How to calculate effective tax rate when splitting 401k?

[lbeauvil]

Getting an early start on my 2023 taxes.

My wife and I are dual citizens (US/Canada) living in Canada/Quebec.

I have income from 401k and dividends from the US and wages, RRSP and interest from Canada.
My wife has dividends from the US and interest and rentals from Canada.

I split my 401k with her at the T1 level but not in Quebec because I'm less than 65 year old.

I calculate our effective tax rate for my wife and I separately to appropriate the correct amount of Canadian tax on the US FTC form 1116.

Example:
Total 401k income: $12,000 --> split $5,000 to my wife on T1

My questions are:

1- Should I use my entire 401k amount of $12k as mine to evaluate the effective tax rate or remove the portion I split with my wife and keep only $7k and add $5k to hers?

2- Currently I evaluate my effective tax rate by adding all taxes from Canada and Quebec as 1 number per category of income. Is that correct or should I evaluate 2 different effective tax rates and do the tax math in Canada and Quebec separately to appropriate the passive and general income taxes for form 1116?

3- Are RRSP income from Canada considered passive income?
Categories for form 1116
Passive income: interest, dividend, rental and RRSP
General income: wages

Thanks

[nelsona]

3. RRSP are considered general income.

Before doing any foreign tax calculation, simply do your tax returns without any foreign tax credit.

Then, with your US joint return, determine how much of the income you are reporting in US-sourced (seems to be only dividends and 401(K). Are your dividends "qualified", meaning that they have a lower tax rate than regular income (likely zero)? Once you determine this, you will be able to determine what your effective tax rate on your 401(K) income.

How you split that tax is up to you: either use it all yourself or proportion it with your spouse. Your Cdn tax software has an option for that. That will be the only foreign tax credit item on your Cdn return. You simply want all of it to be used up, preferably on your federal return, so you don't have to bother with quebec foreign tax credit.

For the US 1116's the CDn income you are reporting is RRSP, wages, interest and rental income.

[lbeauvil]

Thanks nelsona for the quick response.

Got it. I'll put RRSP in general income. The dividends are qualified so no tax on it.

My question 1 is more to try to figure out the Canadian effective tax to allocate the correct amount on the two US form 1116 categories.
Let's put some simple numbers to illustrate.

Me
----
Canadian wages: $40k
401k (US source): $16k - $8k split to wife = $8k
interest: $5k
Total income: $61k ($53k after split)
T1 + TP1 tax: $12k

To allocate my Canadian tax for form 1116 passive income for example, should I use $61k or $53k?
On form 1116 passive income from interest
interest / Total income * Total tax = CAN tax allocated to interest
$5k / $61k * $12k = $984
or
$5k / $53k * $12k = $1132

Wife
------
rentals: $10k
interest: $17k
401k split from me: $8k
Total income: $27k ($35k after split)
T1 + TP1 tax: $2k

On form 1116 passive income from interest
interest / Total income * Total tax = CAN tax allocated to interest
$17k / $27k * $2k = $1259
or
$17k / $35k * $2k = $971

[nelsona]

Like I said, the software will let you choose to either split it prorated, or you can elect to keep it all yourself. All you are wanting to do is use it all, preferably on your federal return. This will not impact your the foreign tax credit on your US return, since you determine this BEFORE taking the US tax credit.

On your 1116, there is no way you will use up all the Cdn tax, so it doesn't matter much how you allocate the income, you simply want to lower your Cdn tax as much as possible. You will be reporting the income and tax on joint 1116s