
Say you earn $1,000 in dividends from a US stock held in a regular, non-registered account. The US withholds 15% at source under the Canada-US tax treaty — $1,000 x 15% = $150 — before you receive the money.
You still report the full $1,000 as Canadian income, but you can claim a foreign tax credit for the $150 withheld, or less if your Canadian tax on that same $1,000 works out to be lower than $150, since the FTC is capped at whichever of the two amounts is smaller.
Frequently asked questions
What form do I use to claim the foreign tax credit?
You claim it on Schedule/Form T2209 as part of your T1 return, calculating the non-business and business portions separately since they're subject to different rules.
What happens if the foreign tax I paid is higher than the credit allows me to claim?
For business income, any excess can be carried back 3 years or forward 10 years; for non-business income such as investment or employment earnings, the credit is generally limited to the current year, so foreign tax above the Canadian tax on that income typically can't be recovered.
Do I need a foreign tax credit for income earned inside a TFSA?
Generally no Canadian credit is needed since TFSA income isn't taxed in Canada, but any foreign withholding tax deducted at source still can't be recovered, because there's no Canadian tax on that income to offset it against.
Related Terms
T1 (General Income Tax Return)
The T1 is the standard personal income tax return that Canadian residents file annually with the CRA.
CRA (Canada Revenue Agency)
The Canada Revenue Agency (CRA) is the federal body responsible for administering Canada's tax laws, collecting income taxes and GST/HST, and delivering benefit programs such as the Canada Child Benefit (CCB) and the GST/HST credit.