What is Foreign Accrual Property Income (FAPI)?

  • FAPI stands for foreign accrual property income and comes into play when taxpayers own a foreign corporation that is earning passive income. Passive income includes royalties, interest, rent etc. If a taxpayer incorporates a foreign company, and has that company buy a rental property offshore, most people think if they do not repatriate any of the income (i.e. sending money to themselves), the money the company receives is not subject to tax in Canada. This assumption is incorrect. For Example, A foreign corporation, owned by a Canadian resident spends $500,000 on a rental property in the Bahamas. FAPI will now come into play.
  • If a corporation earns rental income, that income is taxed in your hands personally here in Canada. If the passive (rental) income is being earned in a country that has a tax treaty with Canada, then taxpayers would receive tax credits in the amount already paid in the other country
  • However, if a foreign corporation's main business is selling and renting homes then income would be considered active income if corporation employs more than five full time employees to earn income. There are separate active income test in order to avoid FAPI.  We would be glad to help you if you want to know more about FAPI tax.

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