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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

 

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rob
rob
2 years ago

Hello Phil. Any update on what the IRS does for 2020 (15% or 30%) would be greatly appreciated.

Also, any insights on optimizing taxes when 15% or 30% results in a tax liability greater than what the annual income allows, making the foreign tax credit only partially used?

How about moving the whole pension into an RRSP???

Thank you very much!

Andrew Nelson
Andrew Nelson
10 years ago

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.

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.

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