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What is FAPI?
FAPI stands for foreign accrual property income and comes into play when Canadian taxpayers own a foreign corporation that earns passive income or incurs capital gains.
Passive income generally includes income from property such as interest, rent and royalties, income from a business other than an active business, and certain taxable capital gains from the disposition of property.
Typically, the FAPI of the CFA (Controlled Foreign Affiliate) will consist of income and taxable capital gains from investments. Certain types of business income may be considered FAPI, and other types of investment income and gains may not be considered FAPI.
Regardless of whether FAPI is distributed to the Canadian resident in the relevant year by the CFA, the FAPI is taxable in Canada. If and when FAPI is distributed as a dividend, double taxation is avoided by allowing a deduction for previously taxed FAPI.
The FAPI amount recorded in Canada is reduced by the foreign taxes paid by the CFA as follows:
Then the FAPI gets reduced by the resulting tax factor. Accordingly, the taxes payable on FAPI can be lower in certain cases if the Canadian shareholder is a Canadian holding company.
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UHY Victor LLP Canada US Tax Team
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