FAPI Explained: Canada's Tax on Foreign Passive Income
Canada's version of subpart F, why a U.S. rental LLC triggers it, and the deduction for U.S. tax
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Foreign accrual property income (FAPI) is the passive income — interest, dividends, rent, royalties, certain gains — of a controlled foreign affiliate, which Canada taxes to its Canadian shareholders every year as earned, distributed or not. It's Canada's counterpart to U.S. subpart F. A Canadian holding U.S. rental property through a U.S. LLC usually has FAPI.
On this page
How it works
| Step | Detail |
|---|---|
| Controlled foreign affiliate | A foreign affiliate controlled by the Canadian taxpayer — alone, with non-arm's-length persons, or with up to four other Canadian-resident shareholders |
| FAPI | Passive income: interest, portfolio dividends, rents and royalties not from an active business, taxable capital gains on non-active property |
| Inclusion | The Canadian shareholder's share is included in income annually |
| Foreign accrual tax deduction | A deduction for foreign income tax the affiliate pays on the FAPI, multiplied by the relevant tax factor — currently 4 for most corporations, 1.9 for individuals and CCPCs |
| Later distribution | Dividends from the taxed FAPI come out of taxable surplus with a deduction — no double Canadian tax |
The rental LLC case
A Canadian resident who owns a Florida condo through a single-member U.S. LLC owns a controlled foreign affiliate (Canada treats the LLC as a corporation) earning rent — FAPI. The United States taxes the same rent to the owner directly (the LLC is disregarded); because the owner, not the LLC, pays that U.S. tax, it isn't foreign accrual tax, so relief has to come through a foreign tax credit or deduction on the owner's own return and may not fully offset it (the Canadian resident owning a U.S. LLC guide).
The active business exception
Income from an active business — a U.S. operating subsidiary with employees — isn't FAPI; it's taxed in Canada only when paid as dividends, usually from exempt surplus (tax-free to a Canadian corporate parent). A rental business escapes FAPI as an active business only if it employs more than five employees full time (or the equivalent) in the active conduct of the business throughout the year.
Frequently asked questions
What is FAPI?
Passive income of a controlled foreign affiliate, taxed to Canadian shareholders annually as it's earned.
Does my U.S. rental LLC create FAPI?
Usually yes — Canada treats the LLC as a corporation and the rent is passive income.
Is there relief for the U.S. tax?
Yes — the foreign accrual tax deduction for U.S. tax the affiliate pays; where a disregarded LLC's owner pays the U.S. tax personally, relief comes through the owner's own foreign tax credit or deduction. Either may not fully offset the Canadian tax.
How is FAPI different from active business income?
Active business income of a foreign affiliate isn't taxed in Canada until distributed, often tax-free from exempt surplus.
Official sources
The Canada Revenue Agency explains: “T1134 Supplement – Part II, Section 1, 2, 3A and Part IV of a separate supplement must be filed for each foreign affiliate. A separate supplement must be filed in full for each controlled foreign affiliate.” — Canada Revenue Agency, Information returns relating to foreign affiliates, https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/foreign-reporting/information-returns-relating-foreign-affiliates.html
Next step
Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our Canadian Tax Desk handles FAPI computations, foreign accrual tax deductions, and restructuring of U.S. rental holdings for Canadian residents. See pricing or book a call.
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