Are you a corporation that has any taxable income earned from another country outside of Canada to report on your T2 income tax return? The Government of Canada enables every province and territory to invite a corporation to claim a foreign tax credit for foreign nonbusiness income. This tax credit allows the corporation to reduce its provincial tax as stated otherwise, such as, in the case of a federal foreign tax credit that is less than the foreign tax which you paid.
Please note that you cannot file for the provincial or territorial foreign tax credit if your corporation is in Quebec or Alberta with a federal tax return because these provinces file their own individual income taxes. Tax treaties of other foreign countries may have criteria that affect the eligibility of claiming this credit as well.
How much foreign tax credit can I claim in Ontario?
This tax attribute enables a Canadian corporation to maximize their foreign tax credits claim and, over the years, consider including or claiming partial foreign income taxes which are not deductible during a tax assessment as the foreign tax credit during a fiscal year. This may be carried over as a claimable foreign tax credit in future taxable years.
The maximum taxable amount that a corporation may claim of each foreign tax credit with respect to a foreign nonbusiness income tax or business income tax is essentially equal to the lesser of these amounts:
- The available foreign taxable income or total profits of tax paid in the taxable year of a Canadian corporation, or
- The total sum of the Canadian tax of a corporation is otherwise payable for the tax year which supports the necessary foreign income of the respective corporation
How to claim the foreign tax credit
To claim the foreign tax credit for your Ontario business, you must file your T2 tax return with Schedule 21 in addition to Schedule 5. Corporations in Canada within a given taxable year are also allowed to claim a federal logging tax credits with both Schedules 21 and 5.
Schedule 21
With Schedule 21, any Canadian corporation at any time of a given tax year may use this form to claim:
- a federal foreign nonbusiness income tax credit
- a federal foreign business income tax credit
- a provincial or territorial foreign non-business income tax credit
Wherein, the respective corporation is able to claim the nonbusiness income from each foreign country, province or territory.
While claiming foreign income tax credits, you must claim each country separately with your assessment including each province or territory of its country of origin. If you claim more than 5 countries for a corporation, attach an additional Schedule 21 to your tax assessment.
Schedule 5
Schedule 5 is a form that you use to claim your corporate supplementary tax calculation using Part 2 where you enter the applicable provincial and territorial foreign tax credits. Schedule 5 is a tax form that specifies whether your corporation has several operational addresses across different jurisdictions, or whether your Ontario company is required to pay provincial income taxes.
Contact T2inc to file your Ontario Foreign Tax Credit
If your Ontario corporation has conducted business with foreign countries and has received a taxable income from an approved foreign financial institution, you are eligible for the Ontario foreign tax credit.
Contact the corporate tax experts of T2inc to help assess your T2 tax files to help your Ontario business claim the foreign tax credit.
Frédéric Roy-Gobeil
CPA, M. TAX
As President of T2inc.ca and an entrepreneur at heart, I have founded many start-ups such as delve Labs and T2inc.ca. A former tax specialist at Ernst & Young, I am also a member of the Ordre des comptables professionnels agréés CPA and have a master's degree in taxation from the Université de Sherbrooke. With a passion for the world of entrepreneurship and the growth mindset, I have authored numerous articles and videos on the industry and the business world, as well as on accounting, taxation, financial statements and financial independence.
