Foreign withholding tax is not automatically a sunk cost in a non-registered account. With the right paperwork, most or all of it comes back via your T1. This guide covers the claim itself; why Canada taxes the income in the first place is explained in foreign income tax in Canada, and the other cross-border topics are listed in the international tax guides.
Overview of the foreign tax credit process
- Foreign payer withholds tax on dividends/interest paid to your non-registered account
- Canadian broker issues a T5 or T3 slip showing the gross foreign income (box 15 or 25) and foreign tax paid (box 16 or 34) in CAD
- You report the gross foreign income on T1 Line 12100 (foreign dividends/interest)
- You complete Form T2209 (non-business income section)
- You enter the credit on Line 40500 of your T1, reducing federal tax owed
- You complete the provincial equivalent (usually Form T2036) for provincial credit
Form T2209: Non-Business Income section fields (simplified)
| Field | Description | Example |
|---|---|---|
| Country | Name of country where tax was paid | United States |
| Foreign income | Gross foreign income in CAD | $1,380 |
| Foreign tax paid | Amount withheld, in CAD | $207 |
| Net income subject to tax | Taxable amount in Canada | $1,380 |
| Tax otherwise payable | CRA tax on that income | $455 |
| Credit (lesser of two columns) | The allowable credit | $207 |
What counts as creditable foreign tax
| Qualifies for T2209 | Does NOT qualify |
|---|---|
| Withholding tax on foreign dividends | Interest on foreign bonds held in RRSP/TFSA |
| Withholding tax on foreign interest | Capital gains tax paid abroad |
| Foreign tax passed through on T3 slip | Indirect taxes (VAT, GST from foreign country) |
| Directly withheld and shown on T5 | Penalties or fines paid to a foreign government |
Line references on the T1
| Line | Description |
|---|---|
| 12100 | Foreign interest and dividends (gross, before withholding) |
| 40500 | Federal foreign tax credits (from Form T2209) |
| Form 428 | Provincial foreign tax credits (from Form T2036) are entered on your province or territory’s Form 428, not on a separate federal T1 line |
What to enter in tax software
When entering a T5 slip from your broker in federal tax software:
- Box 15: Foreign income (reports in CAD; enter exactly as shown)
- Box 16: Foreign tax paid (reports in CAD; enter exactly as shown)
The software does the rest: Form T2209 and Line 40500 are populated automatically. The boxes on each slip are explained in the T5 slip guide and the T3 slip guide.
How much foreign tax is withheld
The rate withheld abroad depends on the country, the type of income and the account it lands in; under the Canada-US treaty, US dividends paid to a Canadian resident are usually withheld at 15% once Form W-8BEN is on file with the broker. The treaty withholding rates by country, and why the RRSP is treated differently, are set out in the foreign dividend withholding tax guide.
Account type matters: where foreign investments are held
| Account | Foreign withholding status | T2209 credit available? |
|---|---|---|
| Non-registered (taxable) | Withheld at treaty rate (e.g., 15% US) | Yes, full credit up to Canadian tax on that income |
| RRSP / RRIF | US dividends: 0% (treaty exempt); others: withheld | No, not reported on T1, no credit |
| TFSA | US dividends: 15% withheld | No, permanently lost |
| RESP | US dividends: 15% withheld | No, permanently lost |
Withholding lost inside a TFSA is a common reason investors weigh account location for US holdings; the trade-offs are covered in US stocks in a TFSA.
Currency conversion for foreign income
CRA requires all foreign income and foreign tax to be reported in CAD. Use the Bank of Canada annual average exchange rate for the relevant tax year:
- The annual average is published at bankofcanada.ca/rates/exchange/annual-average-exchange-rates/
- For individual transactions, you can use the spot rate on the date of the transaction
- Most Canadian tax software handles conversion automatically when you enter the slip amounts; your broker provides T5/T3 slips in CAD already converted
If you receive a US broker’s 1099-DIV instead of a T5 slip, convert the amounts to CAD using the annual average rate and report them manually on your T1.
Foreign pensions and employment income
The same credit applies to foreign tax withheld from a pension or paid on foreign employment income, through the same Form T2209. How foreign pensions are reported, including treaty exemptions, is covered in foreign pension income and Canadian taxes.
FTC vs. deduction: which is better?
Instead of claiming a foreign tax credit on Form T2209, you can alternatively deduct foreign taxes paid as a deduction on Line 23200 of your T1. The deduction reduces your taxable income, while the credit reduces your tax directly.
In most cases, the credit is more valuable. A $207 foreign tax credit reduces your taxes dollar-for-dollar by $207. A $207 deduction only saves you $207 × your marginal rate (e.g., $207 × 33% = $68). However, the deduction can be useful when:
- Your foreign tax credit is limited (excess foreign taxes over the Canadian tax on that income)
- You have unused deductions that would otherwise be wasted
In practice, the credit (Form T2209) is the usual choice rather than the deduction.