Section 7 – Investments
All Canadian residents are required to declare income from all Canadian and foreign sources. The full amount of foreign property investment income, such as dividends and interest, must be included in the recipient taxpayer’s income. The taxable amount is the gross amount received, without taking into account tax withheld at source by the foreign country.
The purpose of the foreign tax credit is to avoid double taxation when foreign tax is withheld on foreign property income earned by a Canadian resident (see Section IX). As this income is also taxable in Canada, the taxpayer can generally claim a tax credit to take into account the tax paid to the foreign country. The credit may only be claimed in the year the income is included in the taxpayer’s income and foreign tax was withheld. The foreign tax amount preventing entitlement to the credit due to the limits prescribed by law may generally be deducted in the calculation of the taxpayer’s income.
Taxpayers resident in Canada must report the specified foreign investments (by filing form T1135 with his/her tax return) if the total cost of a Canadian taxpayer’s foreign property exceeds CAN$100,0004 at any time during the year. Taxpayers who do not comply with these various foreign reporting requirements are subject to stiff penalties.
Specified foreign property includes:
- Funds and bank accounts held abroad;
- Debt securities issued by a non-resident;
- Shares of foreign corporations, even if they are held by a Canadian broker;
- Shares of Canadian corporations on deposit with a foreign broker;
- Foreign real estate; and
- Other tangible and intangible properties located outside Canada.
It does not include:
- Property used or held exclusively in the course of an active business carried on by the taxpayer;
- Registered pension fund investments;
- Foreign investments held in Canadian-registered mutual funds;
- Personal-use properties; and
- Shares or debt securities of a foreign affiliates.
Example: Mrs. Smith owns shares of non-resident corporations with a cost amount of $140,000. The shares are held by a Canadian broker. She must report this investment even if the shares are physically held in Canada, because the cost amount is greater than $100,000.
4 A simplified income tax regime is available when the cost of foreign property is lower than $250,000.
This document has been updated on August 31st, 2018 and reflects the state of the Law, including draft amendments, at that date.