FAPI (Foreign Accrual Property Income)

In Canada, residents are taxed on their worldwide income. Some Canadians think that they can invest in corporations outside of Canada, and because corporations are separate entities, there is no taxes to pay on the income the corporation is earning.

While this can be correct, taxpayers must be careful that they do not run afoul of the FAPI rules.

FAPI stands for foreign accrual property income and comes into play when taxpayers own a foreign corporation that is earning passive income. Passive income is exactly what it sounds like, nothing is done to earn the income. Royalties, interest, rent, these are all examples of passive income.

Here is an example to make it easier:

A Canadian resident taxpayer has $500,000 and wants to buy a rental property as an investment. If the rental property is bought in Canada, or personally offshore, then the rental income is subject to tax in Canada.

If that same taxpayer incorporates a foreign company, and has that company buy a rental property offshore, most people think if they do not repatriate any of the income (ie sending money to themselves), the money the company receives is not subject to tax in Canada.

However, this is incorrect. A foreign corporation, owned by a Canadian resident spends $500,000 on a rental property in the Bahamas. FAPI will now come into play.

FAPI means that if the corporation earns $30,000 net from rental income, that income is taxed in your hands personally here in Canada. If the passive (rental) income is being earned in a country that has a tax treaty with Canada, then taxpayers would receive tax credits in the amount already paid in the other country.

Taxpayers should also keep in mind that there are additional reporting requirements if taxpayers own foreign corporations.

Please give us a call and we can assist you with any FAPI issues you may have, and we can even help ensuring these FAPI rules do not happen to you.