Do I pay Canadian tax on my foreign company's profits before dividends?
On some kinds of profit, yes. FAPI is the passive income of a controlled foreign affiliate, broadly the income the company earns from holding property rather than from carrying on a business, and it is attributed to the Canadian shareholder as it arises rather than when a distribution is made. Leaving the money in the company's own account does not postpone it, because that deferral is what the rules exist to remove. Active business earnings are dealt with differently, which is why the split between the two inside the affiliate decides how much of this reaches you.
What kind of income counts as FAPI?
Start with the character of the income rather than with the company. Income the affiliate earns from holding property, such as interest, dividends from portfolio holdings, rent, royalties and gains of an investment character, is the core of it. Income from an active business is not, though certain income that resembles business income is recharacterised. The practical work is almost always classification: one company with a trading arm and an investment account has both kinds, and the line has to be drawn stream by stream on what the company did to earn each one. A profit and loss account prepared abroad will not draw it for you.
Is rent from my overseas property FAPI if a company holds it?
Rental income earned by a controlled foreign affiliate is income from property in character, so it sits squarely in the territory FAPI is concerned with. Whether that is the right answer for a particular property depends on what the company does beyond collecting rent: the scale of the operation, who performs the work, whether there is a business being carried on rather than an asset being held. That is a facts exercise. It is also the situation we meet most often, because holding a let property through a local company is entirely normal in many countries and carries no implication there at all.
My foreign company is a real trading business, can it still have FAPI?
Yes, and usually it does. A trading company with a deposit account earning interest, or with surplus cash placed in investments, has income from property alongside its business income. The existence of a genuine trade does not immunise the rest of the profit and loss account. What it does mean is that the computation has to separate the streams rather than characterise the company as a whole. Clients often read the classification as a judgement on whether their business is real. It is not. The question is asked of each stream of income rather than of the business behind it.
Do I get relief for the tax the foreign company already paid?
The system recognises foreign tax borne on the same income, so the attribution is not intended to leave you taxed twice over. The relief is mechanical and it is computed in the same schedules as the income, which means it is only as good as your evidence of tax actually paid by the affiliate: assessments, returns and receipts from its own jurisdiction, matched to the income they relate to. Where clients lose the relief it is almost never because it was unavailable. It is because the foreign documents were never obtained, and by the time anyone asked, the local accountant had moved on.
What happens when the money is finally paid out to me?
Income that has already been attributed to you should not be taxed a second time on distribution, and the mechanism for that depends on the attribution having been recorded properly in the first place. This is the argument for doing the computation every year rather than in a rush when a dividend is contemplated: the amounts previously taken into income, year by year, are what the distribution is measured against. A file with attribution done for some years and not others cannot answer the question on payment, and the default is not in your favour.
What is OECD Pillar Two?
A global minimum effective tax for large multinational groups, delivered through top-up taxes rather than a single global rate. Where a group's effective rate in a jurisdiction falls below the agreed minimum, the shortfall is collected — by the parent jurisdiction under the income inclusion rule, by the source jurisdiction under a domestic top-up, or as a backstop by other jurisdictions. Canada has enacted implementing legislation. The compliance burden is data, long before it is tax. See BEPS and Pillar Two.
How do I actually stop being taxed twice?
In this order. Fix your residence under each country's own rules, and if both claim you, apply the treaty tie-breaker. Identify where each type of income is sourced. Read the article that covers that income type, because it decides who taxes and at what maximum rate. Then claim the relief on the residence-country return, with proof of the foreign tax. Most of the tax people lose to double taxation is lost at the last step, not the first. See how double taxation is relieved.
