Subpart F Income: What It Is, What Triggers It, and How It Hits Canadian Corporations

Subpart F is the original US anti-deferral regime, enacted in 1962 and codified in IRC 951 through 965. It requires US shareholders of a controlled foreign corporation (CFC) to include certain categories of the CFC’s income in their own gross income currently, regardless of whether the corporation distributes that income. The targeted categories are passive income (dividends, interest, rents, royalties, capital gains), mobile income (sales and services routed through a base company), and a handful of penalty categories (illegal payments, boycott income, sanctioned-country income). For a US person who owns a Canadian operating corporation, the most common Subpart F trigger is foreign personal holding company income: the investment returns the corporation earns on its retained earnings or on a separate investment portfolio.

What is Subpart F income?

Subpart F income is defined in IRC 952 as the sum of five categories of income earned by a CFC. The inclusion rule is in IRC 951(a): each US shareholder (a US person who owns 10% or more of the CFC by vote or value) must include in gross income their pro rata share of the CFC’s Subpart F income for the CFC’s tax year that ends with or within the shareholder’s tax year. The income is taxed to the shareholder as if it were distributed, even if it stays inside the corporation.

The five categories are:

1. Insurance income (IRC 953): income from insuring risks outside the CFC’s country of organization. Rarely relevant for a Canadian operating corporation.
2. Foreign base company income (IRC 954): the category that matters for most Canadian corporations. It has three sub-categories described below.
3. International boycott factor income (IRC 999): income reduced by a boycott factor if the CFC participates in or cooperates with an international boycott. Not relevant in Canada.
4. Illegal payments: bribes, kickbacks, or payments that would violate the Foreign Corrupt Practices Act if made by a US person.
5. Sanctioned-country income (IRC 901(j)): income from countries under US sanctions. Canada is not a sanctioned country.

For a US person who owns a Canadian corporation, the practical concern is almost always foreign base company income, and within that, foreign personal holding company income.

What is foreign base company income and why does it matter for Canadian corporations?

Foreign base company income is defined in IRC 954 and has three sub-categories. Each targets a specific type of income that Congress identified as artificially shifted to a foreign corporation to defer US tax.

Foreign personal holding company income (IRC 954(c)): dividends, interest, royalties, rents, annuities, gains from the sale of property that produces those types of income, gains from commodities transactions, gains from foreign currency transactions, and income equivalent to interest. This is the passive investment income the corporation earns on its cash, investments, or rental properties. For a Canadian corporation that earns active business income from operations and also holds $500,000 in a GIC or investment portfolio, the investment returns are Subpart F income even though the operating income is not.

Foreign base company sales income (IRC 954(d)): profits from buying personal property from a related person and selling it to someone else, or buying from someone and selling to a related person, when the property is both manufactured and sold for use outside the CFC’s country of organization. This targets triangular trading arrangements where the CFC sits between a related manufacturer in one country and customers in a third country. A Canadian corporation that buys goods from a related US company and resells them within Canada is generally not caught, because the sale is for use within the CFC’s country (Canada). But a Canadian corporation that buys from its US parent and resells to customers in Europe could generate foreign base company sales income.

Foreign base company services income (IRC 954(e)): compensation for technical, managerial, engineering, architectural, scientific, or similar services performed for or on behalf of a related person, when the services are performed outside the CFC’s country of organization. A Canadian corporation that provides consulting services to its US parent, performed in Canada, is generally not caught (the services are performed in the CFC’s country). But if the same corporation sends employees to perform services in the US or a third country on behalf of the US parent, that income can be foreign base company services income.

The common thread: Subpart F targets income that is passive, mobile, or separable from the CFC’s active business in its own country. Active operating income earned by the Canadian corporation from its own customers in Canada is generally not Subpart F income. It falls instead under the GILTI/net CFC tested income regime, which has its own inclusion rules and a different (usually lower) effective rate.

How does Subpart F interact with GILTI?

Subpart F and GILTI (now net CFC tested income for tax years beginning after 2025) are separate inclusion regimes, and income cannot be included under both. IRC 951A(c)(2)(B)(i) explicitly excludes Subpart F income from the CFC’s tested income for GILTI purposes. The priority runs: Subpart F first, GILTI second.

If a Canadian corporation earns $200,000 in active operating income and $30,000 in investment income, the $30,000 is Subpart F income (foreign personal holding company income) and is included in the US shareholder’s income under IRC 951. The $200,000 is tested income for GILTI/net CFC tested income purposes under IRC 951A. The two inclusions are calculated separately, taxed at different effective rates, and reported in different sections of Form 5471.

This ordering matters because the GILTI regime allows a section 250 deduction (40% for tax years beginning after 2025, formerly 50%) that effectively reduces the tax rate on GILTI income. Subpart F income does not get the section 250 deduction. It is included in the shareholder’s income at the shareholder’s full marginal rate (individual rates up to 37%, or corporate rates at 21% if the shareholder is a US corporation or makes a section 962 election).

For a US individual who owns a Canadian corporation, the practical difference: Subpart F income is taxed at individual rates (up to 37%), while GILTI income is taxed at individual rates minus the section 250 deduction (effective rate roughly 60% of the individual rate, or about 22% at the top bracket for 2026). Subpart F income is therefore more expensive than GILTI income, which is why the classification matters.

What is the high-tax exception?

The high-tax exception under IRC 954(b)(4) allows a CFC to elect to exclude foreign base company income that is subject to an effective foreign tax rate exceeding 90% of the maximum US corporate rate. For 2026, the maximum US corporate rate is 21%, so the threshold is 90% x 21% = 18.9%.

If a Canadian corporation earns $30,000 in investment income and pays Canadian corporate tax on that income at an effective rate above 18.9%, the US shareholder can elect to exclude it from Subpart F income. Canadian corporate tax rates vary by province and type of income, but passive investment income earned by a CCPC is taxed at a federal rate of 38.67% (Part I tax plus refundable tax, before the RDTOH refund mechanism). Even after accounting for the refundable dividend tax on hand (RDTOH) mechanism, the effective rate on passive income in a Canadian corporation typically exceeds 18.9%, so the high-tax exception is often available.

The election is made on a CFC-by-CFC, year-by-year basis. It applies to all foreign base company income of the CFC for that year (you cannot cherry-pick which items to exclude). If elected, the excluded income is not Subpart F income and is instead tested income for GILTI purposes, where the section 250 deduction applies. In some cases, the high-tax exception shifts income from Subpart F (taxed at individual rates) to GILTI (taxed at a lower effective rate), producing a better result. In other cases, the GILTI high-tax exclusion under Treas. Reg. 1.951A-2(c)(7) can exclude the income from GILTI as well, eliminating the US inclusion entirely.

The interaction between the Subpart F high-tax exception and the GILTI high-tax exclusion requires careful calculation. The two elections have different mechanics and different consequences, and whether to elect either or both depends on the shareholder’s overall tax position.

What is the de minimis rule?

IRC 954(b)(3)(A) provides a de minimis rule: if the CFC’s combined foreign base company income and insurance income is less than the lesser of 5% of the CFC’s gross income or $1 million, none of it is treated as foreign base company income or insurance income. The entire amount escapes Subpart F.

For a Canadian corporation with $2 million in gross operating income and $40,000 in investment income, the $40,000 is less than 5% of $2 million ($100,000) and less than $1 million, so the de minimis rule applies and the $40,000 is not Subpart F income. It would instead be tested income for GILTI.

There is also a full inclusion rule in the other direction: if the CFC’s foreign base company income and insurance income exceeds 70% of gross income, the entire gross income is treated as foreign base company income (IRC 954(b)(3)(B)). This catches holding companies and investment companies where passive income dominates.

What should I do next?

If you are a US person who owns a Canadian corporation, Subpart F income is one of three US inclusion regimes that apply to the corporation’s income (the others are GILTI/net CFC tested income and section 956 investments in US property). The reporting vehicle is Form 5471, which is filed annually with your US return. The Subpart F calculation is part of the Form 5471 schedules (Schedule I for the income categories, Schedule J for accumulated earnings and profits).

• Do I file Form 5471 for my Canadian corporation?, the filing obligation and penalties
• GILTI / net CFC tested income for Canadian corporations, the other major inclusion regime
• Why a US LLC is a tax trap for Canadian residents, entity-choice problems from the other direction
• FATCA explained, the reporting regime that surfaces the accounts the CFC income flows through
• How far back can the IRS audit?, the statute of limitations when Form 5471 is missing

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