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’s 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’s foreign base company income?

Foreign base company income under IRC 954 has three sub-categories, each targeting income Congress viewed as artificially parked in a foreign corporation to defer US tax. For Canadian corporations, the practical concern is almost always foreign personal holding company income: dividends, interest, royalties, rents, and capital gains the corporation earns on retained cash or an investment portfolio. Active operating income earned in Canada from Canadian customers is generally not Subpart F; it falls under the GILTI regime instead.

• Foreign personal holding company income (IRC 954(c)): dividends, interest, royalties, rents, annuities, gains from property producing those types of income, and gains from commodities and foreign currency transactions. For a Canadian corporation holding $500,000 in a GIC or investment portfolio, the investment returns are Subpart F income even though operating income is not.
• Foreign base company sales income (IRC 954(d)): profits from buying or selling personal property through a related person, when the property is manufactured and sold for use outside the CFC’s country. A Canadian corporation reselling within Canada is generally safe; one reselling to European customers could be caught.
• Foreign base company services income (IRC 954(e)): compensation for technical, managerial, or similar services performed for a related person outside the CFC’s country. A Canadian corporation providing consulting to its US parent, performed in Canada, is generally not caught. Sending employees abroad on behalf of the US parent can trigger it.

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 tested income for GILTI. The priority runs: Subpart F first, GILTI second. For a Canadian corporation earning $200,000 in active income and $30,000 in investment income, the $30,000 is Subpart F and the $200,000 is GILTI tested income, calculated separately and taxed at different effective rates.

• Subpart F income does not get the section 250 deduction and is taxed at the shareholder’s full marginal rate (up to 37% for individuals, or 21% if a section 962 election applies)
• GILTI income gets a 40% section 250 deduction (for tax years beginning after 2025), producing an effective individual rate of roughly 22% at the top bracket
• The classification therefore determines whether the US shareholder pays approximately 37% or 22% on the CFC’s income, which is why Subpart F versus GILTI matters

What’s the high-tax exception?

The high-tax exception under IRC 954(b)(4) allows a CFC to elect to exclude foreign base company income taxed at an effective foreign rate exceeding 90% of the maximum US corporate rate. For 2026, the threshold is 90% x 21% = 18.9%. Canadian corporate tax on passive investment income (38.67% federal before the RDTOH refund) typically exceeds that floor, so the election is often available for Canadian corporations. If elected, the income shifts from Subpart F to GILTI tested income, where the section 250 deduction applies.

• The election is CFC-by-CFC, year-by-year, and covers all foreign base company income of the CFC for that year (no cherry-picking)
• In some cases, the GILTI high-tax exclusion under Treas. Reg. 1.951A-2(c)(7) can further exclude the income from GILTI, eliminating the US inclusion entirely
• The interaction between the Subpart F high-tax exception and the GILTI high-tax exclusion requires careful calculation, because the two elections have different mechanics and different consequences

What’s 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 gross income or $1 million, none of it is treated as foreign base company income. For a Canadian corporation with $2 million in gross operating income and $40,000 in investment income, the $40,000 clears the test (under 5% of $2 million), so it escapes Subpart F and becomes tested income for GILTI instead.

• A full inclusion rule works in reverse: if foreign base company income and insurance income exceeds 70% of gross income, the entire gross income is treated as foreign base company income under IRC 954(b)(3)(B)
• That 70% rule 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
• RDTOH and cross-border dividend planning, how Canadian refundable taxes on investment income interact with Subpart F and CFC dividend planning
• FAPI and controlled foreign affiliates, Canada’s mirror-image anti-deferral regime, and when both fire on the same corporation
• Controlled foreign corporation (CFC) overview, the foundational CFC rules including constructive ownership, GILTI, and PTEP tracking

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