Updated Checked by the Tax-Services.ca editorial team How we check
If you live in Canada, foreign income goes on your Canadian return, in Canadian dollars. You convert each amount at the Bank of Canada rate for the day it arose, and any tax the other country took may earn you a foreign tax credit on Form T2209. That credit can never be bigger than the Canadian tax on the same income. So on $3,000 of foreign dividends, for a worker earning $90,000 in Ontario, the most the credit can cancel is about $890.
What counts as foreign income?
Anything from a source outside Canada that a Canadian resident earns. A US pension, dividends from a European stock, interest from a bank abroad, rent from a flat in another country, wages for work done overseas. The CRA’s guidance on foreign employment income sits with line 10400, and foreign interest and dividends go through line 12100 with your other investment income.
Two rules catch people. First, you report the gross amount. Don’t take the foreign tax off before you write the figure down, because the tax is claimed separately. Second, foreign dividends don’t qualify for the Canadian dividend tax credit, so they’re taxed like ordinary income. You can test that with the dividend tax calculator by entering them as other income instead.
It makes no difference that the money never touched a Canadian bank account. A pension that stays in a foreign account, or rent your cousin collects for you abroad, is still income you earned as a Canadian resident.
How do you convert foreign income to Canadian dollars?
The CRA’s default is the Bank of Canada exchange rate in effect on the day the amount arose.
Use the Bank of Canada exchange rate in effect on the day these amounts arose.
Federal foreign tax credit, line 40500, canada.ca
For something that arrives in many small payments, like a monthly pension, the average annual rate is accepted. The CRA also allows rates from a few other sources, such as Bloomberg, Thomson Reuters or OANDA, if they’re widely available, checkable and used the same way every time.
| Situation | Rate to use |
|---|---|
| One dividend or one sale | Bank of Canada rate on that day |
| Monthly pension or many payments | Average annual rate |
| Foreign tax you paid on that income | Same rate you used for the income |
Use one method and stay with it. Mixing daily rates for some items and averages for similar ones invites questions you don’t need.
A quick illustration, using a made-up rate of 1.40 Canadian dollars per US dollar. A US$1,000 dividend becomes $1,400 on your return. If US$150 was withheld at the source, that tax converts at the same rate, so it’s $210. The rate on the real day will differ, so look it up before you fill in the form.
How does the foreign tax credit work?
You claim it on Form T2209, and the result goes to line 40500. Residents outside Quebec also fill in Form T2036 for the provincial credit. For each country, you get the smaller of two numbers: the foreign income tax you paid, or the Canadian tax otherwise payable on your net income from that country.
Here’s what that does on $3,000 of foreign dividends added to $90,000 of Ontario employment income. Our engine puts the Canadian tax on that extra $3,000 at $889.50, a 29.65% rate on the top dollars. The credit cap on the real form is worked out with a formula, so treat the cap below as a close guide.
| Foreign tax withheld | Credit you can claim | Extra Canadian tax left |
|---|---|---|
| $450 | $450 | $439.50 |
| $889.50 | about $889.50 | about $0 |
| $1,200 | about $889.50 | about $0 |
In that last row you’ve paid $310.50 more than Canada will credit. You don’t get it back through this credit. Move the same dividends onto a $40,000 salary and the Canadian tax falls to $571.50, which shows why the credit shrinks as your rate drops. Try your own figures in the income tax calculator and the marginal tax rate calculator.
If income is exempt under a tax treaty and you deducted it on line 25600, leave it, and the tax withheld on it, out of the credit calculation.
When do you have to file a T1135?
Form T1135, the Foreign Income Verification Statement, is a separate form from the return. You need it if you’re a Canadian resident and your specified foreign property cost more than $100,000 at any time in the year. Cost, not current value.
That property includes funds held outside Canada, shares of non-resident corporations, foreign rental property and debts owed by non-residents. It leaves out personal-use property, property used only in an active business and a few other items the CRA lists. The form has a simple version for holdings between $100,000 and $250,000, and a detailed one from $250,000 up. Most individuals file by April 30, and self-employed people by June 15. The CRA says penalties for late or false forms are significant, and we haven’t confirmed the amounts, so read its penalties page before you skip one.
What goes wrong with foreign income?
Most errors are small, and they’re all avoidable. Come tax time, it’s worth running down this list before you hit send.
- Reporting US dollars or euros as if they were Canadian dollars.
- Subtracting the foreign tax from the income before entering it.
- Claiming a credit larger than the Canadian tax on that income.
- Forgetting the T1135 because the account looked small, when the cost of everything added up went past $100,000.
Foreign capital gains and rental income need their own care. The capital gains tax calculator covers the Canadian side of a sale, and the rental income tax calculator does the same for rent. Neither one models the foreign tax credit, so work that part on Form T2209. The tax credits calculator is federal only.
What if the other country already taxed it?
You still report it in Canada. Paying tax abroad doesn’t take income off your Canadian return, it only opens the door to the credit above. Keep the foreign slips or statements showing what was withheld, since the form asks for the amounts and the country, and you’ll want proof if the CRA writes back.
How we checked the figures
The rules come from Canada Revenue Agency pages on the federal foreign tax credit, line 12100 and Form T1135. The example tax figures come from our calculator engine, which uses 2026 federal and Ontario data. We haven’t seen 2026 filing dates, so the T1135 dates above are the ones the CRA page gives today. Treaty rates and what each country withholds vary, and we haven’t listed them.
Frequently asked questions
Do I report foreign income if I already paid tax on it abroad?
Yes. You report the gross amount in Canadian dollars and claim the foreign tax separately as a credit on Form T2209.
Which exchange rate should I use?
The CRA's default is the Bank of Canada rate on the day the amount arose, or the average annual rate for many small payments. Use the same rate for the income and the tax paid on it.
Is there a dividend tax credit on foreign dividends?
No. The CRA says foreign dividends don't qualify, so they're taxed like other income.
When do I need Form T1135?
When specified foreign property cost you more than $100,000 at any time in the year. It counts cost, not market value.
Can the foreign tax credit be larger than my Canadian tax?
No. For each country you claim the smaller of the foreign tax paid and the Canadian tax on that income.
- How Canadian income tax works: brackets and credits
How federal and provincial Canadian income tax stack up, what marginal and average rates mean, and how credits and deductions change your bill