Foreign withholding tax

When a foreign corporation pays a dividend to a Canadian, the foreign country usually takes some tax before the money is paid out. The United States withholds 30% from foreign investors by default. The Canada-US tax treaty reduces that to 15% on portfolio dividends. Rates for other countries vary; withholding is commonly between 15% and 25%.

The rules

No gross-up and no dividend tax credit. A foreign dividend is fully taxable as ordinary income, like interest. Compare Canadian dividends.
Non-registered account. The tax withheld is claimed back as a foreign tax credit (Form T2209 federally, T2036 for Ontario), which reduces Canadian tax on that income. The credit is the lesser of the foreign tax paid and the share of Canadian tax that belongs to the foreign income. On income from property, such as dividends, the creditable amount is capped at 15% of the income; withholding above that is deducted from income instead.
No carryover. A credit that cannot be used in the year is lost.
RRSP and RRIF. Under the treaty, US dividends paid into these are exempt from withholding. See RRSP room.
TFSA. The treaty does not exempt a TFSA, so the 15% is withheld and there is no Canadian tax against which to claim a credit.

What the engine does

Takes the foreign tax paid as a figure on a fund or trust distribution in a non-registered account, adds the gross foreign income to taxable income, then applies the federal and Ontario credits within the limits above.
Claims the credit first, and deducts only the part above the 15% cap.
Treats the 15% treaty rate as reference only. The amount withheld is an input, because rates differ by country and by account.

What it deliberately does not

It does not look up a country's rate or work out which holdings are foreign.
It does not deduct the tax instead of crediting it, which only helps when Canadian tax is near nil.
It does not model more than one foreign country in a year, foreign business income, or currency conversion.
The planner's own accounts do not split their return into dividends, so no foreign withholding appears in a plan unless it is entered.

Connected to

How dividends are taxed · Canadian dividends are grossed up by 38% (eligible) or 15% (other), taxed as income, then reduced by a federal and Ontario dividend tax credit. The credits make dividends tax less than interest at the same income.
RRSP room, deduction and withdrawals · Room accrues at 18% of earned income up to the annual cap, contributions earn a deduction refunded the following April, and withdrawals are taxed as income. The plan assumes you start with no carried-forward room unless you say otherwise.
The alternative minimum tax · A parallel tax calculation that applies a flat rate to a wider measure of income, so someone with a large capital gain cannot owe almost nothing. The higher of the regular and minimum tax is paid, and any extra is carried forward as credit.

Sources

TaxTips — foreign withholding; FTC-recoverable in non-registered accounts only · Default treaty withholding on foreign dividends (US 15% under treaty; varies by country) · effective 2026-01-01
Convention between Canada and the United States, Art. X(2)(b), Art. XXI(2) · Canada–US Convention: portfolio dividends withheld at most 15% (Art. X(2)(b)); RRSP/RRIF-type trusts exempt (Art. XXI(2)), TFSAs not. Reference only — withholding is a supplied fact · effective 1985-01-01
ITA 20(11); 126(7) "non-business-income tax" excludes 20(11)/(12) amounts; T2209 note ("cannot be more than 15% of your net income from that property"); S5-F2-C1 ¶1.22 · Foreign tax creditable on income from property (other than real property) is capped at 15% of that income; the excess is deductible from income under 20(11) (line 23200) · effective 1972-01-01
Form T2209 (2025) line 2 and notes (2)–(4); ITA 126(1); Folio S5-F2-C1 ¶1.3, ¶1.74 · Federal non-business foreign tax credit per country: lesser of foreign tax paid and net foreign non-business income ÷ net income × basic federal tax, where basic federal tax = line 42900 PLUS the federal dividend tax credit and net income = line 23600 minus net capital losses of other years claimed · effective 2025-01-01
Form T2036 (2025) lines 1–5 and note (4) Ontario; Form ON428 (2025) lines 70–83 · Ontario foreign tax credit: lesser of (foreign non-business tax − federal credit) and net foreign non-business income ÷ net income × Ontario tax otherwise payable (ON428 line 81 with lines 70 and 72 at zero); applied at line 82 after the tax reduction, before LIFT · effective 2025-01-01
Income Tax Folio S5-F2-C1 ¶1.24 · Unused non-business foreign tax credit cannot be carried to another year · effective 1972-01-01
ITA 126(1), 20(11), 20(12); T2209 · Foreign non-business tax on property income is claimed as the 126(1) credit, and the part over the 15% cap is deducted under 20(11); the 20(12) election to deduct instead of crediting is never taken · effective 2026-09-18