Provincial and territorial foreign tax credits

Every province and territory allows a corporation to claim a foreign tax credit for taxes it paid to another country on foreign non-business income. This credit reduces the provincial tax otherwise payable; however, you cannot claim foreign tax credits for the provinces of Quebec and Alberta on the federal return, because these provinces collect their own income taxes.

The provincial or territorial foreign tax credit is available to a corporation that meets all of the following:

  • it is resident in Canada throughout the tax year
  • it has a permanent establishment in the province or territory at any time in the tax year
  • it has foreign investment income for the tax year

For Ontario, an authorized foreign bank is eligible for the foreign tax credit if it performed Canadian banking business.

The tax credit can only be claimed if the foreign non-business income tax paid exceeds the federal foreign non-business income tax credit deductible for the year.

For each province or territory for which you are claiming a credit, you have to do a separate calculation. Also, if you paid tax to more than one foreign country you have to do a separate calculation for each country.

If dual rates of corporation tax apply, use the higher rate when you calculate the foreign tax credit. For Ontario, use the basic rate of tax.

Note

If the tax rate has changed during the tax year, you have to prorate the calculation in Part 9 of Schedule 21 using the number of days in each period. For British Columbia, prorate the tax rate in each period, round off the prorated rates to the nearest one-thousandth of 1 percent (= 0.001%), and add the rounded percentages for the periods before multiplying by the foreign non-business income.

On the appropriate lines of part 2 of Schedule 5, Tax Calculation Supplementary – Corporations, enter the applicable provincial and territorial foreign tax credits.

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