30% withholding

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brianbbc
Posts: 87
Joined: Fri Apr 25, 2014 9:17 pm

30% withholding

Post by brianbbc »

Vanguard in their wisdom has just change withholding policy for IRA distributions to Canadian residents as of 2022. Instead of following the w8ben on file and being able to claim the special tax treaty with the irs, they are now going to withhold 30% from all Ira distributions regardless. How does one deal with the loss of the extra 15% the irs takes as the cra will only allow a 15% tax credit on the taxes paid to the irs. I’m assuming file a 1040nr and get the 15% overpayment from the irs? Say for 100k distribution, vanguard gives you 70k, 30k goes to irs. Seems really stupid
nelsona
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Re: 30% withholding

Post by nelsona »

Yeah, I don't know what is going on, but Fidelity tried to pull that on me earlier this year -- and I'm a US citizen, not even supposed to have flat withholding at all! After THREE months of fighting, I was finally able to get them to use the tax tables like they were supposed to -- and had been doing in the past. Still means that they WAY over-withheld for three months, and I will get that back next spring when I file my 1040.

It' may not really a policy change; it is usually a poorly informed agent that sees your Cdn address and automatically plugs in the non-resident withholding. I assume you are taking "periodic" withdrawals, meaning you are not collapsing your IRA. Periodic does not necessarily mean monthly, but IRS, unlike CRA, does not have a well-defined meaning for periodic, which is why some firms take out the guesswork and withhold the 30% from every foreign withdrawal.

I would, move this up the chain a few times. If they will not honour your W8-BEN. you don't have much choice but to wait it out and file a 1040NR.

By the way, if you do have to file a 1040NR to correct the tax, look at reporting the income as connected income on page 1. Depending on how much IRA you collect, it may work out even less than 15%, once you use the tax tables. If it is more, then simply use the NEC portion of the 1040NR instead and report the income and the 15% treaty tax rate. You are correct that Canada won't grant more than 15%

This can sometimes matter if your withdrawal is small and you have little other CDn taxable income, your effective rate may be less than 15% in Canada (hey, it possible) in which case you wouldn't get full credit for the 15%.
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brianbbc
Posts: 87
Joined: Fri Apr 25, 2014 9:17 pm

Re: 30% withholding

Post by brianbbc »

The reason they gave me eluded to irs not giving a clear definition between periodic and intermittent withdrawals, but why change policy now after all these years? I’m gonna keep protesting so hopefully if enough of us do it they go back to accepting the w8-Ben only.

For you, that new policy even shouldn’t apply as a US citizen.

The irs will owe me a significant amount every year due to the extra 15% taken. I just take a yearly lump sum distributions. Doesn’t look like many 1040nr e-filing software out there. I assume that paper filling would still be Ok, just wait longer for processing to get my overpayment. Looks like the 1040nr is only 2 pages. If I file the w8-ben with vanguard as the irs instructs, I hope there’s no potential problem with the irs, ie, why didn’t vanguard withhold only 15% instead of 30%. Or do I need to file a w8-Ben with the irs to make sure I can claim the special reduced holding rate as the treaty. This really complicates things for a lot of people that otherwise would be easy.
nelsona
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Re: 30% withholding

Post by nelsona »

The W-8 never goes to IRS.

Since you take one payment, I would suggest, if possible, to take it later in the year, so IRS is not holding your money too long.
You should ask if taking monthly would change Vanguards mind.

1040NR are known to be handled very slowly.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
brianbbc
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Joined: Fri Apr 25, 2014 9:17 pm

Re: 30% withholding

Post by brianbbc »

Oh great. At least I found an reputable software for only 50 bucks. The 1040nr verifies that you are treated according to the tax treaty, so no w8-Ben to the irs is needed. Hopefully they change their minds, I’m gonna keep trying
nelsona
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Re: 30% withholding

Post by nelsona »

As I said, W8-BEN is never sent to IRS. They have nothing to do with withholding.
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brianbbc
Posts: 87
Joined: Fri Apr 25, 2014 9:17 pm

Hsa

Post by brianbbc »

On qualified hsa distributions, I know reporting is done with the irs to verify it is qualified. But since it will not be taxable in the US, is any type of reporting required for the CRA? I’m thinking they may want it listed as world income, but wouldn’t that run into a Canadian side tax liability because I disclosed it?
nelsona
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Re: 30% withholding

Post by nelsona »

qualified distributions don't even appear on your 1040, so I wouldn't worry about it.
CRA has been silent on HSA's and they definitely fall under the "accounts to provide employment or retirement benefits" 18.7 clause of the treaty, which makes them only as taxable as they would be in US.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
brianbbc
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Joined: Fri Apr 25, 2014 9:17 pm

Re: 30% withholding

Post by brianbbc »

Thanks once again Bty I’m doing a 1040nr but I assume the qualified distributions won’t appear on that either
brianbbc
Posts: 87
Joined: Fri Apr 25, 2014 9:17 pm

Re: 30% withholding

Post by brianbbc »

Thanks once again Bty I’m doing a 1040nr but I assume the qualified distributions won’t appear on that either
nelsona
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Re: 30% withholding

Post by nelsona »

correct
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ND
Posts: 291
Joined: Thu Feb 21, 2013 5:28 pm

Re: 30% withholding

Post by ND »

Hopefully you're doing the 'simplified method' 1040NR reporting, which only takes a few minutes to prepare since the lion's share of such 1040NR may be left blank.
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