What is Foreign Accrual Property Income (FAPI) and what affect does it have on my corporate taxes?
If you are a Canadian resident and own a foreign corporation that earns passive income, the income needs to be reported on your Canadian tax return even if you never received the funds. However, if the foreign corporation has a loss, the loss is not allowed to offset any other income you have for the year. Instead, the loss can be carried back three years against previous FAPI or forward 20 years against future FAPI.
Foreign corporations that earn active business income (i.e. income is income generated from a profession, calling, trade, manufacture, adventure or concern in the nature of trade — in other words, income that is generated from an activity) are excluded from FAPI.
Passive or property income is a return on invested capital such as rent, interest and royalties. Little or no effort is required to produce the return. Dividend income is specifically excluded from FAPI.
The amount of FAPI to include on the Canadian tax return varies.
In order to reduce taxes payable on the FAPI, a corporation is allowed to accrue and deduct the estimated foreign taxes on the income (i.e. the taxes charged in the foreign country plus withholding taxes on dividends).
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
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