Foreign tax credit for Quebec resident

[formerpatriot]

I am a Canadian citizen and I live in Quebec. I have US pension income from TIAA. As per the tax treaty, 15% is withheld for the IRS. In 2022 the foreign tax withheld was $5,000.00 (I am converting to Canadian dollars and I am using round numbers for simplicity). I use UFILE to do my Canadian and Quebec tax returns. Here are the result:

On form T2209 (Canadian Federal Foreign Tax Credits), UFILE comes up with a $3,800.00 foreign tax credit and on form TP-772-V (Quebec Foreign Tax Credit) it comes up with a $1,200.00 foreign tax credit. Since $3,800.00 + $1,200.00 = $5,000.00, all is well.

My question: Is it possible to claim a smaller foreign tax credit in my Canadian tax return and a larger one in my Quebec tax return. For example, could I claim a $1,000.00 foreign tax credit on my Canadian tax return and $4,000.00 on my Quebec tax return?

[formerpatriot]

I may have found the answer to my own question:
In the UFILE "Interview", at the bottom of the "Foreign Income - Pension" page, you can put a limit on the amount of federal foreign tax credit to be used on line 3 of the T2209. If I put $1,000.00 as the limit, I get the desired result.

How could I have known that I could do that if I had been doing my tax returns on paper, without the use of UFILE?
Line 3 of the T2209 says "Enter the amount from line 1 oe line 2, whichever is less". It does not say that you can enter an amount smaller than the lesser of line 1 and line 2.

[nelsona]

ost people don't limit the fedral credit, because the federal will only take what it needs to reduce income to zero, then quebec gets the rest. It does that autpmatically and most are satified with that.

What made you want to limit the fed tax credit?

[formerpatriot]

nelsona wrote:
> What made you want to limit the fed tax credit?

I have income from multiple sources (DB pension from Canadian employer, QPP, OAS, USA Social Security and annuity from TIAA (USA)).
Per Canada-USA tax treaty, 15% of my TIAA payment was withheld in IRS taxes.
I split my pension income 50-50 with my wife. The tax paid in the USA is also split 50-50.
If I do not put a limit on the fed tax credit, I end up with a 6.5K tax return from Canada and I owe 6k in taxes to Quebec. Plus, I run the risk of Quebec demanding large tax installment payments next Fall. By putting a limit on the fed tax credit, I end up with a 3.5 tax return from Canada and I owe only 3k in taxes to Quebec. Plus, if Quebec demands tax installments next Fall, I expect it will be less.
Same is true for my wife, but to a lesser extent. By putting an appropriate limit on her fed tax credit, she will owe about the same amount to Canada and Quebec, below the installment payments trigger.

Either way, the net result is the same. But with the second approach (limiting the federal tax credit), there is less of a cash flow problem for me.

Note that 2022 was the first year during which wife and I are retired. I expect it will take a year or two of adjustments.

[nelsona]

not a bad thing to do, but it also sounds like you are being over-withheld from your Cdn-sourced pensions. You might simply want to have less federal tax withheld, and more QC tax withheld.

[formerpatriot]

Yes, I will increase the Quebec tax withholding on my Canadian sourced pensions.
As for Canada, 2022 was exceptional. My OAS was entirely clawed back because the reference income was my pre-retirement income. But now I am getting most of it back, hence the big refund.

[nelsona]

So the refuns is not so much a return of withholding, but a return of your clawed OAS.

For future, in case you have any Roth accounts. Any income you take from them needs to be reported as pension income, and later deducted by treaty. While resulting in no increased tax, This can impact clawback and other benefits.

[formerpatriot]

As mentioned above, on line 3 of my T2209, I caped my federal non-business foreign tax credit so that most of it could be used in my Quebec tax return.

Today I filed my tax return using UFILE. Seconds later, an Express Notice of Assessment was deposited in My Account on the CRA website. The cap that I put on my federal non-business foreign tax credit was ignored! I wonder if the real Notice of Assessment (which should be available within 7 days) will be different.

[nelsona]

Like I said, I've never heard of anyone capping their credit in favour of provincial use. This may be an agreement between the fed and provincial tax agencies, since you are in effect reducing your Prov income tax.

They may have denied it. Or in the final version you submitted, your software overrode your election.

[formerpatriot]

The software (UFILE) did not override it.
The CRA "corrected the error" (as the Notice of Assessment says).
Today the large CRA tax return was deposited in my bank account.
Now I am waiting to see what Revenue Quebec does.

[formerpatriot]

Final update:
Today I was on the phone with the CRA and with Revenue Quebec.
The conclusion is that you can’t choose how you want a foreign tax credit to be split between Canada and Quebec. On line 3 of the T2209, you have to do as it says: write the smaller of the amount from line 1 and the amount from line 2. If line 1 is bigger than line 2, then the difference is what you’ll be able to claim in your Quebec tax return via form TP-772 and line 409 of Schedule 8.

It is somewhat annoying that UFILE did not give me an error message or a warning when I tried to force a different split by putting on line 3 of the T2209 an amount much smaller than line 1 and line 2.

In the end all is well.
Instead of getting a tax return of $3000 from Canada and owing $3500 to Quebec,
I am getting a tax return of $6000 from Canada and I owe $6500 to Quebec.

[nelsona]

Yup. That is what I said a few posts ago. Its an agreement between the provinces.