What kinds of income count as Subpart F income?
Broadly two families. The first is passive income of a sort that is not tied to where the company actually operates, such as interest, dividends, rents, royalties and gains on investment property. The second is income from dealings with related parties, where goods or services are bought from or sold to connected companies outside the country in which the company carries on business. Everything else, which in an ordinary trading company is usually most of the total, falls outside these categories. The classification is done on the company's own income, line by line, rather than on how the company describes itself, so a business everyone would call active can still have some of this income in it.
My company only trades actively, so can any of it still be caught?
Usually some of it. The items that catch trading companies are the ordinary ones. Interest earned on operating cash and term deposits. Rent from a property the company owns and does not occupy. Royalties on something it licenses out. Dividends from an investment portfolio holding surplus funds, and gains when any of that is sold. None of these look like a tax structure and all of them fall in the passive family. It is worth reading a year's trial balance with this in mind before concluding that nothing applies, because the answer is rarely nothing, and it is often small enough to be manageable once it has been identified.
Do I pay US tax on this even with no dividend paid?
Yes. That is the whole point of the regime, and it is the part that catches shareholders out. The income is attributed for the year the company earns it, so there can be a liability in a year in which nothing left the company and no cash reached the shareholder at all. Where the company needs its cash for working capital, the shareholder has to fund the charge from elsewhere. Knowing the figure before the year end, rather than at filing time, is the practical difference between a manageable position and a scramble. That is the argument for classifying the income quarterly instead of once a year.
Is there an exception if the amount is small?
There are thresholds at both ends, and both are measured against the company's gross income rather than against its profit. A company whose income in these categories is small relative to gross income can fall below the lower threshold. A company whose income in these categories is large relative to gross income crosses a rule at the top end that sweeps the rest of its income in with it. Because the measure is gross, a business with high turnover and thin margins behaves quite differently from what its profit and loss account suggests, in both directions. The test has to be computed rather than judged by eye, and recomputed every year.
How does this interact with the Canadian tax on the same profits?
Canada taxes the company when it earns the profit and the shareholder when it is distributed. The attribution happens on the US side at the company's year end, which is usually neither of those moments. The result is that tax is paid in the two countries in different years on the same income, and relief for one against the other depends on the two charges meeting in the same period. This is worth working through before the company's remuneration and distribution pattern is set for the year, because that pattern is the only part of the arrangement anyone can still change.
What records prove which part of our income is caught?
A trial balance you can split by the character of each revenue line, which in practice means a chart of accounts that separates interest, rent, royalties and investment gains from trading revenue instead of pooling them into other income. Beyond that: the agreements behind any related-party purchases and sales, records showing where goods were produced and where they were sold for use, and the company's own gross income figures for the threshold computations. Groups that rearrange the chart of accounts once, to match the categories, find the annual work drops to a fraction of what the first year cost them.
Which countries have a tax treaty with the United States?
Around sixty, including Canada, the United Kingdom, India, Australia and most of western Europe — but the list matters less than the terms, because each treaty caps rates and allocates income differently. Two countries with treaties can produce opposite answers on the same pension or the same royalty. What decides your position is the specific article covering your income type. See our country guides.
How much foreign income is tax-free in Canada?
None of it is tax-free for being foreign. A Canadian resident is taxed on worldwide income, so foreign salary, interest, dividends, rent and gains all go on the return, converted to Canadian dollars. What genuinely reduces the bill is the basic personal amount, the credit for foreign tax already paid, and any treaty article that exempts a specific type of income. The reporting thresholds people have in mind — the foreign property statement, for one — govern reporting, not exemption. See the foreign tax credit.
