US Pension Splitting question regarding Form T2209

Canadian Newbie · Post by **Canadian Newbie** » Sat Apr 14, 2018 1:00 am

I saw some other posts on this but I am still somewhat confused.
My wife and I are US citizens/Canada residents and she earns a US based pension.
We are splitting the pension amount between us on our canadian returns.
My question is, does she take the credit on Form T2209 for the entire US tax we paid jointly on Form 1040 on the pension or do we split the amount of tax paid between us on the Form T2209 based on the proportion of the amount of split pension income?

Thanks for the help in advance!

nelsona · Post by **nelsona** » Sat Apr 14, 2018 1:44 am

Unfortunately all the US tax is hers, so you may not be able to take full advantage of pension splitting.
You will have to play with the numbers to see how much she can give you without wasting her US credits.

Canadian Newbie · Post by **Canadian Newbie** » Sat Apr 14, 2018 1:56 am

Sorry but I am still confused.

Her pension is $10,000. I am reporting 1/2 of the pension which is $5,000 as splitting.
We paid joint tax of $1,000 on the pension on our US 1040.

So, from what I understand I am not permitted to report $500 paid as a tax credit on my T1 even though we split the income?

Unfortunately, I already filed so I assume I will have to now amend my Canadian returns by removing the $500 credit from my return and taking the full $1,000 on her return. Net effect is $0 but what a hassle. I should have consulted here and not assume I would split the tax paid between us.

What amount do I report for her net foreign non business income on Form T2209? $10,000 or $5,000?

Thanks so much for the help.

nelsona · Post by **nelsona** » Sat Apr 14, 2018 2:46 am

She is only reporting $5000 of foreign income, so that is what she uses on T2209.
You also could report $5000 of foreign income, but have no foreign taxes since it was her income in US, thus her US tax.

This is a known issue. The net effect might not be zero, as you hve lost $500 credit and she might not be able to use the entire $1000, depending on her other income.

Canadian Newbie · Post by **Canadian Newbie** » Sat Apr 14, 2018 2:55 pm

Thanks. I will have to file T1 Adjustment requests. I wish I would have asked the question here first before filing this year. I assume I will have to wait intil they assess before filing an adjustment request.

This rule by CRA is surprising somewhat. It would seem that the chance for double taxation exists since we are paying tax jointly on the entire pension in the US on Married Filing Jointly. Assuming the same rates, she would get only a credit for her net portion of the pension on Canadian tax and I will pay full Canadian tax on my part of the split pension. There would be an amount of Canadian credit for US tax paid leftover on her return but cannot be carried forward.

It also seems at odds with the fact CRA allows you to split Canadian tax withheld between spouses. If they allow the tax paid only by one spouse to be split, you would think they would allow the US tax to be split as well.
:?

Thanks again for your help.

nelsona · Post by **nelsona** » Sat Apr 14, 2018 3:11 pm

Yes, it is at odds. But that is because CRA has decided to give a benefit that does not jive with the US system. It already doesn't jive because Canada won't allow joint filing. That would solve this pension splitting issue.

Your solution is just no to split pensions. There is no double taxation here, just a tax advantage that you cannot benefit from, just like TFSA is for US citizens. Fortunately, it appears that this one won't hit you too badly.

Imagine if all your income was coming from US pensions, Then pension splitting would be a pointless benefit,

rlb · Post by **rlb** » Mon Apr 16, 2018 12:23 pm

I am a little concerned by this.

For the past several years, I have transferred some US pension to my wife and with that, transferred the proportional amount of the 15% (by treaty) US tax on it. Every year, I think, I have had requests from the CRA for documentation of the tax paid (e.g., 1042S forms) and an elaboration of how I calculated the foreign tax credits for myself and/or my wife. I have always shown that the US tax credit was also proportionally transferred, and this has (to date) always been accepted. Note: uFile transferred the tax automatically, though in my response to the CRA I would lay it out manually in a table.

So perhaps this has not been correct and the CRA reviewer did not know any better.

This year I see that uFile again automatically transferred the tax credit proportionally to the transferred pension amount. Further investigation of the program shows that this is just the default behaviour - there is a box you can check to inhibit transferring the tax credit with the pension income. Testing it both ways, I find the total paid by us is the same whether the tax is also transferred or not (though our individual taxes change), indicating that my Canadian/NB tax rates are high enough to absorb the US tax paid even if all allocated to me. Looking at the 2016 uFile program, I see that the option to not transfer the US tax paid was also there but I had missed it.

It does make me fret about whether I should continue as I have done, since the CRA has been accepting that, or switch to nelsona's recommendation, as it wold not make a difference to our total taxes.

nelsona · Post by **nelsona** » Mon Apr 16, 2018 1:31 pm

The automatic tax "transfer" only applies to Cdn tax, and was instituted to avoid the situation where a filer would owe $1000's while the spouse would get back 1000's.

It does not apply to the US tax.

As to foreign tax credits, it has always been my understanding that foreign tax credits were NOT transferable under any circumstances between one spouse and the other, even in the case where one files and pays tax jointly in US. It would be even less the case where one spouse is merely having US tax withheld at source.

When pension-splitting was first introduced in Canada, this question came up, and the industry was pretty well in agreement that one could not morph the tax one spouse paid over to the other's tax return.

I guess I'll have to do a little digging.

nelsona · Post by **nelsona** » Mon Apr 16, 2018 1:35 pm

Just to add: the only Cdn tax that can be transferred is the portion of the Cdn tax that was specifically withheld by the CANADIAN pension distributor.

nelsona · Post by **nelsona** » Mon Apr 16, 2018 2:03 pm

After some digging I found that Turbo tax also allows foreign tax splitting. It resolves this at the foreign tax credit stage, and have done so for many years now.

Howevr, I have found no basis for this on the CRA website.

rlb, obviously CRA has looked closely into this, have seen your paperwork and have bought it, so I would continue to do this.

I would also now advise that others do the same thing.

nelsona · Post by **nelsona** » Mon Apr 16, 2018 2:38 pm

Just an added note
Canada has INCOME splitting rules under very narrow circumstances, and the form to calculate tax DOES take into consideration the splitting of foreign tax. However it does so EXPLICITLY (so why wouldn't pension splitting do so as well).