I've got a situation that I'm sure is not unique but I'm having troubles finding some firm guidelines in either the US/Canada Tax Treaty, Canadian Income Tax Act, IRS or CRA publications. Hope someone out there can steer me in the right direction.
Both my wife and I lived in Windsor and worked in Detroit for the tax years 2003 and 2004 and filed US taxes as MFJ. My wife has dual citizenship, I'm a Canadian with my income much higher then hers. CRA has not allowed me credit for the entire amount of foreign taxes actually paid but instead assigned a percentage (75% for me/25% for my wife) based on each of our income as claimed on the joint US taxes. I had initially claimed my entire foreign tax deducted from my pay and paid into my RRSP's to bring my Canadian taxes to nil. Now I have a Canadian tax liability for both years. Is the CRA being discriminatory by penalizing me because of a tax benefit issued by a treaty country and not recognizing the tax benefit (lower tax relief for MFJ) given by the treaty county? Do they not have to treat this as a benefit of "Tax Sparing" as defined in Para. 40 of IT-270R3, and therefor base our Foreign Tax Credit on the taxes payable as if we had filed "Married Filing Separately"? As it stands now, CRA has designated a higher proportion of Foreign Tax Credits to my wife's income percentage then what would otherwise be her US tax liability, and a lower proportion to mine.
I already filed an Objection, with no success, and am contemplating Tax Court as my next avenue.
Any ideas are appreciated. Thanks
Al
CRA treatment of Married filingJoint status
Moderator: Mark T Serbinski CA CPA
CRA has consistently taken the position that a married couple with foreign income who file jointly in US, can only claim foreign taxes as being split in exact proportion based on income.
So if your wife made 1/3 what you did , she can claim 25% of the overall income taxes, while you can only claim 75%. The only leeway you would have is on the SS taxes that you paid and she paid, which *could* be considered separately, particularly since they don't appear on the tax return.
Under no circumstances has CRA ever accepted a taxpayer's "withheld" tax as eligible for foreign tax credit, as this would obviously lead to abuses (one could have 1000's extra withheld for IRS, claim a credit in Canada, and then get a refund from IRS). Withholding has little to do with final taxes.
This is a case where it may have been advantageous for both of you to file separately from the start, as this may have rsulted in a lower tax bill overall.
I am puzzled by your statement that "CRA being discriminatory by penalizing me because of a tax benefit issued by a treaty country and not recognizing the tax benefit". They are, quite frankly, by reducing your eligible foreign tax.
If it makes you feel any better (it won't), consider you wife's income as being ADDED to yours, not the other way 'round; then you will see that in fact, her income was very HIGHLY taxed in US, and then when you turned around in Canada, her income was taxed at a low rate, resulting in lost US credits. It will also make you see that she basically worked for no income, and would have been much better off working at a job paying half in canada, or not working at all.
It's a well-known quirk in the cross-border world, combinming the worst of the marriage penalty and the foreign tax credit limits.
<i>nelsona non grata... and non pro</i>
So if your wife made 1/3 what you did , she can claim 25% of the overall income taxes, while you can only claim 75%. The only leeway you would have is on the SS taxes that you paid and she paid, which *could* be considered separately, particularly since they don't appear on the tax return.
Under no circumstances has CRA ever accepted a taxpayer's "withheld" tax as eligible for foreign tax credit, as this would obviously lead to abuses (one could have 1000's extra withheld for IRS, claim a credit in Canada, and then get a refund from IRS). Withholding has little to do with final taxes.
This is a case where it may have been advantageous for both of you to file separately from the start, as this may have rsulted in a lower tax bill overall.
I am puzzled by your statement that "CRA being discriminatory by penalizing me because of a tax benefit issued by a treaty country and not recognizing the tax benefit". They are, quite frankly, by reducing your eligible foreign tax.
If it makes you feel any better (it won't), consider you wife's income as being ADDED to yours, not the other way 'round; then you will see that in fact, her income was very HIGHLY taxed in US, and then when you turned around in Canada, her income was taxed at a low rate, resulting in lost US credits. It will also make you see that she basically worked for no income, and would have been much better off working at a job paying half in canada, or not working at all.
It's a well-known quirk in the cross-border world, combinming the worst of the marriage penalty and the foreign tax credit limits.
<i>nelsona non grata... and non pro</i>