Claim a credit for foreign taxes paid
Foreign tax credit
Section 126 provides a credit against Canadian income tax for income or profits taxes paid to a foreign government, preventing double taxation of foreign-source income earned by Canadian residents.
Plain-language explanation
Section 126 prevents double taxation when a Canadian resident earns income in a foreign country and pays tax to that country. Without the foreign tax credit (FTC), the same income would be taxed both abroad and in Canada.
Two categories of FTC:
*s.126(1) — Non-business income tax:* For employment income, investment income (dividends, interest, rents) from foreign sources. The FTC is the lower of (a) the foreign tax paid, or (b) the Canadian tax that would otherwise apply to that income. Unused non-business income FTCs cannot be carried over.
*s.126(2) — Business income tax:* For income from a foreign business. The FTC limit is based on the Canadian tax attributable to the foreign business income, net of foreign business income deductions. Unused business income FTCs can be carried back 3 years and forward 10 years.
Country-by-country calculation: The FTC is calculated separately for each foreign country. You cannot use excess foreign tax paid to one country to offset Canadian tax on income from another country.
Tax treaties: Canada's tax treaties often reduce foreign withholding rates (e.g., the Canada-US treaty reduces US withholding on dividends to 15%, on interest to 0%). The FTC offsets whatever was actually withheld, not the full foreign rate.
RRSP/TFSA exception: Foreign tax withheld on income earned inside a TFSA or RRSP is not creditable, as those accounts are tax-exempt and there is no Canadian tax to offset.
Example
James, a Canadian resident, owns US stocks that paid $5,000 USD in dividends. The US withholds 15% ($750 USD ≈ $1,000 CAD). He includes the gross dividend (plus foreign tax paid) in Canadian income and claims a $1,000 FTC against his Canadian federal tax. This eliminates the double taxation.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
Global Minimum Tax Act (Budget 2024 measures) introduces Pillar Two rules — a 15% global minimum tax on large multinational groups. May interact with FTC calculations for Canadian members of MNE groups.
Common questions
Can I claim a foreign tax credit for US state taxes? +
Yes. US state income taxes are generally eligible for the s.126 foreign tax credit as they are "income or profits taxes" paid to a foreign government. They count toward the FTC calculation for non-business income.
What if I paid more foreign tax than the Canadian credit allows? +
Excess non-business income FTCs are lost — they cannot be carried forward or back. Excess business income FTCs can be carried back 3 years and forward 10 years. The s.20(11) deduction allows excess non-business foreign tax to be deducted (not credited) in some circumstances.
Key terms
Related sections
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 126. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.