Why was my foreign dividend taxable when someone else's was not?
Because dividends from a foreign affiliate are treated according to the pool they come out of, not according to the company or the country in the abstract. Taxable surplus is the pool whose distribution attracts Canadian tax, with a deduction recognising the foreign tax underlying the earnings. A different affiliate, or the same affiliate in a different year, may have earnings in a pool treated more favourably. Two shareholders with apparently similar companies can get different answers because their affiliates' earnings were of different characters, or arose in different countries.
What kind of earnings end up in taxable surplus?
Broadly, the earnings that do not qualify for the favourable pool: income of a passive character, and active earnings from a country outside the treaty and agreement network. The classification is applied to each year's earnings as they arise, so one affiliate's accounts can carry balances in more than one pool at once. This matters before a distribution rather than after it. A dividend is measured against the balances as they stand, so the work of sorting the earnings has to have been done in the years they were actually earned.
Do I get credit for the tax my foreign company already paid?
Relief for the foreign tax underlying the earnings is part of how this pool works: a distribution from it attracts Canadian tax with a deduction reflecting the tax already borne. The catch is evidential rather than legal. The deduction has to be computed from the affiliate's own assessments and returns in its home country and matched to the earnings being distributed, and those are the documents clients tend not to have. Where relief is lost on a file, the usual cause is not the rules. It is that nobody obtained the foreign paperwork while it was still obtainable.
Does taxable surplus mean the same income is taxed twice?
The design is that it is not. The Canadian charge on a distribution from this pool comes with a deduction for the foreign tax the earnings already bore, so the intention is one overall burden rather than two in full. Whether that works out in a particular case depends on the relationship between the two tax systems and on the quality of the evidence for what was paid abroad. Where clients do end up substantially taxed twice, it is generally because the underlying foreign tax could not be substantiated, not because the mechanism failed.
Can I choose which surplus pool to pay a dividend from?
Not freely. The pools are drawn on in an order the rules set, so labelling a payment as coming from the favourable pool does not make it so. What a shareholder can influence is the state of the accounts before the payment: whether the balances have been computed, whether the classification of each year's earnings is supported, and whether the foreign tax figures behind the deduction are documented. Planning a distribution therefore starts with the surplus accounts, and where they do not exist, that is the first piece of work rather than a formality.
How is the underlying foreign tax on a distribution worked out?
It is computed from the affiliate's own tax position in its home country and matched to the earnings being distributed, which is more fiddly than it sounds. The foreign tax year may not line up with the Canadian one. Assessments may be issued or revised after the dividend. The tax the company paid may relate to the earnings of several years, only some of which are being distributed. So the arithmetic is a matching exercise between two sets of records, and the answer holds only as long as the foreign position it was drawn from stays put.
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.
What is double taxation?
Double taxation means the same income being taxed by two authorities. It comes in two forms: juridical, where two countries each tax one person on one amount, and economic, where two different people are taxed on the same underlying profit — a company on its earnings and a shareholder on the dividend paid out of them. Relief comes from a treaty, a foreign tax credit, or an exemption, and which one applies depends on the income type. How to avoid double taxation sets out the routes.
