In these global, interconnected times, it's not unusual for people to have a secondary source of income from a country outside of Canada. But if you generate income outside of Canada, you must still pay taxes to the CRA and the foreign country. However, you can claim back taxes paid to another country, and Form T2209 is the CRA's way of helping you do just that.
What is a T2209 Form?
T2209 is a Federal Foreign Tax Credit form used to claim tax credits for specific income. Specifically, the T2209 is designed for taxpayers that declared foreign income and had to pay income tax (for that income) to the foreign country. CRA allows taxpayers to claim both business and non-business income tax. This includes contributions made towards foreign pension plans if your stay in another country was temporary and you cannot benefit from such plans. However, you have to be legally bound (by the foreign country's legislature) to make the contributions for you to claim them on your federal income tax. Form T2209 features various sections as follows:
1. Non-Business Tax Credit
The federal non-business tax credit section is precisely what the name suggests. This is where you enter non-business income and tax paid to the foreign country to calculate the total tax credit you can claim in foreign taxes.
2. Business Tax Credit
The federal foreign business tax credit section is where you enter the business income tax paid to a foreign country. This section requires amounts from Part 2 of T2203 and line 42900 of your income return. It features calculations for determining the total business tax credit you can claim.
3. Foreign Tax Credit
This is the last section and features only one line (12) where you enter the total amount of foreign tax credit you are claiming on the countries specified at the top of the slip. It is an addition of the on-business tax credit and business tax credit. The total federal foreign tax credit calculated on T2209 should be entered on line 40500 of your income return and must not exceed the amount on line 42900.
If you paid foreign income taxes to more than one counter other than Canada, and the total exceeds $200, you should calculate them separately and include the total in form T2209.
Who Should Fill One Out?
Form T2209 is for anyone who paid foreign income taxes on income from outside Canada and declared it in their Canadian return. Essentially, if you earn income outside Canada, the CRA expects you to declare the income on your return and it can be taxed if it meets a given threshold. According to their legislature, foreign countries also impose taxes on income made by citizens from other countries, so you may have to pay taxes to a foreign country. The CRA allows you to claim back these amounts in tax credits using the T2209 Federal Foreign Tax Credit form.
As a tax credit, you will claim the full amount of tax paid to the foreign country or the tax you are supposed to pay the CRA for income generated from that country. The CRA allows you to claim the lower amount of these two. You cannot claim amounts included in line3 256 of your return, which is where you enter non-taxable income under Canadian tax treaty laws. Taxes paid on income from foreign property can be claimed on T2209, but the tax credit cannot be more than 15% of the net income earned from the property.
Canadians can also claim contributions made to foreign pension plans grouped under non-business income tax credits. To qualify, you must meet two distinct conditions. The first is that you must be required by the legislation of the foreign country to make these contributions. Secondly, the CRA must come to a reasonable conclusion that there's no way you will benefit from these contributions, given your employments in the foreign country was temporary. Form T2209 protects taxpayers from paying taxes twice on the same income. However, if the foreign country charged more tax than what you are supposed to pay the CRA for foreign income, you will claim the latter, which is the lowest amount.
How to Calculate My Foreign Tax?
Ideally, the tax credits you receive from filing the T2209 should offset the contributions you made to a foreign country if there's an existing tax treaty with Canada. Form T2209 features the calculations necessary to identify your foreign income tax, a combination of non-business taxes and business taxes paid to the foreign country. Any contributions above the amounts required by the foreign country are considered voluntary and cannot be claimed.
The CRA only allows claiming taxes paid to countries with an existing tax treaty with Canada. CRA will charge you foreign income tax using the provided federal and provincial/territorial tax rates for the amounts you declare. To calculate your foreign tax, you must calculate the foreign net income and multiply it by the federal tax rate. If the tax is lower than the amount paid to the foreign country, you can claim the full amount paid to the CRA. Otherwise, your tax credit will be the amount paid to the foreign country.
The simple calculation for foreign tax is:
Gross foreign income minus expenses/costs incurred generating the gross income.
Other deductions are required to calculate the net income, which is then multiplied by the standard federal tax rate. For taxes paid to foreign countries, the calculations are provided by respective taxing authorities in those regions.
