How do I report foreign income on a Canadian tax return?

Start with the rule: worldwide income, in Canadian dollars, gross

A Canadian tax resident is taxed on income from every country, and the T1 has no separate schedule for foreign amounts. You report them on the same lines as Canadian income of the same kind, converted to Canadian dollars. Three habits keep this right:

• Report the gross amount. If a US payer sent you US$850 after withholding US$150, the income is US$1,000. The US$150 is claimed separately as a foreign tax credit, not netted off.
• Use a Bank of Canada rate. The CRA accepts the exchange rate on the day the income was received or, for amounts that arrive throughout the year such as salary or monthly pension, the Bank of Canada annual average rate. Capital gains use the rate on the purchase date for cost and the sale date for proceeds, which means part of every foreign gain or loss is currency movement.
• Keep the source document. A W-2, 1099, 1042-S or foreign pension statement is your evidence for both the income and the tax withheld, and the CRA routinely asks for it before allowing a credit.

Canada does not care that the money never left the foreign account. Interest earned in a US savings account you have not touched since university is still reportable every year.

Which line each kind of foreign income goes on

The T1 lines that matter, with the most common US slips mapped to each:

Two of these lines hide traps. Foreign dividends go on line 12100 and do not qualify for the Canadian dividend tax credit, so US dividends are taxed like interest. And the W-2 box 1 figure is a starting point, not the answer: pre-tax items such as 401(k) deferrals are excluded from box 1 but may need separate treatment on the Canadian return, so keep the full slip rather than a summary.

The 1042-S is the slip most people cannot place. It is what a US payer issues to a non-US person, and box 7 shows the US tax withheld, which is the number you need for the credit. We explain it in what is a 1042-S and what do I do with it, and the rate question for rental owners in which exchange rate to use for US rental income.

How to avoid paying tax twice: Form T2209 and its limits

Reporting the gross income would double-tax you without the foreign tax credit. Form T2209 calculates a federal credit for foreign income tax paid, and Form T2036 carries any remainder to the Ontario return. Both are limited to the Canadian tax that applies to the same foreign income, so if the foreign country taxed you more heavily than Canada does, the difference is not refunded. On investment income, foreign tax above 15% is instead deductible from income under section 20(11).

US payroll taxes for Social Security and Medicare count as foreign income tax for this purpose, which is a meaningful credit for commuters. Foreign tax that exceeded the treaty rate does not count: if a US broker withheld 30% on dividends because you never filed a W-8BEN, Canada credits only the 15% treaty rate and the rest has to be recovered from the IRS. The full mechanics, including the business and non-business baskets, are in how the foreign tax credit works in Canada.

The form that reports the assets, not the income

Form T1135, the Foreign Income Verification Statement, is a separate filing that lists your foreign property when its total cost exceeded $100,000 Canadian at any time in the year. It covers foreign bank accounts, US brokerage accounts, US stocks held anywhere outside a registered plan, foreign rental property and debts owed to you by non-residents. It does not include personal-use property such as a Florida condo you never rent, or anything inside an RRSP, TFSA or RESP. The penalty for missing it starts at $25 a day, and the CRA can reassess more years when it is missing, so it belongs on the same checklist as the income lines. Our T1135 guide covers the thresholds and the simplified method for holdings under $250,000.

How we prepare returns with foreign income

We build a source list before we touch the return: every foreign account, slip and property, with the currency and the rate applied to each. From there the income maps to the lines above, the withholding to Form T2209 with the supporting slips attached, and the assets to the T1135. Where the foreign tax has not been finalized, we hold the credit until the US return is filed so the two agree. This is the routine work of our cross-border tax services, and the pre-season version is in our checklist for Canadians with US income.

Source: CRA — Form T2209, Federal Foreign Tax Credits; CRA — Form T1135, Foreign Income Verification Statement.