A foreign tax credit reduces your Canadian tax by the amount of income tax you already paid to another country on the same income, preventing double taxation.
Canadian residents are taxed on their worldwide income, which risks the same income being taxed twice, once abroad and once in Canada. The foreign tax credit prevents this by crediting the foreign income tax you paid against your Canadian tax on that same income, up to the Canadian tax that would otherwise apply.
The credit is calculated separately for business and non-business income and by country, and it cannot exceed the Canadian tax on the foreign income (any excess may sometimes be deducted or carried). Foreign dividends, rental income and employment income earned abroad commonly generate these credits.
You earn $10,000 of foreign investment income and pay $1,500 of foreign withholding tax on it. Canada taxes the $10,000 too, but a foreign tax credit for the $1,500 already paid reduces your Canadian tax so the income is not taxed twice.
Our certified accounting firm handles this for businesses and individuals across Canada, at fixed fees with no surprises.
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