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Some of my business income is from other countries. How do I report this?

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Question: Some of my business income is from other countries. How do I report this?
Answer:

Generally, you treat foreign business income the same way you would handle business income from Canadian sources on your Canadian income tax return.

That is, if you are a sole proprietor or part of a partnership, you will report foreign income as part of your business or professional income on Form T2125: Statement of Business or Professional Activities.

So your foreign income needs to be converted into Canadian dollars. The Canada Revenue Agency advises using the Bank of Canada exchange rate that was in effect on the day you received the income or using the average annual exchange rate.

For instance, suppose I do some work for an American client, who sends me a cheque in U.S. dollars. It gets converted to Canadian funds when I deposit it into my Canadian business account, and I record it in my business records. When I fill out my T1 form, this foreign income is part of my total business income calculations.

However, if you are actually performing your work in a foreign country, such as the United States, you may have to pay income tax in that country. The United States bases its income tax system on citizenship and where the work is performed, unlike Canada which bases its income tax system on residency. To further complicate matters, some states have state income tax and some don't. So you may end up having to file a tax return with the Internal Revenue Service (IRS) and pay American taxes.

If this is the case, you will also file a Canadian tax return (although you would not pay Canadian income tax as Canada and the U.S. have a tax treaty and you would be credited with the income tax you had paid in the U.S.).

In other words, you only pay your income tax in one place, but you may need to file two income tax returns.

If you have any doubts about your situation and what country you should be filing your income taxes in, don’t guess; contact a tax professional or local tax office and explain your situation.

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