What is the tax treatment of foreign investment income in a corporation?
In an increasingly integrated global market, many corporations are choosing to invest their money in foreign markets. Whether they choose to investment in shares of a corporation or in real property, all income from the investments must be reported on their Canadian corporate tax return.
The type of investment income received from a foreign investment property can vary.
- Foreign interest income would be treated the same for tax as Canadian interest income (see FAQ #148).
- Capital gains on the sale of foreign investments would be treated the same for tax as Canadian capital gains (see FAQ# 150).
- Foreign dividends are taxed at 45.67% and they do not have the same treatment as Canadian dividends. Canadian dividends qualify for the dividend tax credit; however, foreign dividends do not. In addition, there are different tax rules if the corporation owns more than 10% of a foreign corporation.
- If a Canadian parent corporation owns and controls a foreign affiliate that earns passive income (see FAQ #16), then the income earned in the foreign affiliate could be subject to tax even if the income is not distributed to the parent corporation. A complex analysis of the foreign affiliate’s income will need to be done in order to determine if the income is considered to be Foreign Accrual Property Income (FAPI).
In addition to being taxed on foreign investment income, there are various other tax disclosure forms that need to be completed for foreign investments. Two common tax disclosure forms are T1135 Foreign Income Verification Statement (if a corporation owns more than $100,000 Canadian of foreign property at any time during the year) and T1134 Information Return Relating to Controlled and Not-Controlled Foreign Affiliates (for reporting interests in foreign affiliates, whether controlled or not).
If a corporation had foreign taxes withheld or paid on foreign investment income, the corporation will generally receive a foreign tax credit towards the Canadian taxes payable. This is to reduce double taxation of the same income.
If you have questions concerning the tax treatment of foreign investment income, please contact us.Download a copy of this issue