GILTI Explained for Owners of Canadian Corporations
What it taxes, how the 2025 law changed it, why small business rate income is caught, and the two ways out
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
GILTI — global intangible low-taxed income, renamed net CFC tested income (NCTI) by P.L. 119-21 from 2026 — taxes a U.S. shareholder currently on most of a controlled foreign corporation's income that isn't subpart F income. For an American owning a Canadian corporation taxed at the small business rate, it usually produces U.S. tax each year unless planned around.
On this page
What it reaches
| Item | Treatment |
|---|---|
| CFC's tested income | Gross income other than subpart F, effectively connected, and high-taxed excluded income, less allocable deductions |
| Deemed tangible income return | Eliminated by P.L. 119-21 for CFC tax years beginning after 2025 — the 10 percent return on tangible assets (QBAI) no longer reduces the inclusion, which stays under section 951A |
| U.S. shareholder's inclusion | Pro rata share of net tested income, computed on Form 8992 |
Why Canadian small businesses are caught
A Canadian-controlled private corporation's active income taxed at the small business rate (about 9 to 12 percent combined — 9 percent federal plus 0 to 3.2 percent provincial) is "low-taxed" from the U.S. perspective — far below the threshold for the high-tax exclusion — so the U.S. owner includes it as GILTI. An individual can't credit the corporation's Canadian tax against it without the section 962 election, and doesn't get the corporate deduction — so without planning, the income is taxed at the individual's U.S. rates now and again in Canada when distributed as a dividend.
The ways out
| Option | Effect |
|---|---|
| High-tax exclusion election | Excludes tested income taxed above 90 percent of the U.S. corporate rate (18.9 percent, Reg. 1.951A-2(c)(7)) — income at Canada's general rate (about 26–27 percent) qualifies; small business rate income doesn't |
| Section 962 election | Taxes the inclusion as if the owner were a U.S. corporation — 21 percent corporate rate, the section 250 deduction (40 percent from 2026, for an effective 12.6 percent rate), and an indirect credit for 90 percent of the Canadian tax (80 percent before 2026) |
| Pay it out | Salary or a bonus to the owner is deductible to the corporation and reduces tested income; a dividend doesn't reduce the inclusion |
| Forgo the small business rate | Paying the general rate in Canada can make the income high-taxed and excludable — a trade the numbers decide |
Frequently asked questions
Does GILTI apply to my Canadian corporation?
Yes, if it's a CFC and you're a U.S. shareholder — its active income not otherwise excluded is tested income.
Why is my Canadian small business income considered low-taxed?
The small business rate (about 9 to 12 percent) is below 90 percent of the U.S. corporate rate, so the high-tax exclusion doesn't apply.
What did the 2025 legislation change?
For CFC tax years beginning after 2025, P.L. 119-21 renamed GILTI net CFC tested income, eliminated the 10 percent return on tangible assets, set the section 250 deduction at 40 percent (a 12.6 percent effective rate), raised the deemed-paid credit to 90 percent, and limited the expenses apportioned to the credit basket to directly allocable ones (no interest or R&E).
What's the simplest way to reduce GILTI?
Paying profits out as salary each year, or making the section 962 election on what's retained.
Official sources
The IRS explains: “U.S. shareholders of controlled foreign corporations use Form 8992 and Schedule A to figure their global intangible low-taxed income inclusions under section 951A and its related regulations.” — Internal Revenue Service, About Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), https://www.irs.gov/forms-pubs/about-form-8992
The IRS explains: “Certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations file Form 5471 and schedules to satisfy the reporting requirements of sections 6038 and 6046, and the related regulations.” — Internal Revenue Service, About Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, https://www.irs.gov/forms-pubs/about-form-5471
Next step
Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk and Canadian Tax Desk handle GILTI and net tested income computations under current law, high-tax exclusion elections, section 962 modeling, and compensation planning for U.S. owners of Canadian corporations. See pricing or book a call.
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