Section 962 Election Explained: Corporate Rates for You
How individuals get corporate treatment on CFC inclusions, what it saves, and the cost when the earnings are distributed
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
The section 962 election lets an individual U.S. shareholder of a controlled foreign corporation be taxed on subpart F and GILTI inclusions as if a domestic corporation — the corporate rate, the corporate GILTI deduction, and a credit for the foreign corporation's taxes. It often cuts current U.S. tax sharply, at the cost of a second tax on distributions.
On this page
What the election changes
| Item | Without the election (individual) | With the election |
|---|---|---|
| Rate on inclusion | Individual ordinary rates (up to 37 percent) | Corporate rate (21 percent) |
| GILTI deduction (section 250) | Not available | Available — 40 percent from 2026 (50 percent before), an effective 12.6 percent rate (Reg. 1.962-1(b)(1)(i)(B)(3)) |
| Credit for the CFC's Canadian tax | Not available | Indirect credit — 90 percent of the Canadian tax for GILTI from 2026 (80 percent before), full for subpart F |
| Later distribution of the earnings | Previously taxed, not taxed again | Taxed again to the extent it exceeds the U.S. tax paid under the election |
When it helps most
A Canadian corporation paying the general rate (about 26–27 percent) — the indirect credit can eliminate the U.S. tax on the inclusion entirely (though the high-tax exclusion may already do so). One paying the small business rate (about 9–12 percent) — the corporate rate, the deduction, and the partial credit leave a modest U.S. tax, far below the individual-rate result.
The cost — the second tax
When the CFC later distributes the earnings, the distribution is taxable to the individual to the extent it exceeds the U.S. tax paid under the election (section 962(d)). A dividend from a Canadian corporation can be a qualified dividend — a Canadian corporation is a qualified foreign corporation under the treaty rule of section 1(h)(11)(C), if the holding period is met — taxed at the lower rates, with a foreign tax credit for Canada's 15 percent withholding to a U.S. resident. The election is a deferral and rate trade, modeled over the years the earnings will stay in the company.
The mechanics
The election is made annually, by attaching a statement to the individual's return for the year (Reg. 1.962-2(b)); it applies to all CFCs for that year; the individual computes the tax on the inclusions separately at the 21 percent corporate rate, computes the GILTI inclusion on Form 8992, claims the section 250 deduction on Form 8993, and claims the deemed-paid credit on Form 1118.
Frequently asked questions
What does the section 962 election do?
It taxes an individual's subpart F and GILTI inclusions at the corporate rate, with the corporate GILTI deduction and a credit for the foreign corporation's taxes.
Is the section 962 election worth it?
Often, for a Canadian corporation retaining earnings — it can cut the current U.S. tax to near zero at Canada's general rate and to a modest amount at the small business rate.
What's the downside?
A second U.S. tax when the earnings are later distributed, to the extent the distribution exceeds the tax paid under the election.
Is the election permanent?
No — it's made year by year and applies to all of the individual's CFCs for that year.
Official sources
The IRS instructions for Form 1118 state: “Use Schedule C to compute taxes deemed paid by the domestic corporation filing the return with respect to inclusions under section 951(a)(1). Use Schedule D to compute taxes deemed paid by the domestic corporation filing the return with respect to inclusions under section 951A.” — Internal Revenue Service, Instructions for Form 1118 (12/2025), https://www.irs.gov/instructions/i1118
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
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 section 962 election modeling and filings, indirect foreign tax credit computations, distribution planning for previously taxed earnings, and multi-year CFC planning for individual shareholders. See pricing or book a call.
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