Hi Hutcheson & Co. LLP,
I have an investment account with a U.S. bank. I believe that the majority of my investments are with US companies. For the last two years I have received Form 1042-S for the dividend income that I have received from the account.
On the Form 1042-S the bank withheld U.S. federal tax of 30%. My understanding is that they should have only withheld 15%.
My question is can I get the excess 15% that they withheld back and how can I make sure that they only withhold 15%?
Your scenario is not uncommon. Many people will invest in U.S. companies not realizing that the U.S. is entitled to tax on certain types of income before Canada is.
The good news is that you will be able to recover the excess tax withheld and reduce the amount that they withhold going forward. The correct amount that they should be withholding on U.S. source dividend income is 15%.
In order to make sure that going forward the bank only withholds 15% of the dividend income you receive you will need to fill out Form W-8BEN and give it to your withholding agent (i.e. the bank).
In order to complete Form W-BEN you will also need to obtain an IRS Individual Taxpayer Identification Number (ITIN). To obtain an ITIN you will need to complete Form W-7.
Once the withholding agent has your completed W8-BEN they should then begin withholding only 15% of the dividend income you are earning. Income earned prior will still be withheld at the 30%.
In order to recover the excess 15% withheld during 2012 and 2013 you will need to prepare Form 1040NR. This is a U.S. income tax return for non-residents. One will need to be filed for each year.
On the 1040NR you will report the total dividends you received from U.S. corporations, the tax withheld from the 1042-S and the appropriate tax that should have been withheld. The difference between what was withheld on the 1042-S and the appropriate amount is claimed as a refund.
If you require any further assistance, please contact one of our experienced professionals.
Rob Brown, CA