How Foreign Income and Foreign Tax Credits Work in Canada

If your Canadian corporation earns income outside Canada, you might have to pay tax in two countries on the same money. Canada’s foreign tax credit system helps prevent this double taxation. This guide is for Canadian businesses and explains how foreign income and tax credits in Canada can help lower your business taxes.

Foreign tax credits are not grants and do not pay cash. They reduce your taxes when you meet rules set by the Canada Revenue Agency (CRA) and your province or territory.

How Canada Taxes Foreign Income

Canadian corporations pay tax on their worldwide income. This means your business must report income earned in other countries, even if you already paid tax there.

Foreign income usually fits into two types:

Foreign business income
Money earned by running a business outside Canada, like a branch or office in another country.
Foreign non-business income (investment income)
Passive income such as interest, dividends, rent, or royalties from foreign sources.

Canada offers different foreign tax credits for each type of income.

Federal Foreign Business Income Tax Credit

If your corporation has foreign business income, you may be able to claim the Federal Foreign Business Income Tax Credit.

Key facts:

Used only for foreign business income (not investment income)
Calculated for each country using CRA Schedule 21
Reduces federal Part I corporate tax
Unused credits can be carried back 3 years or forward 10 years

To be eligible:

Your corporation must pay Canadian Part I tax
Foreign tax was paid on business income from outside Canada
The income is not exempt under a tax treaty

This credit works with provincial or territorial credits, which usually focus on foreign non-business income.

Provincial or Territorial Foreign Tax Credits

Most provinces and territories give a Provincial or Territorial Foreign Tax Credit to corporations that pay foreign tax on non-business income.

What this credit does:

Lowers provincial or territorial corporate tax
Applies to foreign non-business income tax paid
Stops double taxation at the provincial level

For most provinces and territories, this credit is handled through the federal corporate tax system.

Who Can Claim Provincial or Territorial Foreign Tax Credits?

To qualify, your corporation must:

Be a Canadian resident for the whole tax year
Have a permanent office or place of business in the province or territory during the year
Earn foreign investment income
Pay more foreign non-business income tax than the federal foreign tax credit claimed

If your corporation is not a Canadian resident for the full year, or does not have a permanent establishment in the province or territory, you cannot claim the credit.

Example: BC Foreign Tax Credit

British Columbia follows the federal rules but has its own guidelines.

Main points for the BC Foreign Tax Credit:

Available to eligible Canadian-resident corporations
For foreign non-business income taxes paid
Lowers BC corporate income tax you owe
Not refundable — you cannot get a cash refund

You can only claim the BC credit if the foreign taxes paid are more than the federal foreign non-business income tax credit claimed for the year.

How the Credit Is Calculated

The provincial or territorial foreign tax credit is usually the lesser of:

The foreign non-business income tax paid, or
The provincial or territorial tax owed on that income

This rule makes sure the credit does not reduce your tax below zero.

Common Mistakes to Avoid

Mixing up business income and investment income
Different credits apply to each type. Using the wrong one can lead to denied claims.
Claiming the credit without a permanent establishment
You need a permanent place of business in the province or territory.
Thinking the credit is refundable
These credits only lower tax owed. They do not provide cash refunds.
Missing provincial differences
Quebec and Alberta have their own corporate tax systems with separate rules.

Frequently Asked Questions

Q: What is foreign non-business income?
Foreign non-business income is passive income such as interest, dividends, rent, or royalties earned from outside Canada.

Q: Do all provinces and territories offer a foreign tax credit?
Most do through the federal system. Quebec and Alberta have their own rules.

Q: Is the provincial foreign tax credit refundable?
No. It lowers your provincial or territorial tax but does not give you a refund.

Q: Can authorized foreign banks claim this credit in Ontario?
Yes. Authorized foreign banks may be eligible if they do Canadian banking business in Ontario.

Q: How much is the foreign tax credit worth?
It depends on your provincial tax and the amount of eligible foreign taxes paid. There is no set maximum.

GrantHub tracks active provincial and territorial tax credit programs across Canada. You can check which ones match your business profile or use GrantHub’s search filters to find credits by location and business type.

Next Steps

Foreign income can raise your tax bill if you miss or use credits the wrong way. Tools like GrantHub’s eligibility matcher can help you filter tax credits by location and business type. If your corporation earns money outside Canada, review your credits each year to make sure you are not paying too much tax.

See also:

Tax Credits vs Grants for Employee Training in British Columbia
What Business Expenses Are Eligible Across Canadian Grants and Loans?
Federal vs Provincial Workforce Training Grants: What Canadian Employers Should Use

How Foreign Income and Foreign Tax Credits Work in Canada