Foreign Tax Credit percentage

New clients are dual citizens. Spouse 1 works for a Canadian company and Spouse 2 works for a US. They also have some investment income from the US.

Their US accountant has filed a joint return for them. But he said from the total tax, 80% is attributed to Spouse 2 because spouse 1’s income falls under the foreign earned income exclusion.

Should I split the FTC 80/20 based on this, or should I base it on their portion of total income regardless of the exclusion (they make about the same, so it would be 50/50).

The problem is in 2020 they dealt with a CRA review about the same topic on their own. Only spouse 2’s claim was being reviewed. CRA only allowed a deduction based on the ratio of her W-2 income compared to the overall income on the US return, but I don’t think the clients provided any documents showing they also had investment income that was joint or that the spouse’s employment income was exempt.

The issue you have here is that the way that Canada deals with the Foreign Earned Income Exclusion is that it is a tax reduction calculation. The income is still on the tax return and therefore, the US tax is proportional to it as well as the other income.

You may wish to view the calculation that Canada uses to determine what portion of the Canadian tax is related to that income, because that is the same method that will be used for relating the US tax. The form is T2209 for Federal purposes. The province uses the same calculations.