Here’s a good puzzle.
Dual citizens are living in Canada. The wife works in the US and has US income only. The husband works in Canada and has Cdn income only. Normally she would pay taxes on her US income to the US and claim the foreign tax credit paid to the US. I did such a calculation and applied the foreign tax credit on her Cnd tax return.
Now for the fun part, When the US tax return is done the husband’s Cdn income is brought in along with his foreign tax credit and the rest of the family. All this reduces the final tax bill to the IRS changing the foreign tax credit which was claimed in Canada.
Any thoughts on how to deal with this?
Her foreign tax credit to claim on the Canadian return would be her income tax ultimately payable to the IRS as substantiated by her US tax return and an account transcript from the IRS. The US tax return and transcript being necessary to support the FTC claim under a post assessment review.
If her final tax bill from the IRS is reduced then her final tax bill in Canada will be increased. You can’t claim a foreign tax credit on income tax that has been ultimately refunded to the client.
Credit to @Arliss for pointing out the client needs to request an Account Transcript rather than a Tax Return Transcript from the IRS.
True but I forgot to say they were filing jointly in which case the tax payable is on both incomes.
I’d just reduce the FTC on her return to what was actually paid. It sounds like you used the married filing separate rates initially then changed to married filing joint and that reduced the taxes paid on hers by increasing her access to the lower tax brackets. If her income is the only US sourced income then all tax relates to that although the way the CRA calculates the FTC is slightly different and you may have to argue with them a bit to get the last little bit they will want to allocate to his income. I have generally been successful in getting it by pointing out that their calculation formula generally results in paying tax on the Canadian income twice to a certain extent. You generally have less of an issue with this if you use form 2555 instead of claiming FTC’s on form 1116.
Thanks. Learned something.
I usually claim the FTC instead of the 2555 to accumulate FTC’s incase of need.