Foreign Income Reporting for Canadians

Canadian residents are taxed on their worldwide income, regardless of where it is earned. If you have foreign employment, investments, pensions, or rental properties, you must report all of that income on your Canadian tax return.

What Counts as Foreign Income

Foreign income includes any income earned outside Canada:

• Employment income earned while working abroad
• Business income from foreign operations
• Investment income — interest, dividends, and capital gains from foreign securities
• Rental income from foreign real estate
• Pension income from foreign government or employer plans
• Freelance or contract income paid by foreign clients

All foreign income must be converted to Canadian dollars using the exchange rate on the day it was received, or you can use the average annual rate published by the Bank of Canada for consistency.

Avoiding Double Taxation: The Foreign Tax Credit

If you paid tax to a foreign government on income that is also taxable in Canada, you can claim a foreign tax credit to avoid being taxed twice. The credit is claimed on Form T2209, Federal Foreign Tax Credits.

The credit is generally the lesser of:

• The foreign tax actually paid, or
• The Canadian tax payable on that foreign income

If the foreign tax exceeds the Canadian tax on that income, the excess cannot be refunded, but you may be able to deduct the uncredited foreign tax as an expense.

Form T1135: Foreign Income Verification

If you own specified foreign property with a total cost exceeding $100,000 CAD at any point during the year, you must file Form T1135, Foreign Income Verification Statement.

Specified foreign property includes:

• Foreign bank accounts
• Shares of foreign corporations (held outside registered accounts)
• Foreign rental properties
• Foreign bonds and debentures
• Interests in foreign trusts

Not included: Property held in registered accounts (RRSP, TFSA, RESP), personal-use property (a vacation home you do not rent out), and shares of Canadian mutual funds that hold foreign investments.

T1135 Penalties

Failing to file Form T1135 carries steep penalties:

• $25 per day the form is late, to a maximum of $2,500
• Gross negligence penalty: $500 per month, to a maximum of $12,000
• The CRA can also extend the normal reassessment period by three years for any income related to unreported foreign property

US-Specific Considerations

Many Canadians hold US investments or earn US income. Key points:

• US dividends are subject to a 15% US withholding tax (under the Canada-US tax treaty, reduced from the default 30%). This withholding qualifies for the foreign tax credit.
• US rental income requires filing a US tax return. You can claim the US tax paid as a foreign tax credit in Canada.
• US Social Security received by Canadian residents is only 85% taxable in Canada under the treaty.

Reporting Foreign Employment Income

If you work temporarily abroad but remain a Canadian resident, report the full employment income on your return. Claim foreign taxes paid via Form T2209. If you were a resident of a treaty country, check the specific treaty for any exemptions or reduced rates.

Tips for Compliance

1. Keep detailed records of foreign income, taxes paid, and exchange rates used
2. File T1135 on time — the penalties are severe and easily avoidable
3. Check treaty provisions — Canada has tax treaties with over 90 countries that may reduce or eliminate double taxation
4. Consult a tax professional for complex situations involving multiple countries or immigration/emigration

Sources

• CRA — Foreign income
• CRA — Form T1135
• CRA — Form T2209, Federal Foreign Tax Credits