Am I okay filing the foreign tax credit in Canada?

[Mswalleye2]

We live in Canada, husband is US citizen.. on US pension. He has been filing MFS on US return, I complete his US return and then claim a credit in Canada for the taxes he pays to the IRS. We split his pension here to reduce taxes. Canada does not get much of our tax money as the majority seems to go south of the border. Should I be completing his Canada return first and then filing for a tax credit in the USA? I usually hash out both ways just to see where there may be a tax advantage but it doesn't seem to make much of a difference other than who receives the taxes but ...is there a specific way I am supposed to be doing this? Thanks

[nelsona]

The order doesn't matter. His US pension is taxed in US first, and credit can only be given in Canada on that, the same applies to any other US-sourced income he has.

The CDn income he has is taxed first in Canada, with credit given in US.


So your returns all need to be done at the same time to figure this out.


Remember, if you split US pension income, you are now allowed by CRA to split the US tax in the same proportion.

[nelsona]

There isn't any advantage when it come to foreign tax credit, all it does is apportion it between the two countries. You end up paying the same total tax (roughly) that you would pay if all your income was from Canada, except US has the right to the tax from his US pension.

[Mswalleye2]

Thanks for the info and confirming things for me.

You mentioned that with the US pension "you are now allowed" to claim the proportionate tax ... he has been claiming his pension for about 5 years now and I initially contacted CRA about the way the US taxes were to be reported with regard to split income because the wording and instructions seemed to refer to a canadian pension and not a usa pension. CRA told me that he did not have to claim a specific proportion on a split for a USA pension (only Canadian) .. he could claim all of the taxes if he wanted, or any portion. I asked for the source but they said that there was no public document on it , that she was referring to their documents??? So ... I have been claiming them in a manner to our best advantage.

Since you mentioned "you are now allowed" ... when did this change you mention take place and what was it about?

Also, if the Foreign Tax Credit from USA exceeds the Canadian taxes owed ... I believe I can carry forward any credit can I not?

[Mswalleye2]

You also mentioned that his Canadian income is taxed first in Canada so ... he just has interest income in Canada and I have been adding it to his 1040 and then claiming the credit in Canada. So from what you say, that is wrong. but easy :) So, if he had $2500 interest in Canada .... how exactly do you accurately calculate taxes just on that interest .. for the foreign tax credit for his usa return. If this is blatantly obvious I apologize but I am having a brain farct ....

[nelsona]

So, let's give some history.

In the past, only the person having the foreign (US) tax liability) could claim the foreign tax credit on their Cdn return. This initially made income splitting of US pension almost worthless, since, although it reduced the overall Cdn tax liability, it did little to help the overall tax liability, since only the pension-earner could claim the US taxes, meaning that he would have a US tax bill, but perhaps a lower Cdn tax bill, now that the pension had been shifted, and the spouse would have no US tax to claim.

In recent years however, CRA seems to be allowing ( and your experience confirms this) couples to split the US tax, but from what I had seen, it was only in the SAME proportion as the income. So, if he reported 60% of the pension, his spouse could only claim 40% of the US tax on her return.

Now, generally, this should be good enough, as I do not see haw the US tax (if calculated properly) on the pension, could be less that the Cdn tax on the pension, regardless of how it is split. Remember that the US tax can only be 15% (even for a US citizen) and that should be be much less that the Cdn tax. I'd be curious to know how there would be any leftover US tax in any year.

Your goal is only to use up the US tax. You CANNOT carry forward personal foreign tax to other years. So, not sure what 'advantage" you might be seeking. Your Cdn returns should should be maximized for the Cdbn tax, as any other pensioners would, and the US tax should be used up 100%.

[nelsona]

You asked about his Cdn income.

There is very little Cdn income that US can tax Cdn residents for. But, since your spouse is a USC, he has to report the income. So, for interest, he reports it, and then takes credit for any the Cdn tax from that income, since he should not have been taxed.
So, say he makes $5000, $2500 is his US pension, and $2500 is Cdn bank interest (all figures are in USD). he comes out with a tax bill of $50 on his 1040, and $70 on his T1.

In US, his pension was half his income, so half the tax is from his pension, so $25 and half the tax is from his bank interest. In Canada its $35 and $35.

SO, on an IRS 1116 form, he reports the $2500 bank interest as foreign, and reports the $35 he paid in Canada. IRS will credit him up to $25 of that Cdn tax. There are some other limits that are determined on form 1116, so expect a little less that the $25. whatever is left can be carried forward, for future use on form 1116.

In Canada, he reports the pension as foreign and uses the $25 from 1040 towards the credit. As I said earlier, this should use it all up. Even if it doesn't though, he can't carry forward.

so, notice that you stop there. In principle, you prep both sets of returns without taking into consideration any foreign tax credits, and then you do the foreign tax credits on each return, and stop.

[nelsona]

... when you have income from both countries.

[Mswalleye2]

"I'd be curious to know how there would be any leftover US tax in any year."

I believe the leftover tax was ... my husband inherited a small annuity from his mom when she passed, he is leaving it in place for the allowable 5 years but he took some of the money out last year. He had to pay taxes on the full amount because of the type of annuity. What I understood from what I read here and there was, he paid full tax on the amount in the USA but in Canada he was to pay on the generated interest. So, the amount of yearly interest was a small portion of what he withdrew?

Plus, I am not doing things right. :)

Really appreciate the information ..