How do I know if my foreign company is a controlled foreign affiliate?
Two questions, in order. First, is the non-resident corporation a foreign affiliate at all, which is an equity test on your interest. If it is, the second question is control, and control is not measured on your own holding alone: shares held by related parties, and by certain other Canadian shareholders, are brought into the count. So a company in which you hold a large but not majority stake can still be controlled for this purpose. It is worth answering both questions in writing, because the second one changes the Canadian treatment of the company's income while the money is still abroad.
Can I control a foreign company I own less than half of?
For this purpose, yes. The control test is not simply whether you hold a majority of the votes. Interests held by persons related to you count, and in defined circumstances so do the holdings of other Canadian residents, so several shareholders who each consider themselves a minority can add up to control. There is also the question of arrangements sitting outside the share register: a shareholders' agreement, a voting arrangement, a right to appoint directors. That is why the analysis reads the constitutional documents rather than the ownership percentages on their own.
Does this mean I pay tax before taking any money out?
On part of the income, potentially yes, and that is the whole point of the classification. Where a foreign affiliate is controlled, the passive income it earns can be attributed to the Canadian shareholder in the year it arises rather than when a dividend is paid. The company keeping its profits in its own bank account does not postpone the Canadian charge. Active business earnings are treated differently, which is why the split between business income and income from property inside the affiliate matters more here than anywhere else in the structure.
My spouse and I each own part of a foreign company, does that count?
Almost certainly it is counted together. The control test takes in the holdings of related persons, and spouses are related, so two stakes that are each short of control can produce a controlled foreign affiliate between them. The same applies to shares held by children or parents in the same company. This is the most common way clients arrive at the status without intending to: the shares were split for reasons that had nothing to do with tax, often on incorporation abroad, and each holder then assessed their own position in isolation.
Is a controlled foreign affiliate different from a foreign affiliate?
It is a narrower category inside it. Every controlled foreign affiliate is a foreign affiliate; the reverse is not true. Affiliate status brings the surplus accounting and the information reporting. Control adds the attribution of passive income to the Canadian shareholder before any distribution is made. The two tests do different jobs and are answered separately, so a file that establishes the first without addressing the second has stopped halfway. If the shareholding or the other shareholders change, the second answer can change while the first stays exactly as it was.
What happens if the company stops being controlled partway through a year?
Status is tested by reference to the year, so the first job is establishing when it changed and on what evidence: a share sale, a new investor, a death in the family altering who is related to whom. Attribution, and the reporting that goes with it, follow the period in which the status existed. Clients tend to treat the change as a clean break from the date on the paperwork, and the paperwork often disagrees with the company's own records in its home country. Resolving that difference is usually where the work is.
What is double taxation in a corporation?
That is the economic form: the company pays tax on its profit, then the shareholder pays tax again on the dividend distributed out of that same after-tax profit. Domestic systems soften it with dividend credits or reduced rates on distributions; across borders it is compounded by withholding tax in the paying country. Which relief applies turns on the entity type and the treaty article covering dividends. See repatriating profits.
What counts as foreign income, and what is a foreign tax?
Foreign income is income sourced outside the country you are filing in — where the work was done, where the property sits, where the payer is resident, depending on the type. A foreign tax, for credit purposes, is a levy imposed by another country that functions as an income tax and that you were legally required to pay. Consumption taxes, property taxes and most social contributions are not, however real the cost. Sourcing is decided by rule, not by which bank received it. See the foreign tax credit.
