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An Introduction to Subpart-F Income

September 4, 2013

Canadians with US reporting requirements who own their own Canadian corporations (or plan to own), have many potential US reporting requirements to keep in mind. Even if the corporation doesn’t operate in the US, if the Canadian taxpayer who has a US filing obligation holds a controlling stake in the company (as defined by the internal revenue code), it opens the door for foreign reporting and potential Subpart-F income issues. AG Tax LLP’s US and Canada tax specialists would like to highlight “Subpart-F Income” in today’s article, as it can be the source of many unwelcome surprises when fulfilling US reporting requirements for foreign corporations.

What is Subpart F Income?

Subpart F income deals with the US taxation of income earned by U.S Controlled Foreign Corporations (CFCs). Generally, a CFC is a non-US foreign corporation in which more than 50% of the shares of the total value of the stock is owned by US shareholders during a taxable year.

Subpart F Income rules require that certain types of income from CFCs, even though undistributed, must be currently included in the gross income of the US shareholder in the year the income is earned by the CFC.

What is the purpose of Subpart F Income?

Generally, the earnings of foreign corporations are not taxed in the US until the foreign corporation repatriates its earnings through the distribution of dividends to its U.S shareholders. Subpart F Income rules were established in 1962 to prevent CFCs from structuring transactions in a way that may take advantage of the inconsistencies between foreign and US tax systems (in an attempt to lower US tax). Rather than tax being deferred, certain kinds of income are included in gross income and taxed in the year the income is earned. That is why this Subpart F is known as an “anti-deferral regime”.

Income that can be treated as Subpart F:

• Passive investment income

• Related-party sales or services income

• Insurance income (issuing or reinsuring of an insurance or annuity contract)

• CFC’s income consisting of sales, services, shipping, and oil related income

Subpart F Income Limitations:

Some limitations on Subpart F income are:

• Subpart F income does not include income derived from the conduct of trade or business in the U.S by the U.S controlled foreign corporation, unless the income is exempt from tax or subject to a reduced tax rate due to a tax treaty obligation

• Subpart F income of any controlled foreign corporation for any taxable year should not exceed the earnings and profits of such corporation for such taxable year

Unforeseen Implications of Subpart F Income:

As a short example. If a Canadian with US reporting requirements held a controlling interest in a Canadian corporation they would be required to report this interest on Form 5471. If this corporation had income that was considered Subpart F, the taxpayer would be required to report their share of this income on their personal US tax return, even if they did not in fact receive this income at the personal level in Canada. This can lead to potential double taxation.

Few Canadian taxpayers with US reporting requirements are aware that their Canadian corporation may have US filing requirements as well. Subpart F income is just one component of these complex filing requirements, and it is a complex matter by itself.

AG Tax LLP Can Help

If you own a stake in a foreign (non-US) corporation, and have US reporting requirements, please contact an AG Tax advisor today. Our tax specialists will assist you in determining your filing requirements.

Additionally, if you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance. As a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.

We can assist with:

  • Canadian Personal and corporate tax returns
  • Cross Border Taxation and Business Planning
  • U.S. Personal and Corporate Taxation
  • Disclosure of Foreign Assets and other information filings
  • Retirement planning
  • State Sales Tax & E-commerce Taxation
  • Estate Planning, Inheritance tax advice

To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:

  •  416-238-5920 (Greater Toronto Area, ON)
  • 604-538-8735 (Greater Vancouver Area, BC)
  • 780-702-2732 (Greater Edmonton Area, AB)


Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.

ABOUTAylett Grant Tax, LLP
With offices across Canada, we are positioned to manage and process the full scope of your Canadian, US and US Canada cross-border tax filing needs.
12752 28th Ave, Surrey, BC, V4A 2P4
104–4220 98 St NW Edmonton AB, T6E 6A1
With offices across Canada, we are positioned to manage and process the full scope of your Canadian, US and US Canada cross-border tax filing needs.
12752 28th Ave, Surrey, BC, V4A 2P4
104–4220 98 St NW Edmonton AB, T6E 6A1

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