Income Splitting in Canada

eeyore · Post by **eeyore** » Fri Oct 31, 2014 8:27 pm

Now that the Canadian government is promising income splitting, I'm wondering how that might impact U.S. citizens living in Canada like my wife.

My wife is a U.S. citizen and I am Canadian, both living in Canada. Since my wife has very little income of her own, it would be beneficial to take advantage of any income splitting provision by CRA. However, would she then have to report her split portion of my CRA income to the IRS? Currently she files as Married Filing Separately to IRS.

exPenn · Post by **exPenn** » Sat Nov 01, 2014 8:16 am

I will let more knowledgeable people give you the definitive answer, but I have been splitting my pension income with my wife (a former USC) on our Canadian taxes for the last 8 years, and she was never required to report it on her US taxes. The IRS requires you to report YOUR world wide income. I don't think that income that is shifted only on Canadian Tax forms can be considered real income.

JGCA · Post by **JGCA** » Sat Nov 01, 2014 12:47 pm

I agree the pension split allowed in Canada was never allowed in the US so this should fasll under the same rules.

eeyore · Post by **eeyore** » Sat Nov 01, 2014 5:28 pm

exPenn: I agree that there *should* be no impact on the U.S. tax return--that's what I would have expected.

A comparable scenario is how the CRA and IRS tax interest income held in joint accounts: CRA taxes it based on source, whereas IRS normally taxes it 50/50, regardless of the source of the funds. If IRS is consistent, what CRA regards as my wife's "income" (after splitting) should not impact her income on her U.S. return.

However, it could get tricky if my wife ever needs to apply taxes paid to CRA as input tax credits on her U.S. return: as far as CRA is concerned, she paid taxes on a higher income than IRS even recognizes she had.

JGCA: True. However, IRS allows a couple to file as Married Filing Jointly, which I would think accomplishes essentially the same thing as income splitting.

exPenn · Post by **exPenn** » Sat Nov 01, 2014 6:27 pm

I assume that the new "Family" income splitting would work the same way as pension income splitting. When I tranfer up to 50% of my pension income to my wife, I also transfer a proportionate amount of the tax that I paid on that income to my wife's Canadian return as "income tax deducted". Of course that might be different from the tax actually owing on that income.
We never had to claim foreign tax credits on her US return so I won't speculate on what one should do in that case.

nelsona · Post by **nelsona** » Sat Nov 01, 2014 11:08 pm

Income splitting is not accepted by IRS. In the case of a US citizen receiving the split income, it is a non-event.

However in the case of the US citizen GIVING the income, this raises the problem of having less tax attributable to the reported income, making splitting less attractive.

In the case of MFJ it really doesn't matter, since all income is reported, and all Cdn tax is creditable.

But not in MFS scenarios as I described above.

The reason one may think that it is not an issue us because of the foreign earned income exclusion. But remember that up til noe only pension income ha been splittable, which is not eleigible for FEIE. The result is that US citizens splitting their pension with non-US spouse has sometimes had to forego the split.

the same will apply going forward for other income