How does the foreign tax credit work on a T1, and what is the 15% rule?
For 2025 returns, the federal foreign tax credit on Form T2209 is generally the lesser of the foreign tax your client paid and the Canadian tax otherwise payable on net income from that country, computed country by country. Tax on foreign property income other than real property counts only up to 15%; the excess is deductible under s.20(11).
Business or non business foreign tax: which rules apply?
Section 126 runs two separate credits. Non business income tax is credited under s.126(1), business income tax under s.126(2), and only the business credit can use unused credits from the 10 years before and the 3 years after laws-lois.justice.gc.ca. Business income tax is foreign tax that relates to a business your client carries on in that country; everything else that qualifies is non business income tax, including tax on foreign capital gains
canada.ca.
| Rule | Non business income tax, s.126(1) | Business income tax, s.126(2) |
|---|---|---|
| What it covers | Tax on interest, dividends, pensions, employment income, foreign capital gains | Tax on income from a business carried on in that country |
| T2209 line | 43100 | 43400 |
| 15% cap for individuals | Yes, on property income other than real property | No |
| Tax the credit cannot absorb | No carryover; deduct under s.20(12) instead | Carry forward 10 years, carry back 3 |
| Provincial credit on Form T2036 | Yes, outside Quebec | No, T2036 covers non business tax only |
| Quebec resident | Revenu Québec gives the provincial relief | Multiply the business tax by 55% on T2209 |
Both credits are worked per country. The T2209 says that when total foreign tax across all countries is more than $200, you do the calculation for each country on a separate sheet and enter the total on the form canada.ca.
How does Form T2209 cap the credit?
For each country, the credit is generally whichever is less: the foreign income tax actually paid, or the tax otherwise payable in Canada on net income from that country canada.ca. On the 2025 form, the non business limit is net foreign non business income divided by net income, times basic federal tax
canada.ca.
| 2025 T2209 item | What goes in it |
|---|---|
| Line 43100 (line 1) | Non business tax paid to the country, minus any part deductible under s.20(11) or deducted under s.20(12) |
| Line 43300 | Net foreign non business income after related expenses, s.20(11) and s.20(12) deductions, treaty exempt income and income sheltered by the capital gains deduction; never more than net income |
| Net income | Line 23600 plus split income from Form T1206, minus lines 24400, 24900, 25000, 25300, 25395, 25400 and treaty exempt amounts on line 25600 |
| Basic federal tax | Line 42900 plus the federal dividend tax credit (line 40425) and federal surtax on income allocated outside Canada, minus the Quebec abatement (line 44000) and the First Nations abatement (line 44100) |
| Line 3 | Non business credit: the lesser of line 1 and the limit |
| Lines 4 to 11 | Business credit: line 43400 tax plus unused credits, against line 43900 net foreign business income |
| Line 13 | Lines 11 plus 12, entered on line 40500 of the return |
Line 13 can't be more than line 42900 of the return plus any federal surtax on income earned outside Canada canada.ca. So the credit only reduces federal tax; it never creates a refund. The non business credit is claimed first, and the business limit is reduced by it
canada.ca.
The 15% rule on property income and the s.20(11) deduction
For an individual, foreign tax on foreign property income other than real or immovable property counts as non business income tax only up to 15% of that income. The part above 15% is deductible from income under s.20(11) instead, and that deducted part is excluded from the credit laws-lois.justice.gc.ca. The 15% cap doesn't apply to corporations, and it doesn't apply to tax on rent from, or a sale of, foreign real property
canada.ca.
On the T1, the excess over 15% goes on line 23200 canada.ca. The gotcha is that the s.20(11) deduction also comes off net foreign non business income on line 43300, so the limit shrinks with it.
Worked example. Your client, an Ontario resident, earned $4,000 (in Canadian dollars) of interest from Country X, which has no tax treaty with Canada and withheld 25%, or $1,000. Assume net income as T2209 defines it is $100,000 and basic federal tax is $15,000.
| Step | Arithmetic | Result |
|---|---|---|
| Tax withheld | $4,000 × 25% | $1,000 |
| Counts as non business tax (line 43100) | $4,000 × 15% | $600 |
| Deductible under s.20(11) on line 23200 | $1,000 minus $600 | $400 |
| Net foreign non business income (line 43300) | $4,000 minus $400 | $3,600 |
| Limit | $3,600 ÷ $100,000 × $15,000 | $540 |
| Federal credit (line 3) | lesser of $600 and $540 | $540 |
| Tax still without a federal credit | $600 minus $540 | $60 |
The $60 isn't lost yet. Your client takes it to Form T2036 for the Ontario credit, and any part still without a federal, provincial or territorial credit can be deducted on line 23200 canada.ca.
Which foreign taxes don't qualify?
Tax paid above what the treaty requires doesn't count. The CRA treats it as a voluntary contribution, not foreign tax paid canada.ca. If a US broker withheld 30% on dividends because no W-8BEN was on file, the excess goes back to the IRS, not onto T2209. For the treaty rates themselves, see Canada US tax treaty withholding.
The 2025 T2209 also excludes from line 43100 any tax that relates to canada.ca:
- income deducted on line 25600 as treaty exempt (leave the income out of line 43300 too)
- taxable capital gains for which your client or their spouse or common law partner claimed the capital gains deduction
- income someone else received or is entitled to receive
- Canadian source income taxed abroad only because your client is a citizen of that country
- income earned inside a TFSA, and the tax withheld on it
US FICA (Social Security and Medicare) qualifies as non business income tax when two conditions are met: the contribution was required under US law, and it's reasonable to conclude your client won't get any benefit from it because the US employment was temporary and short canada.ca.
Provincial credit, currency and records
When the federal non business credit is less than the foreign tax paid, a client who did not live in Quebec on December 31 uses Form T2036 to claim a provincial or territorial non business credit against the tax of the province where they lived at year end canada.ca. Quebec residents skip T2036 and follow Revenu Québec's rules
canada.ca.
Convert foreign income and tax to Canadian dollars at the Bank of Canada rate for the day each amount arose. For a monthly pension or several payments through the year, use the annual average rate canada.ca.
On an electronic return, keep the documents. On paper, attach T2209, the foreign tax authority's assessment or similar proof of tax paid and a note showing your calculations; for US tax, add the W-2, the 1040 and the IRS account transcript canada.ca. Documents in another language need a qualifying English or French translation, and a CPA's signature is one of the accepted ways to certify it
canada.ca. Clients holding foreign property may also owe a T1135.
Sources
Can unused non business foreign tax be carried forward?
Which line on the T1 does the credit go on?
Does the 15% rule apply to US rental income?
No. The 15% cap covers property income other than real or immovable property, so US tax on rent from a US property is fully non business income tax, still subject to the T2209 limit laws-lois.justice.gc.ca.
Does a partner get a credit for foreign tax the partnership paid?
Yes. A partner entitled to a share of the partnership's foreign tax uses the amount in the financial statements or in boxes 171 and 172 of the T5013 slip canada.ca.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.