Foreign Income. It is earned from investments made outside the domicile country of the investing entity. Also, that is typically taxed at the foreign source.

In simple terms, it means the income which is being earned in from the foreign country.

Tax on foreign Income (Canada) :

The Canadian Income Tax Act provides two mechanisms for the relief of double taxation: foreign tax credits. In certain circumstances, a deduction from income for income taxes paid in a foreign jurisdiction. Additionally, Canada has negotiated international tax treaties with many countries to prevent double taxation.

Foreign tax credits are calculated by each source country, with separate computations for business and non-business income taxes paid. The allowable tax credit cannot exceed the Canadian tax that would otherwise be payable on that category of income. Foreign tax credits on property income (other than real property) cannot exceed the lesser of 15 percent or the withholding rate provided in a relevant tax treaty of the income received from the foreign property. Unused non-business foreign credits cannot be carried over to other years, but may be claimed as a deduction if the foreign tax does not exceed the withholding rate specified under a tax treaty between Canada and the country that levied the tax. Any unused business foreign tax credits may be carried back three years and forward ten years.

Individuals resident in Canada are subject to Canadian tax on their worldwide income, regardless of where it is earned or where it is received, and they are eligible for a potential credit or deduction for taxes paid on income derived from foreign sources.

Tax on Income (USA) :

The earned income exclusion prevents double taxation by excluding the income from U.S, taxation. The United States will tax your income earned worldwide. However, if you are an American expat, this means you are taxed twice on this income. The income you receive overseas, sees the foreign country tax and can be taxed again by the IRS.

The following criteria need to be met in order to the exclusion;

  • Taxpayers home must be in a foreign country. Tax home is defined as the general area of your main place of employment. Where you are permanently or indefinitely engaged to work as an employee or self-employed individual regardless of where you maintain your family home. Note: Taxpayers place of residence can be different from taxpayers tax home.
  • A U.S. citizen who is a bonafide resident of a foreign country for an entire tax year.
  • A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect. As well as, who is a bonafide resident of a different country for an entire tax year, or
  • Also, U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

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