Corporations may prefer to keep more of their income, but Canadian tax laws also reach foreign income. However, reporting money earned outside Canada can feel complex for corporations.
In this article, we will discuss how to report foreign income for Canadian resident corporations. For more detailed questions, consider speaking with a Lexpert-ranked corporate tax lawyer.
What are the tax rules for foreign income of corporations in Canada?
Similar to individual taxpayers, resident corporations in Canada are subject to corporate income tax (CIT) on their worldwide income. This means that they're taxed on income earned both in and outside Canada.
First, it's important to determine whether your corporation is resident in Canada for tax purposes. If it is a non-resident corporation, then it is only taxed by the Canada Revenue Agency (CRA) if:
- it carried on business in Canada, or
- if it disposed of taxable Canadian real property
If it is a resident of Canada, the corporation must file the required tax returns, such as the T2 Corporation Income Tax Return or the T2 Short Return. These returns must be filed on time, together with any required forms and schedules.
We will discuss these rules below.
Watch this video if you want to learn more about Canadian CIT in general:
To learn more about how to report foreign income in Canada for corporations, reach out to the best corporate tax lawyers in Canada as ranked by Lexpert.
When is a corporation a resident of Canada
The CRA determines the residency of a corporation using common law principles and the standards provided by the Income Tax Act (ITA) or other laws. As such, it is important to determine the residency of your corporation, so that you know which Canadian tax rules apply.
A corporation is a resident of Canada under the following cases:
- deemed resident: if it was incorporated in Canada, whether federally under the Canada Business Corporations Act (CBCA), or under provincial or territorial laws
- common law: if its central management and control is exercised within Canada (e.g., where the principal business is done, among other factors)
Certain exceptions apply, such as where a tax treaty provides otherwise. A corporate tax lawyer can help confirm the residency status of your corporation for tax purposes.
How to report foreign income of corporations
Similar to other corporate tax filings, Canadian corporations must report their foreign income by:
- converting all foreign earnings into Canadian dollars
- reporting them on the T2 Corporate Income Tax Return
- using additional forms, such as Form T1134 or T1135
For tax credit purposes with the CRA, corporations should keep records of any taxes paid to foreign taxing authorities (e.g., the USA's Internal Revenue Service). Foreign income must also be reported on time to avoid penalties.
T2 Corporate Income Tax Return
Reporting foreign income of corporations can be done using the CRA's T2 Corporate Income Tax Return (T2 return):
- when to file: within six months of corporation's fiscal year-end, even if there is no tax payable or owing
- how to file: electronically, except for insurance companies and non-residents, or through the printed T2 return
In addition to filing your T2 return, separate provincial returns are required for corporations with a permanent establishment in these provinces:
- Québec: using the CO-17 return with Revenu Québec
- Alberta: using the AT1 return with Alberta Tax and Revenue Administration
When filing your corporate tax return, there are specific forms and schedules that you should attach if any of the following applies to your corporation:
- Schedule 7: for Canadian-controlled private corporations (CCPCs)
- Schedule 21: when claiming foreign tax credits
- Form T1134: if the corporation have any foreign affiliates
- Form T1135: if the corporation owns any specific foreign property
These Forms and Schedules above are in addition to the mandatory Schedules 100, 125, and 141 that must accompany your T2 return.
T2 Short Return for Canadian corporations
A shorter version of the return, called the T2 Short Return, can be used if the corporation is either:
- a CCPC throughout the tax year, and it has either (1) a nil net income or (2) a loss for income tax purposes; or
- tax exempt under Section 149 of the ITA (e.g., non-profit organizations, registered charities, among other tax-exempt bodies)
The T2 Short Return can only be used if the corporation:
- has a permanent establishment in only one province or territory
- is not claiming any refundable tax credits; except for refund of paid instalments
- did not either receive or pay out any taxable dividends
- is reporting in Canadian currency
- does not have an Ontario transitional tax debit
- does not have an amount calculated under Section 34.2 of the ITA
Form T1134 in case corporation has foreign affiliates
Form T1134 (Information Return Relating to Controlled and Non-Controlled Foreign Affiliates) is required if a corporation has investments in foreign affiliates.
These affiliates may be non‑resident corporations or non‑resident trusts, whether controlled or non‑controlled. If a Canadian owns 10 percent of a foreign corporation, that corporation will qualify as a foreign affiliate.
Form T1134 must be filed within 10 months after the end of the taxation year and can be submitted electronically through EFILE.
Form T1135 for corporations with specified foreign property
On the other hand, Form T1135 (Foreign Income Verification Statement) is required if the total cost of a taxpayer's "specified foreign property" exceeds $100,000 at any time during the year.
This Form also applies to Canadian individuals, corporations, partnerships, and trusts, as long as this $100,000 threshold is met. However, the basis of the $100,000 is not the properties' fair market value, but their cost amount.
As defined by the ITA, specified foreign property includes the following:
- funds, tangible, or intangible property found outside Canada (e.g., intellectual properties, precious metals, gold certificates, and futures contracts)
- shares of:
- the capital stock of a non-resident corporation
- resident Canadian corporations held outside Canada
- interest in a
- non-resident trust that was acquired for consideration
- partnership that holds a specified foreign property (unless Form T1135 is required)
- foreign insurance policy
- property that is convertible into, exchangeable for, or confers a right to acquire a specified foreign property
- debt owed by a non-resident (e.g., government and corporate bonds, debentures, mortgages, and notes receivable)
Similar to the T2 return, Form T1135 must be filed within six months after the end of the corporation's fiscal period. Corporations can also file Form T1135 electronically, through the EFILE or NETFILE.
Learn more about Form T1135 with this video:
Head over to our directory of Canada's Largest Firms if you're looking for law firms to help you how to report foreign income in Canada for corporations.
How can lawyers help corporations when reporting foreign income?
Below are some ways that lawyers can help corporations with how to report foreign income in Canada:
- know how to report foreign income: corporate tax lawyers understand the rules that can help your corporation know which amounts must be reported, what documents support each figure, and which forms or schedules must be filed
- learn about foreign tax laws: aside from Canadian tax laws, your corporation must know the tax rules of the foreign country where it is operating or conducts business, for which a cross-border lawyer can help; for instance, lawyers can align the foreign country's income reporting with Canada's rules on T2 filing
- review applicable tax treaties: to prevent double taxation, or to know the rules on permanent establishment, tax lawyers are well placed to review Canada's tax treaties with other countries and interpret them for your corporation
- for tax credit purposes: another thing that lawyers can help with is when claiming tax credits, such as matching each item of foreign income reported on the Canadian tax return with the right foreign tax credit claim, or even as simple as identifying what qualifies for a tax credit
- handle complex tax situations: corporate tax lawyers can also help corporations decide how to apply different tax laws, whether it be Canada's or the foreign country's laws, in complex corporate structures, (e.g., when several foreign holdings or subsidiaries are involved)
How to report foreign income in Canada: A corporation's must-know
While foreign contracts, offshore bank accounts, and overseas properties can be good for corporate growth, they are still subject to Canadian tax rules. Because Canadian tax law can apply to your corporation's foreign income, it is important to seek professional advice. To stay on top of the Canadian tax filings, many corporations work with a Lexpert‑ranked corporate tax lawyer.
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