Corporate Foreign Tax Credit Calculator
A Canadian corporation that pays tax abroad gets credit for it in Canada, but only up to the Canadian tax on that same income, and business and non-business foreign tax are treated very differently. Work out the credits, what spills over, what carries forward, and how much double tax is left.
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Business Foreign Tax Credit, Subsection 126(2)
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Non-Business Foreign Tax Credit, Subsection 126(1)
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The Overall Position
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Points That Decide This
What to Do Next
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Disclaimer: Section 126 of the Income Tax Act provides a credit against Canadian tax for foreign income or profits tax paid by a corporation resident in Canada. Subsection 126(1) provides a credit for non-business income tax, limited to the Canadian tax otherwise payable that is attributable to the foreign non-business income, computed broadly as that tax multiplied by the ratio of the foreign non-business income to the corporation’s income for the year, and unused non-business credits cannot be carried to other years. Subsection 20(12) permits a deduction in computing income for non-business income tax paid to the extent it is not claimed as a credit. Subsection 126(2) provides a credit for business income tax, limited by reference to the Canadian tax otherwise payable attributable to the foreign business income and to the tax otherwise payable less any non-business credit, and unused business income tax may generally be carried back three years and forward ten years under the definition of unused foreign tax credit. The credits are computed separately for each foreign country and reported on Schedule 21 of the T2 return. Canadian tax otherwise payable for these purposes is federal Part I tax and its computation depends on, among other things, whether the foreign income is income earned in a province, which affects the provincial abatement; income earned through a foreign branch may not attract provincial tax, which changes the effective Canadian rate against which the credit is measured. Provincial foreign tax credits operate separately. This calculator uses a single Canadian rate entered by the user, treats all foreign income as arising from one country, and does not model the provincial abatement, country-by-country computation, the carryback mechanics or the ordering of carryforwards; it is an estimate only. Whether an amount is business or non-business income tax, and whether it qualifies as income or profits tax at all, are matters of characterisation that should be confirmed. This page is general information, not tax advice.
A Credit, Limited by the Canadian Tax on the Same Income
Canada taxes a resident corporation on its worldwide income, so a dollar earned abroad can be taxed twice: once where it is earned and again in Canada. The foreign tax credit exists to prevent that, and it does so by crediting the foreign tax against the Canadian tax.
The credit is not unlimited. It cannot exceed the Canadian tax that is attributable to the foreign income. Canada gives relief for the foreign tax up to what Canada itself would have charged on that income, and no further, because it does not refund tax paid to other governments.
So the result depends on which rate is higher. Where foreign tax is below the Canadian rate, the credit covers all of it and Canada collects the difference. Where foreign tax is above the Canadian rate, the credit is capped and the excess is foreign tax that Canada will not relieve in that year.
Business and Non-Business Tax Are Treated Differently
This is the distinction that matters most, and it turns on the character of the foreign income rather than on the country.
| Feature | Business Foreign Tax | Non-Business Foreign Tax |
|---|---|---|
| Arises from | A business carried on abroad | Interest, portfolio dividends, royalties |
| Credit provision | Subsection 126(2) | Subsection 126(1) |
| Unused amounts | Back three years, forward ten | Lost if not used this year |
| Alternative relief | None, the carry is the relief | Excess deductible under 20(12) |
Unused business foreign tax survives, because it can be carried to years in which there is more Canadian tax to absorb it. Unused non-business foreign tax does not survive as a credit, but the excess can be deducted instead, which recovers part of it rather than all.
Credit First, Deduct the Excess
For non-business tax the order almost always favours claiming the credit first and deducting only what the credit cannot absorb. A credit reduces tax dollar for dollar. A deduction reduces income, so it is worth only the tax rate applied to it.
Deducting the whole amount instead of crediting it trades a full dollar of relief for a fraction of one. There are narrow situations where deducting everything makes sense, usually involving losses, but as a default the credit comes first.
The same dollar cannot be both credited and deducted. The deduction under subsection 20(12) is available only for the portion not claimed as a credit. Claiming the credit on the full amount and then deducting it as well double-counts the relief, and it is an error that tends to be found on review.
Where the Income Is Earned Changes the Canadian Rate
The credit is measured against Canadian tax otherwise payable, which is federal tax. Income earned through a foreign branch is often not income earned in a province, which removes the provincial abatement and changes the federal rate on that income.
That means the effective Canadian rate against which foreign tax is measured is not always the familiar combined rate. For a corporation with a meaningful foreign branch, getting that rate right changes how much of the foreign tax is credited, and it is worth confirming rather than assuming.
Each Country Is Computed Separately
The credits are calculated country by country rather than on a pooled basis. High foreign tax in one country cannot be averaged against low foreign tax in another to create more credit overall.
A corporation earning in several countries can therefore have unused credits in one country and additional Canadian tax on income from another in the same year. Schedule 21 is where that computation is laid out.
Treaties Reduce the Foreign Tax First
Before any of this applies, a tax treaty usually reduces the foreign tax on non-business income, typically by cutting withholding rates. Tax withheld above the treaty rate is generally not creditable in Canada, because it was not properly payable; the remedy is to recover it from the foreign country.
Excess withholding is a recovery problem, not a credit problem. Where a payer withheld at a statutory rate instead of the treaty rate, the difference should be reclaimed from the foreign tax authority rather than claimed as a Canadian credit, and the claim period there is often short.
What This Calculator Does Not Cover
- Country-by-country computation, since all foreign income is treated as one country here
- The provincial abatement and its effect on the federal rate for branch income
- Carryback mechanics and the ordering in which carryforwards are applied
- Provincial foreign tax credits, which operate separately
- Whether a foreign tax qualifies as income or profits tax at all
- Foreign affiliate dividends, which are relieved through the surplus rules instead
Unused business credits expire after ten years, and they are easy to lose track of. Our international tax planning service covers the Schedule 21 computation, the business and non-business split, the carryforward record and recovering excess foreign withholding.
Frequently Asked Questions
Common questions on foreign tax credits for Canadian corporations.
Related Calculators and Guides
More tools for Canadian corporations earning abroad.
Stop Paying Tax Twice on the Same Dollar
Send us the foreign tax returns, the withholding slips and the corporation’s T2. We will split business from non-business foreign tax, compute the credits country by country, record the carryforwards before they expire, and recover any excess withholding.