When you pay foreign tax on certain types of foreign property income, you have two options:
- Claim a section 20(12) deduction, which reduces your net income by the amount of foreign tax paid
- Claim a foreign tax credit, which reduces your tax payable dollar-for-dollar by the amount of foreign tax paid
Generally, individuals with lower tax payable (due to lower income or eligibility for many tax credits) benefit more from the section 20(12) deduction. Others may benefit more from the foreign tax credit.
Eligibility for a 20(12) deduction depends on:
- Amount of foreign tax paid
- Source country of the income
- Type of income (for example, you can't claim 20(12) deductions for trust/T3 income)
Wealthsimple Tax automatically determines whether to claim a section 20(12) deduction, a foreign tax credit, or a combination to maximize your refund. Our optimization algorithm incorporates all relevant rules.
To override the optimized section 20(12) deduction:
- Go to the Foreign Tax Credits Summary section
- Enter your preferred amount for a Section 20(12) deduction (or $0)
- Navigate to the Optimizations section
- Find the Credits and deductions table
- Locate the Total section 20(12) deduction line
- Click "Lock amounts" next to this line
- Click the Review & Optimize button
Where to find these deductions and credits on your return:
- Section 20(12) deductions appear on line 23200 of your T1 General
- Foreign tax credits are calculated on forms T2209 and T2036, and appear on:
- Line 40500 of your Schedule 1
- Your provincial form 428 (TP-1 in Québec)
For more information about foreign tax credits and section 20 deductions, refer to the CRA's Income Tax Folio S5-F2-C1.
If you need help with section 20(12) deductions in Wealthsimple Tax or for specific tax insight consider consulting with a tax expert.
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