Why did part of my foreign dividend arrive without further tax?
Because the foreign affiliate rules look at what the paying company earned, not simply at the fact that it paid. Earnings are tracked in pools — exempt, taxable and hybrid surplus — and the pool a distribution is treated as coming out of decides how it is handled in the hands of the Canadian shareholder. A dividend out of one pool can arrive without further Canadian tax; out of another it produces a different result entirely. The payment itself tells you nothing about which it was. The pools do, which is why they have to be computed rather than assumed.
Nobody has ever calculated our surplus accounts — is that serious?
It is common, it is fixable, and it is the thing that decides the answer. Without the pools you cannot say how a distribution should have been treated, so the filing position on money already received rests on an assumption rather than a computation. Reconstruction after the fact is possible. It needs the foreign company's financial statements and tax computations for every year since it became an affiliate, restated where the local basis differs from what the rules here require. The work is not conceptually difficult. It is long, and it costs more the later it is done.
Do I need surplus accounts for every foreign company we own?
The pools are tracked per affiliate, so each company has its own set. That matters most when distributions move through a chain: a dividend paid up one level changes the pools of both companies involved, and the treatment at the top depends on what happened at each step below it. Groups that keep accounts for the top company alone usually find the chain is where the difficulty lies. Begin with the affiliates that actually distribute or are likely to, and with any that are candidates for sale or liquidation, because those are where the figures are needed first.
Why am I taxed on income my foreign company has not paid me?
Because not all foreign income waits for a distribution. Income that is passive in character can be attributed to the shareholder as it arises, whether or not anything has been paid out. The reasoning is straightforward enough: an active business abroad is left to be taxed where it operates, but income that could as easily have been earned at home is not given a deferral simply because it sits inside a foreign company. So the first question to ask about a foreign subsidiary's profit is not when it will be distributed. It is what kind of income it is.
Does it matter whether the foreign company really trades?
It matters more than almost anything else about it. The distinction between income from an active business and income that is passive drives both halves of the analysis: whether income is attributed to you as it arises, and which pool the earnings fall into when they are eventually distributed. That makes the substance of the foreign operation — what it does, who does it and where they do it — a tax question rather than only a commercial one. It is also the element most easily evidenced at the time and most difficult to evidence several years afterwards.
We are selling a foreign subsidiary — do the pools still matter?
Yes, and usually more than in an ordinary year. The pools decide what a distribution before the sale would produce, while the cost base of the shares decides the gain on the sale itself, so the order of the two steps changes the total outcome. A group that has never computed its pools is choosing between those routes blind. If a sale is a realistic prospect within the next couple of years, that is the point at which reconstructing the accounts pays for itself, because the alternative is fixing the shape of a transaction without knowing what is inside the company.
Does GILTI apply to individuals?
Yes, and it lands harder on them. An individual US shareholder of a controlled foreign corporation has the same inclusion a corporate shareholder does, but without an election gets neither the corporate-level deduction nor credit for the foreign corporate tax already paid — so foreign profit can be taxed at individual rates with no relief for tax the company paid abroad. An election to be taxed as though through a domestic corporation is usually the first thing to model. See Form 5471 and CFCs.
What is Form 5471 and who has to file it?
The information return a US person files about a foreign corporation they own or control, in one of several filer categories that determine which schedules apply. It is not a tax computation, which is exactly why it gets missed — and why the penalty regime is severe. The consequence people underestimate is that a missing 5471 can keep the limitation period open on the whole return, not merely on the foreign company's figures. See Form 5471.
