Is Form T2036 a separate claim from the federal credit?
Yes, and the distinction is the whole point of the form. The federal foreign tax credit is claimed first, against the Canadian federal tax on the same foreign income. Form T2036 claims the provincial or territorial share, and only where that federal credit did not absorb all of the foreign non-business tax. They are two computations on two forms, and the second does not follow automatically from the first. If the federal credit has taken up the whole of the foreign tax there is nothing left for this form to pick up. If it has not, the residue is exactly what the form exists to claim, and leaving it unfiled leaves that residue with nobody.
Who can claim the provincial foreign tax credit?
A resident of Canada who paid foreign non-business tax in the year and whose federal foreign tax credit did not absorb all of it. Both halves matter. Residence in Canada for the year is what puts the foreign income into the Canadian return in the first place, and the unabsorbed residue is what gives the provincial form something to work on. If you were not resident, or if the federal credit covered the whole of the foreign tax, this form has no work to do for that year. The test is arithmetic rather than judgement, but it has to be run before you can answer it.
Does Form T2036 cover foreign tax on business income?
The residue this form claims is foreign non-business tax — the tax taken at source on things like dividends, interest and pension income from abroad. Foreign tax paid on business income carried on outside Canada is a different computation and is not the balance this form is picking up. It is a distinction people trip over when they have a mix of both in the same year, because the foreign paperwork rarely labels the income the way the Canadian forms need it labelled. Separate the two categories first; the provincial claim can only be sized once you know which pot the foreign tax sits in.
Why would foreign tax be left over after the federal credit?
Because the federal credit is limited by the Canadian federal tax on that same foreign income. Where the foreign country took more tax on the income than Canada charges federally on it, the credit runs out before the foreign tax does, and a residue remains. That residue is the point of the provincial form. It is most visible in a year with heavy withholding at source on foreign investment or pension income, and least visible in a year where the foreign rate was lower than the Canadian one, in which case the federal credit will have swallowed the lot and there is nothing to carry across.
My accountant only claimed the federal credit — did I miss the provincial one?
It is the commonest version of this question, and the reason is structural rather than careless: most filers stop at the federal credit because that is where the foreign tax first appears, and the provincial claim is a separate computation on a separate form. Whether anything was actually missed depends on the year. Take the foreign non-business tax paid, take the federal credit that was allowed against it, and see whether a residue was left. If it was, that year had a provincial claim in it. If it was not, nothing was lost by stopping at the federal form.
Is the provincial credit worth claiming after a heavy withholding year?
A year of heavy foreign withholding is precisely the year it is worth doing, because that is when the federal credit runs out before the foreign tax does and leaves a residue for the provincial form. It is also the year most likely to be skipped, since the work involved is a second form and a second calculation on income that has already been dealt with once. Nobody can tell you what it produces without running it: the answer depends on the foreign tax paid, the federal credit limit for that year, and the province or territory you were resident in.
When is Form 1116 not required?
Three situations. You elect the exception for a small amount of creditable foreign tax that arises from passive income and is reported to you on a payer statement such as a 1099 or K-1. You choose to deduct the foreign tax instead of crediting it. Or all the foreign income was excluded under the foreign earned income exclusion, in which case there is no credit to claim on it in the first place. The first option costs you the carryover. See Form 1116.
Should I claim the foreign tax credit or deduct the foreign tax instead?
The credit is usually worth more, because it reduces tax rather than income, and because unused amounts carry over. The deduction can win in narrow cases — where the limitation would waste most of the credit and you have no prospect of foreign income later to absorb it. The choice is all-or-nothing for the year and it interacts with your carryovers, so it is a decision to model rather than to default. See exclusion against credit.
