Canada taxes its residents on worldwide income — meaning every dollar you earn anywhere in the world is subject to Canadian tax. This guide explains how foreign income is reported, how to avoid double taxation, and what forms you need to file.
The basic rule: worldwide taxation
If you are a Canadian resident for tax purposes, you must report income from all sources, both inside and outside Canada:
| Income Type | Must Report? | Possible FTC? |
|---|---|---|
| Foreign employment income | Yes | Yes |
| Foreign business income | Yes | Yes |
| US dividends and interest | Yes | Yes |
| Foreign rental income | Yes | Yes |
| Foreign pension income | Yes | Yes |
| Capital gains on foreign property | Yes | Yes |
| Foreign inheritance | Generally no (not income) | N/A |
How the foreign tax credit works
The foreign tax credit (FTC) prevents you from being taxed twice on the same income; if income was missed in prior years, review what happens if you do not report foreign income before filing corrections.
Example
- You earn $10,000 USD in US investment income
- The US withholds 15% ($1,500 USD) in tax
- You report the full $10,000 USD (converted to CAD) on your Canadian tax return
- You claim a foreign tax credit of $1,500 USD (converted to CAD) against your Canadian tax
- You only pay the difference between your Canadian tax rate and the US rate already paid
If your Canadian tax rate on that income is 40% and you already paid 15% to the US, you owe approximately 25% to Canada.
US income: special rules
The Canada-US Tax Treaty governs how income is taxed between the two countries.
US employment income
If you work in the US (or remotely for a US employer), that income is taxable in both countries. You file a US tax return (1040-NR) and claim the US tax paid as an FTC on your Canadian return.
US dividends
US companies withhold 15% tax on dividends paid to Canadian investors (0% for RRSP accounts under the treaty). Report the gross dividend on your Canadian return and claim the FTC.
US social security
US Social Security benefits received by Canadian residents are 85% taxable in Canada. The US generally does not tax these benefits if you are a Canadian resident.
US rental income
Rental income from US property is taxable in both countries. File a US return to report the rental income, pay US tax, and claim the FTC on your Canadian return.
Form T1135: Foreign Income Verification
If the total cost of all your specified foreign property exceeds $100,000 CAD at any point during the year, you must file Form T1135.
What counts as specified foreign property
- Foreign bank accounts
- Foreign stocks held on foreign exchanges (not Canadian-listed ETFs holding foreign stocks)
- Foreign bonds
- Foreign rental real estate
- Foreign business interests
What does NOT count
- Canadian-listed ETFs that hold foreign stocks (e.g., XEQT, VUN)
- Property used exclusively for personal use (foreign vacation home)
- RRSP, TFSA, RESP holdings (even if they contain foreign investments)
Penalties for not filing T1135
$25 per day late, up to $2,500. For deliberate non-compliance, penalties can be much higher.
Currency conversion
All foreign income must be reported in Canadian dollars. Use the Bank of Canada exchange rate for the date the income was received, or the average annual exchange rate if reporting aggregate amounts.
Common situations
Canadian working remotely for a US company
Your income is generally only taxable in Canada (where you perform the work). The US company may issue a W-8BEN form certifying you are a Canadian resident and not subject to US withholding.
Canadian with US rental property
File a US tax return (Form 1040-NR), report the rental income, deduct expenses, and pay US tax. Claim the US tax paid as an FTC on your Canadian return.
Canadian with a US brokerage account
Report all US investment income on your Canadian return. Claim FTC for any US withholding tax. File T1135 if the account value exceeds $100,000 CAD.
Bottom line
Canadian residents are taxed on worldwide income, but the foreign tax credit system prevents true double taxation. The key is to report everything and claim your credits. If your foreign financial affairs are complex, consider consulting a cross-border tax specialist. Use our income tax calculator to estimate your Canadian tax on combined domestic and foreign income.
Voluntary Disclosure Program
If you realize you have not reported foreign income from prior years, CRA’s Voluntary Disclosure Program (VDP) allows you to correct the record with reduced penalties:
- Apply before CRA contacts you or launches an audit
- Pay the back taxes and interest owed — but penalties are typically waived or reduced
- Available for unreported income, unfiled T1135s, and other omissions
Applications are submitted online through CRA My Account. A tax professional familiar with cross-border matters can help navigate the VDP for complex multi-year foreign income situations. The VDP is far preferable to CRA discovering the omission through an audit, which can result in full penalties and potential criminal charges for deliberate evasion.