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Question

Hi Phil

Found your information on the internet and I think you may be just the person to help answer my questions.

I stumbled across an article on our blog that was very similar to my situation.

My Grandfather who lived in the US recently passed away and my siblings and I all received about $400,000 in inheritance. The inheritance was made up of mostly of IRA investments. We all received a 1042-S for the amounts received and reported those amounts on our Canadian tax return (our uncle is a CGA who helped us file our tax returns). He also claimed a foreign tax credit for the 30% withheld on the 1042s. CRA has audited all our tax returns and is only considering giving us us 15% for a foreign tax credit.

My uncle is appealing their decision but I’m not terribly confident that he has the appropriate amount of experience to deal with this issue.

Does this seem right? Should we only get 15% as a foreign tax credit on our Canadian tax returns? If so, does that mean that we lose the other 15%? Shouldn’t we at least get a deduction for the additional amount?

Any help would be appreciated.

Thanks

XXXXXX

Answer

Hi XXXXX

Thanks for the email, this is a fairly common issue.

The payor of the IRA should have only have withheld 15% pursuant to the Canada-US tax treaty. Unfortunately most payors simply withhold the standard 30% non-resident rate without asking.

CRA is correct however, you should only get 15% credit for the IRA withdrawal as a foreign tax credit in Canada.

The good news is that you do have options. You should be able to file a US tax returns to apply for a refund of the additional 15% paid not credited in Canada. You’ll need to file a 1040NR and a W7 (to get a US ID number assuming you don’t have one already) in order to claim the refund.

We’ve had lots of success in obtaining refunds for these amounts in the past. Please call me at 250-381-2400 and we can start the process.

Cheers

Phil

Phil Hogan

Phil Hogan is a Canadian and US CPA working with clients throughout Canada and the US. Phil advises on cross border tax and financial planning matters. Phil can be reached at phil@hutcheson.ca or via telephone at 250-661-9417. You can also read more about Phil at Hutcheson.ca/phil.
Phil Hogan

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The information contained in this article is for general use only and should not be viewed as professional advice. Accounting and tax rules and regulations regularly change and individuals should contact a competent professional to obtain accounting and tax advice based on their specific situation.

Phil Hogan

Phil Hogan is a Canadian and US CPA working with clients throughout Canada and the US. Phil advises on cross border tax and financial planning matters. Phil can be reached at phil@hutcheson.ca or via telephone at 250-661-9417. You can also read more about Phil at Hutcheson.ca/phil.
Phil Hogan

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