Calculating Foreign Tax Credit in Canada
Calculation of foreign tax credit in Canada depends upon source of foreign income. Foreign tax credits are available for business income taxes and non-business income taxes. Taxpayer needs to categorize the income based on where and how the income was earned.
Business income and property income both make determination of business income difficult. One has to analyze the activity undertaken to earn income. Usually income earned from a passive investment (rental property) is generally a property income rather than business income.
Rental income is a real challenge when trying to decide if the income is from business activity or non-business activity. Determination of this depends upon nature and extent of services provided by the landlord. If the services provided to tenants are restricted to heat, light, parking and laundry facilities, income generated from such an activity can be considered as property income. Providing additional services can change the income type to business income.
For payments to qualify for the purpose of foreign tax credits, the amount paid must be the income tax. Sales tax, real estate tax, value added tax and customs tax are not income taxes and cannot be considered for calculating foreign tax credit.
Medicare and FICA can be considered in addition to income taxes paid in the U.S for calculating foreign tax credits.
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