Foreign Accrual Property Income

Certain high net worth Canadian taxpayers that have maxed out traditional investment vehicles (like the RRSP and TFSA) may be tempted to look offshore for further investment opportunities. The reason for this being to avoid paying the maximum tax rates on any returns from their investments (ex. a combined federal and provincial rate of 47-48% for Ontario).

A common method to go about this would be to set up a foreign corporation in a “tax haven” country. Cayman Islands, for example, allows its corporations to not be taxed on any income (including investments) earned outside the country.
To combat this loophole, CRA introduced Foreign Accrual Property Income (FAPI).

This attributes any investment income of a controlled foreign affiliate directly to its Canadian resident owner. Acting like a short circuit to the loophole, the owner receives no benefit from setting up foreign corporations as he will be taxed on the investment income just the same.

FAPI occurs if the Canadian resident has 51% or more of ownership. A T1134 is due 15 months after their year end, with penalties up to $2500 for not filing.

For more help with correctly reporting foreign investment income or tax planning, feel free to reach out to IDM Professional Corporation CPA.