Pension splitting and FTC for US tax paid on pension

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rlb
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Pension splitting and FTC for US tax paid on pension

Post by rlb »

If I transfer (nearly half) of my US pension to my wife for our Canadian tax returns, can I transfer the US tax paid on the pension also to her as if she paid that US tax? Otherwise, I won't be able to get full credit for US tax paid, as I am paying US tax on the full amount, but Canadian tax only on the part retained by me.
rlb
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Post by rlb »

Second question is: if I *can* split the tax as well, *must* I split it?

TurboTax indicates that if I can't transfer the tax, then I should transfer less of my pension to my wife, in order to get full credit for the tax paid on the pension (calculated using our MFJ effective US rate). The non-optimal split only results in paying an extra $41 to Canada, so it won't be too bad if I can't transfer the US tax paid as well when I transfer the income. But I ought to know if Canada actually requires moving the tax as well as the pension.
nelsona
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Post by nelsona »

I'm not sure what you mean by moving the tax. Which tax? The pension spltting rules require that you transfer the portion of the withholding tax that was sent to CRA. You had none withheld from your US pension, so none can be transferred.

For FTC purposes, as long as you MFJ, then you can allocate US tax to whatever US-source income she reports. Same for you.

btw, if this is IRA money, it is not eligible for splitting.
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rlb
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Post by rlb »

Because the pension is US income, of course there is no CRA withholding on it, but there are US taxes on it from our US 1040.

Let me clarify a bit, and also see if I understand your answer. We are dual US/Canadian citizens who moved from the US back to Canada after retirement. The pension in question is a US corporate pension (although my wife also has an IRA withdrawal, I know you cannot split that , as you pointed out). After finishing our US 1040 MFJ without yet including any foreign tax credit on it for a small amount of Canadian source income, I find our effective tax rate to be 14.56%. The US tax on the pension amount, for purposes of claiming a credit on the T1 for US taxes paid on the pension is then 0.1456 times the pension amount.

So the question is, am I (a) allowed and/or (b) required, when filling out the foreign tax credit on the T2209 form for the US tax paid, to split the US tax paid on the pension (0.1456 x pension) between my wife and myself in the same ratio that we have elected to split the pension income? (Getting TurboTax to actually do that may be another difficulty altogether.)

I think I interpret your answer as "yes", we "can" split the US tax between our two T2209 forms, but perhaps we are not obligated to do so.
nelsona
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Post by nelsona »

Reread my answer, but I'll make it clearer.

If she reports X US-sourced income on her return, and you report Y, then she can only claim X/(X+Y) of the US tax, and you can only claim Y/(X+Y) of the US tax.

So, while there is no requirement for her to claim all the US tax she is entitled to, you can't use what she does not.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
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Post by nelsona »

btw, 14.56% is getting close to the limit on your eligible US tax for credit in canada.
Remember that your ftc on the Cdn return cannot exceed 15% for pensions, so watch this in future years. There is a complex remedy to get anything more than 15%.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
rlb
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Post by rlb »

I think I recall you telling me in an older post, the US has the right to tax my US corporate pension at more than 15% (if that is our effective tax rate) because we are both US and Canadian citizens. But Canada will not allow a foreign tax credit for more than 15% despite that?

Can you point me toward the "complex remedy" so that I can both research this and plan for next year? Thanks.
nelsona
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Post by nelsona »

Look for re-sourced by treaty in here. That's all I'll say about that.

Even 14% is quite high for MFJ. I trust you are not reporting SS/CPP/OAS on your 1040?
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
rlb
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Post by rlb »

Thanks for the tip in the right direction.

No SS/CPP/OAS received for us. Pension (60K) + One last Deferred Comp (20K) + IRA withdrawal (33K) + other (investments, 7K) is about 120K. All US source, except most investment income. With standard deduction, tax is 17.5K or 14.56%.

We have been trying to bleed down the IRA's, moving the money (after taxes) to investments in Canada. But perhaps we should keep an eye on the 15% effective rate and not do too much at once.
nelsona
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Post by nelsona »

Well, you do want to take as much money know before you are subject to clawback on OAS.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
vyjuz
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Re: Pension splitting and FTC for US tax paid on pension

Post by vyjuz »

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viqurux
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