Candian Resident Lump-Sum 401K Withdrawal

[jason25]

Hi Nelsona,

Canadian citizen/resident commuted to the US to work for 5 years. Each year correctly grossed up my US income on my Canadian return by the 401K contributions, deducted them on line 207, completed RC268 form, etc.

In 2019 I have no US employment income (worked in Canada). However, I made a $20K lump-sum 401K withdrawal. I completed W-8BEN and they still withheld 30% at source.

I understand that this withdrawal will be fully taxable on my Canadian return.

I read many posts on this site, the applicable section of the tax treaty and IRS publication 901, table 1. I’ve seen some conflicting info and can’t quite figure this out on my own.

1) I gather from reading that CRA will only allow a maximum 15% foreign tax credit PLUS the 10% penalty for a total of 25%, correct?

2) 1040NR is income effectively connected at graduated rates or a flat non-resident rate? It appears there was some uncertainty about this in previous years. Do we have a definitive answer on this yet?

3) If it’s a flat non-resident rate, is it 30% or the reduced 15%?

4) Just to confirm, I do have to pay the 10% penalty even know they did not withhold it on my 1042-S slip and I’m US non-resident correct (I’m 35 years old)?

Many thanks!!

[nelsona]

401(k) IS effectively connected, so you should file 1040NR, calculate tax, if any, and penalty, Use tax and penalty against Cdn tax.

You *could* just accept the 30% withholding, since technically it was not a periodic distribution, so does not really qualify for the 15% (plus 10% penalty = 25%), but this may end up being more than your CDn liability, so wasted, and may be rejected by CRA as you mentioned.

I would file 1040NR.

[jason25]

Thanks for the quick response.

I think my Canadian tax liability on this will be between 30% and 40%.

I made about $75K of Canadian employment income, plus the $20K USD 401K income.

So let's call it $100K CDN $ total income after converting 401K to CDN $, ballpark.

I will likely just file a 1040NR as you suggest and tax as effectively connected, just to be safe.

If I decide not to file a return and just use the 30%, is the IRS going to come after me for the extra 10% penalty later?

Or do they recognize I likely overpaid and leave me alone?

Thanks again. Hope you are your family are staying safe.

[nelsona]

I'm pretty sure the 30% included penalty.