Tax Residence Certification and Backup Withholding

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WiseGuy
Posts: 20
Joined: Sat Jun 18, 2005 12:17 pm

Tax Residence Certification and Backup Withholding

Post by WiseGuy »

My U.S. based investment company, American Century (A.C.) that holds my 401K plan (now a IRA rollover) has sent me a Tax Residence Certification Form along with a W-9 and W-8BEN (Certification of Foreign Status of Beneficial Owner for United States Tax Withholding) to fill out for tax years 2001 to present. If I don't send it in, they say I may be subject to "backup withholding to redemptions made to my taxable accounts".

I have been cashing in a few IRA-Rollovers since arriving back to Canada in 2002 and they (A.C.) have been deducting the minimum 10% tax at source.

Since this is the first time I've tried tackling these 1040NR and W-9/W-8BEN beasts (I have been filing only 1040's up until now for years 2000, 2001, and 2002) the questions I have are as follows:

1. Are my IRA-Rollover redemptions considered taxable accounts subject to backup withholding? What is backup withholding (I assume it gets charged at a 28-30% rate)?

2. Is the 10% tax (to the U.S.) what I should have been paying on these IRA-Rollover redemptions now that I'm resident in Canada or will I owe more (15-30%) tax? (I will show the IRA redemption income on my Canadian return and claim foreign tax credits for the tax already paid to U.S.)

3. When I'm filling in my 1040NR do I need to show these IRA-Rollover redemptions on page 4 titled "Tax on Income Not Effectively Connected with a U.S. Trade or Business", specifically at Line 79 - "Pensions and annuities", as well as on page 1 Line 16a and 16b "Total IRA distributions" or is line 79 just for payments received if one had a regular pension income?

4. When completing page 5 "Other information" section of the 1040NR do I answer the questions from the perspective of the tax year I'm filing for or from the first time I entered the U.S. to work (ie. TN in 2000)?

a.) For example Question C, D, E ask Purpose of visit, Entry visa type, and Date entered U.S. Do I go back to year 2000 when I first entered on a "TN" or do I just answer for the tax year 2003 (my first year filing the 1040NR), when I visited for 5 days of holidays on B2?

b.) Do I need to answer Section M - "If you are claiming the benefits of a U.S. tax treaty with a foreign country..." for these IRA redemptions on the 1040NR? Are the IRA redemptions considered "income not effectively connected that is exempt or subject to a reduced rate"? If so, is the 10% tax I'm paying the "reduced rate of tax"?

c.) I assume I would tick "yes" to the fourth section "Were you subject to tax in that country on any of the income you claim is entitled to treaty benefits".

5. American Century gives my a choice of filing a W-9 (Request for Taxpayer Identification Number and Certification) or the W-8BEN (Certification of Foreign Status of Beneficial Owner for United States Tax Withholding). I assume I file the W-9 for years 2001 and 2002 (while I was a U.S. resident), and the W-8BEN for years 2003 to present (while living in Canada).

On the W-8BEN, I assume I would check off under Part II - "Claim of Treaty Benefits", Parts 9a, and 9b only. I also assume I would leave Section 10 - "Special rates and conditions ... The beneficial owner is claiming the provisions of Article _____ of the treaty identified on line 9a above to claim a ____ % rate of withholding on (specify type of income) ____" blank since I was "not claiming treaty benefits that require meeting conditions not covered by the representations made on line 9a through 9b" as explained in the Instructions for Form W-8BEN on page 5.

Lastly, I believe I would file a statement with the IRS saying my residency termination date was Dec. 31, 2002 and that I was last physically present in the U.S. in 2002 on Feb. x. I would <u><b>not</b></u> show I had a tax home in nor had a closer connection to Canada in 2002 in order to use this Dec. 31, 2002 date.

Enjoy the forum. Thanks for the help.
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

I think your making this more complex that you need to, and your withholding is not really that important, as you should be filing a 1040NR to determine the final US tax, and you should be reporting ALL the withdrawals in Canada, and taking credit for the US tax paid.

Your firm should have been withholding 30% on your withdrawals after you left US, but since I suspect that they did not know that you were not a US citizen and had left the US, they merely withhld the minimum. That is why they are backtracking to cover their failure to properly withhold you.

As a Cdn resident , you are entitled to a 15% withholding rate instead of 30%, if these are 'periodic' withdrawals, rather than lump sums.

If they are not periodic withdrawls, then the withholding should be 20% (again because you are Cdn), and there should be 10% extra witheld if you are younger than 59 to cover the early withdrawal tax.

You should have files your 2003 1040NR over a year ago, so expect some interst and late penalties when you file these.

<i>nelsona non grata... and non pro</i>
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