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QUESTION

Hello,

I’m a Canadian resident citizen that held interest in a $50,000 private pension account that I obtained when I worked in the US 20 years ago. I’m not a US citizen and I’m not required to file US tax returns.

When I withdrew the $50,000 from the plan (completely collapsed the plan) they withheld 10% before sending the me the rest.

I was told to use my brother’s US address on the account so that they didn’t withhold 30%, but they did end up withholding 10% (not great advice).

Can you help me recover the additional 10% ($5,000) they withheld from my pension. And if so, how much would that cost?

Regards

XXXXXX

ANSWER

Hi XXXX

Unfortunately I have some bad news for you. Technically speaking pursuant to Article XVIII of the US Canada Tax Treaty the proper withholding tax rate is 30% for lump sum payments from foreign pensions.

Which means that the withholding agent neglected to withhold the appropriate amount of tax, most likely because of the US address on the account.

You now owe the US government an extra 20% in tax.

You’ll have to file form 1040NR to report the $50,000 pension and calculate the required 30% tax owing. Once the return is prepared you’ll have to remit the additional $10,000 of tax to the IRS.

Note, that if you don’t have a valid US Tax ID you’ll have to also complete a form W7 to obtain a tax ID. This form can be filed along with the 1040NR and it’s not necessary to wait until you receive your ITIN before filing the return.

If you have any questions about the above information please don’t hesitate to call me at 250-381-2400 and I would be glad to help you through the process.

Regards

Phil Hogan, CA
250-381-2400
phil@hutcheson.ca

 

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

2 Responses to “Tax Withholding on US Source Pension Income”

  1. Andrew Nelson says:

    Phil, The IRS has been consistenely applying the 15% treaty rate to pension withdrawals of any form, including lump-sum. This is in accord with the Table in IRS Pub 515, which makes no distinction between periodic and lump-sum payments to Cdn residents. Unfortunatey, the pension did not even withhold this amount correctly. My advice on this would be to file a 1040NR to pay the extra 5% (not 20%), and see what the IRS says.

    • Phil Hogan Phil Hogan, CA says:

      Andrew

      Thanks for the insightful comment.

      Yes, you are correct, the IRS does not distinguish between periodic and lump sum payments with respect to withholding and often agents withhold 15% with no problem.

      However I have had situations where the IRS has rejected 1040NR that were filed claiming 15% on lump sum pension payments and they requested an additional 30% based on the wording of the treaty. But this is rare.

      I would love to hear from others that have had similar experiences.

      Phil

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Philip 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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