Section 962 Election: How Individual CFC Shareholders Get the Corporate Tax Rate

Section 962 of the Internal Revenue Code lets an individual US shareholder of a controlled foreign corporation (CFC) elect to be taxed as if they were a domestic corporation, but only for purposes of Subpart F and NCTI (Net CFC Tested Income, which replaced GILTI for tax years beginning after December 31, 2025). Without the election, individuals include CFC income in their own gross income at individual rates up to 37%, with no access to the Section 250 deduction and no indirect foreign tax credits. With the election, the inclusion is taxed at the 21% corporate rate, reduced by the Section 250 deduction (40% for NCTI, bringing the effective rate to 12.6%), and offset by indirect foreign tax credits under Section 960 for taxes the CFC paid in its home country. For US persons who own Canadian corporations paying combined Canadian tax rates of 26% to 27%, the Section 960 credit typically covers the entire US liability, resulting in zero current US tax on the CFC inclusion.

What is a Section 962 election?

Section 962 was enacted in 1962 alongside Subpart F itself, recognizing that individual shareholders of CFCs should not be worse off than if they held the same CFC through a US corporation. Without the election, an individual who owns a Canadian operating company directly is taxed on Subpart F income and NCTI at individual rates up to 37%, cannot claim the Section 250 deduction (which by statute is available only to domestic corporations), and cannot claim indirect foreign tax credits under Section 960 (also available only to domestic corporations). The result is potential double taxation: the Canadian corporation pays Canadian tax, and the US individual pays US tax at individual rates on the same income with no credit for the Canadian corporate tax already paid.

The Section 962 election solves this by treating the individual as if they were a domestic corporation solely for purposes of computing the tax on Subpart F and NCTI inclusions. The individual calculates the tax on the inclusion using the 21% corporate rate, applies the Section 250 deduction (reducing NCTI by 40%), and claims indirect foreign tax credits under Section 960 for the CFC’s foreign taxes. The election does not change anything else on the individual’s return: all other income (wages, investment income, other foreign income) remains subject to individual rates.

The election is made annually by attaching a statement to the taxpayer’s timely filed return (including extensions). It applies to all CFCs the taxpayer is a US shareholder of for that year. You cannot elect Section 962 for one CFC and not another. The election is revocable: you can make it in one year and not the next, choosing each year based on the tax outcome.

How does Section 962 reduce the tax on NCTI and Subpart F income?

The benefit comes from three provisions working together: the corporate rate, the Section 250 deduction, and the Section 960 foreign tax credit. Here is how the math works for a US individual who owns 100% of a Canadian CCPC with $200,000 of NCTI (active business income that flows through the NCTI calculation).

Without Section 962: The $200,000 NCTI inclusion is added to the individual’s other income and taxed at individual rates. At the top bracket of 37%, the federal tax is up to $74,000. The individual cannot claim the Section 250 deduction (it is a corporate deduction). The individual cannot claim indirect foreign tax credits under Section 960 for the Canadian corporate tax the CCPC paid. The individual may be able to claim a direct foreign tax credit under Section 901 in limited circumstances, but the categories and baskets often do not align to provide meaningful relief. The practical result is full US tax at individual rates with minimal credit for Canadian taxes.

With Section 962: The $200,000 NCTI inclusion is taxed at the 21% corporate rate: $42,000 before deductions. The Section 250 deduction reduces the NCTI by 40%, so the taxable amount is $120,000 ($200,000 minus $80,000). Tax at 21% on $120,000 is $25,200 (effective rate of 12.6% on the original $200,000). Now the Section 960 credit applies: the CCPC paid Canadian corporate tax of approximately $53,000 (at a combined 26.5% rate). Under Section 960(d), 90% of the deemed-paid foreign tax is creditable: $47,700. The credit of $47,700 exceeds the US tax of $25,200, so the net US tax on the NCTI inclusion is zero. The excess credit ($22,500) can be carried forward or back under the general Section 904 rules.

The Section 962 election transforms a $74,000 US tax bill into a $0 bill for the same income, solely by unlocking the corporate-rate treatment and the indirect foreign tax credit.

What changed under the One Big Beautiful Bill Act?

The One Big Beautiful Bill Act (OBBBA), signed into law in 2025, replaced GILTI with NCTI for tax years beginning after December 31, 2025. The core mechanics are similar (US shareholders include the CFC’s tested income currently), but several changes affect the Section 962 calculation.

QBAI offset eliminated. Under GILTI, a CFC’s tested income was reduced by 10% of its qualified business asset investment (QBAI, essentially the depreciated basis of tangible assets used in the business). This meant a capital-intensive Canadian manufacturer with substantial equipment could reduce its GILTI inclusion significantly. Under NCTI, the QBAI offset is gone. The full tested income flows through to the US shareholder’s inclusion, increasing the amount subject to US tax (or, with Section 962, the amount that the foreign tax credit must cover).

Section 250 deduction reduced. The deduction on NCTI is 40% (down from 50% under GILTI). This increases the effective pre-credit corporate rate from 10.5% to 12.6%. For Canadian corporations where the Section 960 credit covers the liability anyway, this change has no practical impact. For lower-tax jurisdictions, it narrows the benefit.

Section 960(d) credit percentage increased. The deemed-paid foreign tax credit is 90% of the CFC’s foreign taxes (up from 80% under GILTI). This partially offsets the reduced Section 250 deduction by allowing more of the foreign tax to be credited.

Net effect for Canadian CFC owners: The QBAI elimination increases the inclusion amount, but Canadian corporate tax rates remain high enough that the Section 960 credit covers the resulting US tax. The Section 962 election continues to produce zero or near-zero current US tax on NCTI inclusions for most Canadian CCPCs.

What is the second layer of tax under Section 962(d)?

This is the trade-off. Section 962(d) provides that when the CFC distributes the previously included earnings as an actual dividend, the distribution is not fully excluded as previously taxed income the way it would be for a US corporate shareholder. Instead, the distribution is treated as a taxable dividend to the extent it exceeds the US tax the individual actually paid under the Section 962 election on the original inclusion.

In the example above, the individual paid $0 in US tax on the $200,000 NCTI inclusion (because the Section 960 credit covered it). When the CCPC distributes $200,000 to the individual, the entire distribution is a taxable dividend. Because Canada is a treaty-eligible country, the dividend qualifies for the 20% qualified dividend rate under IRC 1(h)(11). The federal tax on the distribution is approximately $40,000 ($200,000 at 20%), plus potentially 3.8% net investment income tax ($7,600) for high-income taxpayers.

The total US tax across both layers is $47,600 on $200,000 of CFC income: $0 on the initial inclusion plus $47,600 on the distribution. Without Section 962, the total would have been $74,000 on the inclusion alone (with the distribution then excluded as previously taxed income). The Section 962 election saves approximately $26,400 in this scenario, and the tax is deferred until the CFC actually distributes the earnings.

If the CFC retains the earnings indefinitely (reinvesting in the business, for example), the Section 962(d) tax on the distribution is deferred indefinitely as well. This makes the election particularly valuable for growing businesses that do not need to distribute all earnings currently.

When does a Section 962 election make sense for Canadian corporation owners?

The election is almost always beneficial for US individuals who own Canadian operating corporations, because Canadian corporate tax rates are high enough to generate sufficient Section 960 credits. The specific scenarios where it matters most:

Active business income through a CCPC. A US citizen or green card holder who owns a Canadian-controlled private corporation paying combined Canadian tax of 12% to 27% (depending on whether the SBD applies and the province) generates Section 960 credits that cover part or all of the Section 962 US liability. At the small business rate (approximately 12% combined), the credits cover most of the 12.6% effective US rate but may leave a small residual. At general rates (26-27%), the credits exceed the US liability entirely.

Multiple CFCs. Because the election applies to all CFCs, a taxpayer who owns a Canadian operating company and a separate foreign holding company must evaluate the combined effect. If one CFC is in a low-tax jurisdiction, the Section 962 election still helps (the corporate rate is lower than individual rates), but the Section 960 credit from that CFC may not fully cover the US tax.

Retained earnings. If the Canadian corporation is growing and reinvesting earnings rather than distributing them, the Section 962 election defers the Section 962(d) distribution tax indefinitely. The deferral benefit grows with time and is most valuable for businesses in their growth phase.

When it may not help. If the individual’s marginal rate is already at or below 21% (low-income years, large deductions), the election provides no rate benefit. And if the CFC is in a zero-tax jurisdiction, the Section 960 credit is zero, so the election only provides the rate reduction (21% vs. 37%) without the credit offset.

The election requires careful coordination with Form 5471 (which reports the CFC’s income and taxes), the NCTI calculation, and the foreign tax credit computation. The compliance burden is meaningful: the individual must maintain previously taxed earnings and profits (PTEP) accounts by CFC, track Section 960 credit pools, and properly report the Section 962(d) distribution treatment when dividends are paid.

• Subpart F income and Canadian corporations, the original anti-deferral rule that Section 962 applies to
• GILTI tax on Canadian corporations, the inclusion regime now replaced by NCTI
• Form 5471 for Canadian corporations, the CFC reporting form that supports the Section 962 election
• CCPC: what makes a Canadian-controlled private corporation, the corporate status that determines the Canadian tax rate feeding the Section 960 credit
• The US-Canada tax treaty explained, the treaty that qualifies Section 962(d) dividends for the 20% rate

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.