Non-Resident Withholding on US Pension???

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MFC
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Joined: Mon Feb 01, 2016 5:26 pm

Non-Resident Withholding on US Pension???

Post by MFC »

I’ve been a Canadian resident and citizen my entire life and commuted to work in the US for General Motors (GM) for several years. I retired in 2013 and started to receive a small GM pension. The money is now invested with Fidelity (I’m guessing in the form of an annuity because I selected the lifetime payout option). Fidelity sends a cheque to me in Canada on a monthly basis in US $. However, they have not been withholding any tax and I have never reported this income in the US on a tax return. Does this seem right? Should they be withholding tax and/or am I required to file a US tax return for this income?

This has been worrying me for the last year and I want to make sure I do the right thing for 2015. Please help!
nelsona
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Post by nelsona »

Yes, fidelity should be withholding 15% of the gross pension. That should be all that you need to do. Otherwise you need to report it on a 1040NR and pay 15% tax.

The gross amount must also be reported on your Cdn return, with the US tax used as a credit.

Does fidelity know that you live in Canada. A W*-BEN would have been filed with them.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
MFC
Posts: 16
Joined: Mon Feb 01, 2016 5:26 pm

Post by MFC »

Wow, thanks for the super fast reply! I knew something didn't seem right. They send me a cheque to my Canadian address each month so they must know I'm Canadian; but I don't ever remember completing the form you mentioned. I suppose I will give them a call and see where I can mail this completed form to them at.

Should I file a 1040NR for 2103 and 2014 and adjust my Canadian returns to include the foreign tax? I did include the amounts on my Canadian return, but did not claim a foreign tax credit as no tax was paid.
MFC
Posts: 16
Joined: Mon Feb 01, 2016 5:26 pm

Post by MFC »

Wow, thanks for the super fast reply! I knew something didn't seem right. They send me a cheque to my Canadian address each month so they must know I'm Canadian; but I don't ever remember completing the form you mentioned. I suppose I will give them a call and see where I can mail this completed form to them at.

Should I file a 1040NR for 2103 and 2014 and adjust my Canadian returns to include the foreign tax? I did include the amounts on my Canadian return, but did not claim a foreign tax credit as no tax was paid.
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Even US citizens are subject to withholding if the pension income is being sent outside US, so this is puzzling.

Get in touch with them and figure this out before changing all your tax returns.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
MFC
Posts: 16
Joined: Mon Feb 01, 2016 5:26 pm

Post by MFC »

I just got off the phone with them and they mentioned the exact same form you suggested; the W8-BEN. They had no explanation why no tax was being withheld and said it must have been a mistake. They gave me an address to mail the completed form to. So I guess I will do this right away and maybe consider filing a return for 2013 and 2014 to be on the safe side. Thanks for pointing me in the right direction on this!
MFC
Posts: 16
Joined: Mon Feb 01, 2016 5:26 pm

Post by MFC »

Hi Nelsona,

I did as you suggested and completed the W8-BEN in 2015 and Fidelity is now withholding the correct 15% tax on my pension. In addition to the Fidelity income, I have US SS income and a small taxable benefit of $745 for life insurance that shows up on a W2 slip every year.

I read the 1040NR guide to try and figure out if I still need to file a return this year but I'm not sure. I won't owe any money and won't get a refund. The SS is not taxable via treaty and the $745 is less than $4050.

However, reading further under the exceptions section 1b) it says you don't need to file if you have no other need to file a return to claim a refund or to satisfy additional withholding at source OR to claim income exempt by treaty.

I meet the first part of this as I don't owe any money and won't be getting a refund, but I WILL have to rely on the treaty for the SS income. So does this mean I still have to file a return?

Many thanks.
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

The pension is still taxable US income. So you meet the filing minimum. You would only not have to file 1040NR if that was your ONLY US income and it was withheld correctly. it is not your only income, regardless of how it is withheld.

But since you have other income (the insurance money), you need to report both on 1040NR.
The good news is that you can choose to have your pension considered connected (page 1) income, so by reporting it and the other US source funds (not the SS as you correctly pointed out), you will probably get some money back. You would need to make a pretty hefty pension for the graduated tax to add up to 15%. If it ends up that your tax rate is more than 15%, then simply leave it as NEC income at 15%.

So, it is likely that while getting this insurance money, you will be filing a 1040NR every year, and will be probably be getting a refund. Since you are filing, you might as well include the 8833 for the SS. If the insurance income goes away, then I wouldn't bother filing is you are happy with the 15% tax. I wouldn't file just to tell them I'm using the treaty for SS.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
MFC
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Joined: Mon Feb 01, 2016 5:26 pm

Post by MFC »

Great, thank you!

The taxable benefit is for the insurance premium my former employer pays on my life insurance policy. This will continue as long as I'm alive, so looks like I will be stuck filing a return every year.

Thank you for mentioning the 8833. Last year I did not include this. I just mentioned Article XVIII at the very bottom of the 1040NR and listed the amount of the SS income. Should I adjust my 2015 return to include the 8833 or will I be ok?

My pension is pretty small, so I'm guessing the tax on this will be less than 15%. However, if I get some of this back, I'm guessing I will have to reduce the foreign taxes I claim in Canada? If so, maybe I will just let them keep the 15% and not bother; unless there is another benefit that I'm overlooking? Am I ok to just let them keep the 15%? My tax rate in Canada is higher than 15% for sure.
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

The 1040NR space is sufficient to report the SS item, so I wouldn't bother with 8833, which is really only required if the tax difference is $10K. if they are happy with that leave it be.

Your point about the 15% being good enough is correct. That is why most don't bother refilling. Just something to keep in your pocket, if you find in one year that you cannot use up all your 15%.

Include the payment from your employer as a US-source of income when determining your tax credit. Doesn't help you right now, but you never know.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
MFC
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Joined: Mon Feb 01, 2016 5:26 pm

Post by MFC »

Thanks so much!

I think I know what you are saying...

This might be applicable to me when the amount I take from my RRIF is less. I'm taking more than the minimum, so the amount I withdraw will eventually decrease over time and my average tax rate might drop below 15% at some point. If so, at that point, I might be better off taxing the pension income as effectively connected instead of the 15% and getting a refund on the US side, right?

Furthermore, I should always remember to include the $745 W2 income in my foreign tax credit calculation on the Canadian side (which might help me be able to claim more foreign tax credits). Can I still add it to the calculation on the Canadian side even if I exempt it via treaty on the US side (which is what I did last year)? What about the US social security exempted income? Can I add this to the calculation as well? I don't think I can, my software does not seem to be pulling in the US SS, but it definitely pulled in the W2 income and lumped it together with the Fidelity pension income.
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
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Post by nelsona »

There is a slight difference between source and taxability in the treaty as interpreted by CRA, Both the SS and W-2 income is definitely US-sourced. The difference is that the W-2 income is not taxable in US because it falls below the $10K minimum, otherwise it would be taxable.

The SS is simply not taxable at all by treaty. CRA usually takes the position that if a certain TYPE of income is not taxable by treaty, then it can't be used as foreign-sourced. IRS doesn't take that position, so, for example, CCP is not taxed by CRA for Cdn residents, but IRS accepts that it is Cdn-sourced, for FTC determination.

CRA often takes a stricter position on FTC.

If they were ever to argue this on the W-2 income, I would simply report it on the 1040NR and NEC the pension and pay no US tax on the W-2 income anyways.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
MFC
Posts: 16
Joined: Mon Feb 01, 2016 5:26 pm

Post by MFC »

Ok, this makes sense to me now.

Thank you so much for taking the time to help me out with this.
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