The 1042-S Form, titled "Foreign Person’s U.S. Source Income Subject to Withholding," is used by the IRS to report income that has been paid to foreign individuals or entities and the taxes withheld on that income. This form includes various types of income, such as:
Dividends: Payments from U.S. corporations.
Interest: Income from U.S. bonds, notes, or other financial instruments.
Royalties: Payments for intellectual property or natural resource extraction.
Other Income: Such as rental income or payments for services performed in the U.S.
The 1042-S form provides details on the type of income, the amount earned, and the amount of U.S. tax withheld.
How Does the 1042-S Form Affect Your Canadian Tax Return?
As a Canadian resident, you are required to report your worldwide income on your Canadian tax return. Income reported on a 1042-S form must be included in your Canadian tax return. However, because you’ve already had U.S. taxes withheld on this income, you may be eligible for a foreign tax credit to avoid double taxation.
How to Report the 1042-S Form on Your Canadian Tax Return?
Gather Your Documentation
1042-S Form: Ensure you have the 1042-S form from the U.S. source, which will detail the income received and the taxes withheld.
Additional Documentation: Keep any supporting documents, such as statements from financial institutions or contracts that describe the nature of the income.
Report the Income
Include Income: Report the income listed on the 1042-S form on your Canadian tax return. This is typically done on Line 10100 (Total Income) of the T1 General form.
Convert Currency: Convert the U.S. dollar amounts to Canadian dollars using the exchange rate for the year in which you received the income. You can use the Bank of Canada’s annual average exchange rate or the rate on the date the income was received.
Claim Foreign Tax Credit
Form T2209: To claim the foreign tax credit for the U.S. taxes withheld, complete Form T2209, Federal Foreign Tax Credits. This form allows you to calculate the credit based on the taxes paid and the income reported.
Calculate Credit: The credit is intended to offset the amount of foreign taxes paid against your Canadian tax liability, preventing double taxation. Ensure you only claim credit for taxes withheld on income that is also subject to Canadian tax.
Report Any Additional Information
Schedule 1: Use Schedule 1 of the T1 General form to report the federal foreign tax credit.
