Foreign corporations that earn active business income (i.e. income is income generated from a profession, calling, trade, manufacture, adventure or concern in the nature of trade — in other words, income that is generated from an activity) are excluded from FAPI. Passive or property income is a return on invested capital such as rent, interest and royalties. Little or no effort is required to produce the return. Dividend income is specifically excluded from FAPI. The amount of FAPI to include on the Canadian tax return varies.

1. If the foreign corporation’s total FAPI is $5,000 or less, then no amount is included.
2. If the foreign corporation’s total FAPI is more than $5,000 and the foreign corporation only has one class of issued shares, then the amount to include is equal to the corporation’s equity percentage. For example, if there is FAPI of $10,000 with only class A shares issued and a corporation owns 10% of the class A shares, the corporation includes $1,000 of FAPI.
3. In any other cases, the corporation will have to estimate the earnings on its issued class of shares and then take its equity percentage.

In order to reduce taxes payable on the FAPI, a corporation is allowed to accrue and deduct the estimated foreign taxes on the income (i.e. the taxes charged in the foreign country plus withholding taxes on dividends).