Is income in my foreign company taxed before I take it out?
It can be, in both systems, and by different definitions. Canada attributes the passive income of a controlled foreign affiliate to the shareholder as it arises. The United States pulls in defined categories of income and adds a residual inclusion for active income above a routine return. Neither waits for a dividend. So a profit still sitting in the foreign company may already have been taxed in the shareholder hands under one regime, both, or neither, depending on what kind of income it is and which system is asking. Establish the character of the income first; the inclusion follows from it.
Can the same profit be caught by both Canadian and US rules?
Yes, and it can also fall outside both. The two regimes each tax certain foreign company income to the shareholder before it is distributed, but they define what they catch differently: the Canadian rule is built around passive income of a controlled foreign affiliate, the US one around listed categories plus a residual inclusion for active income above a routine return. Overlap and gaps are both normal results. For someone inside both systems the real computation is the interaction, meaning what each regime includes, in which year, and what credit is available for the tax the other has already taken.
What counts as passive income inside a foreign subsidiary?
The character of the income is the whole question, and it is decided by what the company actually does rather than by what its constitution says. Interest, rents, royalties and investment returns sit at the passive end. Income from a real operating business, with people and functions behind it, sits at the active end. The Canadian regime is built around attributing the passive side to the shareholder as it arises. Because the same receipt can be characterised differently in each country, the classification has to be settled in both systems before either inclusion can be calculated.
What do I report if I live in Canada and own a company abroad?
Two separate things, and they are often confused. First the information reporting: the ownership itself is reportable, and that obligation attaches to holding the shares rather than to receiving anything. Second the attribution: the passive income of a controlled foreign affiliate is brought into your hands as it arises, whether or not a dividend was paid. If you are also inside the US system, that regime runs its own inclusion on its own definitions over the same profits. Start by establishing control and the character of the company income, because both answers depend on those two facts.
Does tax the foreign company paid reduce what I owe at home?
Relief for foreign tax is part of the computation rather than an afterthought, which is why the order of work matters. The inclusion is calculated first: what each regime attributes to you, on its own definitions, in which year. Then the tax already paid abroad on that same income is traced to that inclusion, so the credit is claimed against the right income in the right year. Where two systems both attribute the profit, the credit position is the thing that decides whether the result is one layer of tax or two.
Why does my US accountant include income my Canadian one does not?
Because they are applying two different definitions to the same company. The Canadian regime attributes passive income of a controlled foreign affiliate. The US regime catches defined categories and then adds a residual inclusion for active income above a routine return, which has no Canadian counterpart. Active operating profits can therefore be taxable to you in one system and not the other in the same year. Neither adviser is wrong on their own side. What is usually missing is the reconciliation between them, including which foreign tax is credited where, and that is one piece of work rather than two.
Can I set up a trust that works in two countries?
You can, but the two systems classify and tax trusts differently enough that a structure which is efficient in one is often a reporting problem in the other — a Canadian family trust with a US beneficiary, or a US revocable trust holding Canadian property, are the classic pairs. Canada's twenty-one-year deemed disposition, the US grantor rules and each country's reporting have to be read together, before drafting rather than after. See cross-border wills and trusts.
What is a foreign trust for US tax purposes?
A trust that is not a domestic trust — broadly, one that fails the tests looking at whether a US court can exercise primary supervision and whether US persons control the substantial decisions. The classification decides everything downstream: whether the settlor is taxed on the income as owner, how distributions to US beneficiaries are taxed, and which annual information returns are due. Many ordinary foreign arrangements, including some pension and education savings vehicles, land inside the definition. See Form 3520-A.
