Non-resident alien backup withholding tax

[Fug1]

I am a former US permanent resident. I moved back to Canada in 2019 and relinquished my green card in 2019. So for 2020, I should not be subject to US tax.

I still have one taxable brokerage account in the US that I need to withdraw funds from. This account holds US mutual funds, so I need to sell the mutual funds and withdraw the money.

I recently provided this brokerage with a W8-BEN form, which specifies my Canadian citizenship and tax residence. Somehow, the brokerage has determined that any sales in this account are now subject to a "non-resident alien backup withholding tax" of 24% of the gross sales.

Does anyone know about this "backup" withholding tax, specifically as it applies to the US-Canada tax treaty? I've asked the brokerage to provide me with the relevant section of the US tax code and/or US-Canada tax treaty that specifies the application of "backup withholding", and I'm waiting to hear from them.

Separately, if I should indeed be subject to this "backup" withholding tax, is there any chance of getting the money back?

TIA!

[nelsona]

Get back to us when the brokerage gives you the reason.

Any US taxes that are withheld are always subject to a final tax determination, by submitting a 1040NR. Any cap gains will be considered non-effectively connected income, with a flat tax rate of 0% for Cdn residents. Since you will owe no tax, the withheld taxes will be refunded.

[Fug1]

Okay, so it turns out the reason they applied backup withholding was because they didn't have a W8-BEN on file for my wife, who is a joint owner on the account. So I've supplied them with a W8-BEN for my wife, and I've been told they will refund the backup withholding tax. Which is good news, because I otherwise wouldn't have had to file a US tax return next year.

[nelsona]

Unusual that THEY would refund you rather than IRS, but if that is the case, good for you.

[Fug1]

Thought I would give an update to this, since I've finally gotten it resolved.

I kept going back and forth with the brokerage on how the W8-BEN form should be filled out. Strangely, they wanted me to fill out line 10 ("special rates and conditions") in the W8-BEN to give them specific instruction on what rate of withholding should be applied for each income type. I believed that they should have just been able to take the country specified in line 9 to determine what rate of withholding should be applied (based on the USA-Canada treaty), but they insisted that line 10 should be completed. If I didn't fill out line 10, they would use their standard 30% withholding.

After getting all of this sorted out, they agreed to refund the backup withholding they had previously deducted. So thankfully, I won't have to file a US tax return this year to get that money back.

[nelsona]

Well, that is good news. I guess they never sent the withholding in the first place.