15% tax rate on pensions

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SergeP
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15% tax rate on pensions

Post by SergeP »

XVII 2(a) says that pensions sourced in the US will be taxed at 15% by the US if the recipient is a Canadian resident.
I am a Canadian with 25K income from my 403(b) plan. I was taxed at 30% by the plan holder (TIAA-CREF) because it was a lump-sum withdrawal but not a periodic one. This income is reported on my 1042-s form.
My question is what part of this tax can I recover by filing 1040NR? 50% if it is a fixed 15% rate or a remainder after an actual 1040NR rate is applied (which is ~10.7 % for 25 K income). Thank you.
Serge
nelsona
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Post by nelsona »

To be completely accurate, the treaty says only that Periodic pension withdrawals will be taxed at 15%. Yours likely did not meet the definition -- albeit vague and difficult to nail down -- of periodic for IRS purposes.
It is doubtful that you would ge able to claim 15% on a 1040NR
But you could file as connected page 1 income and calculate a progressive rate.
Or do nothing
Whichever you choose, CRA would accept any tax as creditable
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
SergeP
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Post by SergeP »

Unfortunately I do not have enough Canadian income to claim this size FTC. May be I can file a joint 1040 (my spouse is a USC) and be treated as a US resident to get a lower tax rate? I am not sure though that my form 1042-s can be used as 1099 in this case.
Could you elaborate about "connected page 1 income". Is it for form 1040NR?
Thank you.
Serge
nelsona
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Post by nelsona »

Yes.

1040NR is used to report 2 types of income: connected and non-connected. Your 403(b) or any pension, can be considered either. Non-connected is flat taxed at either treaty rate or 30%, and connected income is at graduated rates.

Since your pension was withheld correctly, you have the option of simply accepting this rate and not even filing a return, or filing 1040NR at graduated rate. The decision would be based, as you correctly conclude, upon whether you can use up the US tax. I wouldn't bother with adding you to her 1040, just remember that she cannot claim your as an exemption, because of your US income.

1042-s is perfectly acceptable.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
ND
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Post by ND »

search online for and then Read:
IRS Explains Cross Border Pension with Tax Treaty Countries

UILC: 9114.03-42 Release Date: 8/3/2012 Date: April 24, 2012

CC:INTL:B01:LABanjanin – POSTN-103348-12

to: William C. Grace Large Business & International (LB&I:DCI:Dfo:IIC:1617)

from: M. Grace Fleeman Senior Technical Reviewer, Branch 1 (International)

also search online for and then see:
19 April 2011 Internal T.I. 2011-0398741I7 - Foreign Tax Credit on 10% additional US
tax
nelsona
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Post by nelsona »

From IRS Pub 519:

"Pensions: If you were a nonresident alien engaged in a U.S. trade or business after 1986 because you performed personal services in the United States, and you later receive a pension or retirement pay attributable to these services, such payments are **effectively connected income** in each year you receive them. This is true whether or not you are engaged in a U.S. trade or business in the year you receive the retirement pay"

Effectively connected means report on page 1 of 1040NR, not NEC page, and pay tax at graduated rates.

This has nothing to do with withholding, which is the responsibility of the pension manager, and would require you to have furnished a W8-ECI proving before the withdrawal that the income was effectively connected. You may want to look into this for future distributions.

Also, as I said earlier, you could (it would not be to your specific advantage) to accept the withholding and thus not even bother with 1040NR.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
SergeP
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Post by SergeP »

Thank you for pointing out to the form W8-ECI. My pension manager requested the form W8BEN before that withdrawal. This seems not correct as my pension is certainly a "effectively connected income". It is a surprise that such a large pension fund as TIIA-CREF does not know about the W8-ECI. I will contact them on this. As per form W8-ECI no tax may be withheld on such withdrawals (providing that a tax return is filed for the year of this withdrawal).
Serge
nelsona
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Post by nelsona »

Just remember that if you do go the W-8 ECI route, that it is upto you to make sure that the amount withheld is a good estimate of what you will eventually calculate on your 1040NR, and if it is too low, you might need to send a estimated tax payment at some pint during the year to avoid an underpayment penalty (which, btw, would NOT qualify for any foreign tax credit).
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Chkronos
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Post by Chkronos »

Nelsona, you said : "Pensions: If you were a nonresident alien engaged in a U.S. trade or business after 1986 because you performed personal services in the United States, and you later receive a pension or retirement pay attributable to these services, such payments are **effectively connected income** in each year you receive them. This is true whether or not you are engaged in a U.S. trade or business in the year you receive the retirement pay"

What if the taxpayer was a resident alien as opposed to a non resident alien when performing the services, would his pension income still be considered as effectively connected income ? I guess so but I can't find any reference.

Do you have any reference where it states that the taxpayer can "elect" to treat his pension income as effectively connected vs nec ?

I'm just trying to figure out whether a NRA receiving pension income on a 1042-S is required to file and therefore I'm trying to see how should be categorize such incomes.

Thanks !
nelsona
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Post by nelsona »

If you were a resident alien at the time, then they are considered effectively connected. That has always been the case. The decision to use the treaty rate rather than the graduated rate can always be made.

The NRA is only required to file if he ELECTS to use the ECI (to lower his taxrate below 15%) or if he was otherwise over-withheld.

If he is completely using up the 15% tax, then there really isn't any point in reducing the tax. CRA will accept the 15%
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
SergeP
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Post by SergeP »

I filed 1040NR. Received a tax refund from IRS and claimed FTC on T1 for the payed US tax. Now CRA requested a whole bunch of additional documents to accept this FTC. My advice is to keep all your records available as it seems that the FTC is a sure flag for a CRA review.
Serge
nelsona
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Post by nelsona »

Serge, that might simply be CRA's recent policy to ask for proof of US tax paid, not a result of your decision to ECI your pension. You would have claimed FTC in any event.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
kerrywentling
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Re: 15% tax rate on pensions

Post by kerrywentling »

I think you should consult about this with a lawyer or an accountant who can calculate the interest rate in your particular case because it is impossible to say with certainty that there are no other details that would not affect your tax deductions. As far as I know, tax deductions of this nature are carried out, among other things, to provide care for your elderly. And you should already think about how to [equip your home for the convenience of an older person https://www.thekey.com/learning-center/ ... n-the-home.
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