T2209: How the Federal Foreign Tax Credit Works in Canada

Form T2209 is the CRA form that calculates your federal foreign tax credit when you’ve paid US tax on income that’s also on your Canadian return. The credit is the lesser of the US tax you paid and the federal tax on that US income. Anything above the cap doesn’t come off federal tax that year. Investment income has an extra step, because US tax above 15% can’t be credited.

What is Form T2209 used for?

T2209 is the form you complete to calculate your federal foreign tax credit. The law behind it is section 126 of the Income Tax Act, which lets a Canadian resident take foreign tax paid off the federal tax otherwise payable. The result goes on line 40500 of your T1. The newest version posted when we checked was the 2025 file, so use the form for the year you’re filing.

• Where to get it. CRA’s T2209 page has the fillable and print versions.
• Who it’s for. ITA 126(1) applies to anyone resident in Canada at any time in the year. Non-residents have separate rules we don’t cover here.
• What comes first. You report the US income on the T1 first, in Canadian dollars. The guide to reporting US income on your Canadian return covers that part, and this page picks up at the credit.

How is the T2209 limit calculated?

The non-business cap is your federal tax multiplied by a fraction: US income over net income. If a third of your income is from the US, the credit can’t pass a third of your federal tax. You get the lesser of that cap and the eligible US tax you paid. The cap is calculated separately for each foreign country, so US income only counts against US tax.

• The 126(1)(b) formula. Limit = federal tax otherwise payable x (qualifying US income minus qualifying US losses) / (net income minus listed deductions).
• On the form. T2209 calls the federal tax “basic federal tax”: line 42900 of your return plus the federal dividend tax credit, with adjustments for surtax and abatements. Net income starts from line 23600.
• The top of the fraction is calculated as if you carried on no business in the US. Business income belongs in the other limit.
• The bottom of the fraction comes down for amounts like the capital gains deduction under section 110.6, loss carryovers under 111(1)(b), and amounts deductible under 110(1)(d) to (g), 112 and 113.
• A smaller bottom number raises the fraction, so those deductions can raise the cap.

Is my US income non-business or business income?

Generally, it turns on whether you carry on a business in the US. Business-income tax is tax on income from a business you carry on in the other country, and it gets its own limit under 126(2). Everything else that’s eligible is non-business-income tax under 126(1). Rental income and dividends generally start in the non-business bucket, though the facts can change that for an active operation.

• The ordering matters. Under 126(2)(c), the business claim can’t pass your federal tax left after the 126(1) non-business claim.

Question	Non-business income, 126(1)	Business income, 126(2)
What tax goes in	Non-business-income tax paid for the year	Business-income tax paid, plus unused credits
What it’s capped at	Federal tax x US income / net income	Least of the tax and credits, the 126(2.1) amount, and federal tax left after 126(1)
Income in the fraction	US income, assuming no US business	Income from businesses carried on in the US
Unused amount	No carryover	Forward 10 years, back 3 years
The 15% split	Applies to individuals on property income other than real estate	Doesn’t apply, since 20(11) covers income from property

Which US taxes count on T2209?

Income or profits tax you paid to the US government or to a state generally counts, because section 126 says the government of a country includes a state or other political subdivision. Some of that tax is carved out. US tax above 15% on investment income is the big one for most people. Tax that exists only because you’re a citizen, and that can’t be tied to income from outside Canada, is another.

Here are the rules most likely to touch a Canadian with US income.

• The 15% split. ITA 20(11) lets an individual deduct foreign tax above 15% of income from property other than real or immovable property. The definition in 126(7) then removes any tax “deductible” under 20(11) from the credit. That holds whether or not you claim the deduction, as CRA’s Folio says at paragraph 1.22. So a US citizen with a $1,000 dividend and $300 of US tax can deduct $150 and credit at most $150. A non-citizen is different. The treaty generally caps US tax on dividends at 15%, and Form T2209 treats tax paid above a treaty rate as a voluntary contribution that doesn’t count. An over-withheld 30% gets claimed back from the IRS. If your rate looks high, the guide to cross-border dividend tax is the place to check it.
• Real estate. The 20(11) split doesn’t reach real property, so US tax on US rental income stays in the credit calculation.
• Optional deduction. ITA 20(12) lets a resident deduct non-business tax from business or property income. Whatever you deduct that way can’t also be credited.
• Exempt gains. Tax attributable to a gain you sheltered with the capital gains deduction is excluded by paragraph (g) of the definition.
• Treaty-exempt income. Income the treaty fully exempts from US federal tax generally stays out of the top of the fraction, under Folio paragraphs 1.66 to 1.68. A non-citizen’s gain on a US stock sold on an exchange is the usual case. If a state taxed that income, it goes back in.
• TFSA and RRSP holdings. Income earned inside these accounts, and US tax withheld on it, stays off T2209, under Folio paragraph 1.69.
• US social security taxes. These usually don’t qualify as income tax, but Article XXIV(2)(a) of the treaty, as replaced by the 1995 protocol, has Canada credit an individual’s US social security taxes on income arising in the US, other than unemployment taxes. Form T2209 says FICA qualifies, including Social Security and Medicare.
• State taxes. Article XXIV(7) of the treaty also includes substantially similar state and local taxes of general application. A levy that isn’t an income or profits tax doesn’t get in through this door. CRA’s Folio looks for a tax on net income or profits and lists property, sales and gift taxes as outside it (paragraphs 1.7 and 1.9).

What happens to US tax above the limit?

It depends on the bucket. Business tax above the limit becomes an unused foreign tax credit, which carries forward 10 years and back 3. Non-business tax above the limit can’t be carried over, as CRA’s Folio says at paragraph 1.24. It may still get a provincial credit outside Quebec, and part of what’s left may be deductible from business or property income.

• Carryover. Section 126(2)(a) is written from the claim year, so it reads 10 years before and 3 years after. Form T2209 states the same window from the credit’s own year: forward 10, back 3. The Folio adds that you can use a carryover only in a year you carry on business in that country (paragraph 1.104), and business tax you could have deducted but didn’t claim is lost (paragraph 1.100).
• Provincial credit. Section 126’s limit is tied to tax “under this Part”, which is federal tax. Form T2036 calculates the non-business credit against provincial or territorial tax. It doesn’t apply to Quebec residents, who go through Revenu Quebec.
• Deduction. Form T2209 says you may be able to deduct, on line 23200, net foreign tax that got no federal or provincial credit. ITA 20(12) covers income from a business or property, so tax on wages doesn’t qualify.

How does T2209 work for a US citizen in Canada?

A US citizen resident in Canada claims the same section 126 credit, but Article XXIV of the treaty only requires Canada to credit the US tax a non-citizen would’ve paid. The US then credits the Canadian tax that’s left, and the treaty treats income as arising in Canada as far as needed to stop double tax. That last step is called re-sourcing. It usually means Canada keeps first tax on income the US could tax only because of citizenship.

• Paragraph 3 sources income by asking whether the US may tax it under the treaty, ignoring the Article XXIX(2) saving clause.
• Paragraph 4 says Canada’s deduction need not exceed the US tax that would apply if you weren’t a citizen, and the US credits the Canadian tax remaining.
• Paragraph 5 handles US dividends, interest and royalties that the US would tax even if you weren’t a citizen. As replaced by the 1995 protocol, Canada’s deduction need not exceed the US tax a non-citizen would pay on them, as long as Canada keeps allowing a deduction for tax above 15%.
• Paragraph 6 does the re-sourcing, deeming items to arise in Canada to the extent needed to avoid double tax.

The Income Tax Act has its own citizenship rule. Paragraph (d) of the definition excludes tax that wouldn’t have been payable without citizenship and can’t reasonably be tied to income from outside Canada. CRA sources employment income to where you normally do the work (paragraph 1.57), so a citizen working in Canada generally gets nothing on T2209 for US tax on those wages, even from a US employer. US tax a citizen pays personally on S corporation income isn’t business-income tax, though it may count as non-business tax (paragraph 1.27).

The other half of this is on the US return. Form 1116 has the US limit, FEIE vs FTC has the choice between exclusion and credit, and double tax for US citizens in Canada has the wider picture.

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