Tax Withholding Severance Pay to Non-Resident
Moderator: Mark T Serbinski CA CPA
Tax Withholding Severance Pay to Non-Resident
My wife was working for her Canadian employer of 12 years (in Canada since beginning and from the US since Aug 2023). The remote arrangement did not work well and her employer chose to terminate her employment. She was paid salary until June 2024. Until June 2024 she was paid in Canada with all applicable CRA, CPP and EI deductions. Since her Canada departure in Aug 2023, we paid IRS and state taxes for the Canadian income earned and have asked CRA for a refund which was approved as well. We plan to do the same for compensation she received until June 2024 as well. She received a severance package which was payable in June 2024, but we had asked her employer to pay that in 2025 (the separation was on amicable terms and we fully trust the employer to honor their deal). What should I do to eliminate or reduce any withholding taxes for this severance payment. We thought of applying for a waiver using R-102 but it looks like it applies only to salary compensation. Also, it appears (from a CRA site) that severance pay to non-resident has a 25% withholding. We are looking for a way to to either completely eliminate any withholding in Canada or at least reduce it. Our current process is 1) Pay CRA; 2) Pay IRS 3) Get refund from CRA. Because of the significant time lag I am would like to eliminate or optimize steps 1 and 3
Re: Tax Withholding Severance Pay to Non-Resident
You may have to follow your past pattern.
However, severance, as you found out, is NOT wages; it actually falls into the pensions realm, the tax for which Canada has first rights to, regardless of where you live. That is why it is subject to 25% non-resident withholding, rather than graduated rates, nor subject to EI/CPP. There is no treaty article to apply here. Most likely you will end up paying the 25% in canada and getting credit for that tax on your US return (with a form 1116).
if that is her only source of world income in 2025, she can see if a section 217 return will lower that tax below 25%. Otherwise, no need to file a return in Canada for that year; accepting the 25% withholding as final Cdn tax.
However, severance, as you found out, is NOT wages; it actually falls into the pensions realm, the tax for which Canada has first rights to, regardless of where you live. That is why it is subject to 25% non-resident withholding, rather than graduated rates, nor subject to EI/CPP. There is no treaty article to apply here. Most likely you will end up paying the 25% in canada and getting credit for that tax on your US return (with a form 1116).
if that is her only source of world income in 2025, she can see if a section 217 return will lower that tax below 25%. Otherwise, no need to file a return in Canada for that year; accepting the 25% withholding as final Cdn tax.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Re: Tax Withholding Severance Pay to Non-Resident
Thank you @nelsona for your response. Aside, is there a standard table on what are the withholding taxes for various types of payments? Or is the standard position is 25% for all payments - with specific exceptions as outlined in the Canada-US Tax Treaty?
Re: Tax Withholding Severance Pay to Non-Resident
There is no "special provision" for US residents for lump-sum pension income: it is 25%, the normal non-resident tax rate, just like taking RRSP money.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
-
- Posts: 1
- Joined: Thu Sep 26, 2024 11:47 pm
Re: Tax Withholding Severance Pay to Non-Resident
btaylor70 wrote:
> Thank you @nelsona for your response. Aside, is there a standard table on
> what are the withholding taxes for various types of payments? Or is the
> standard position is 25% for all payments - with specific exceptions as
> outlined in the Canada-US Tax Treaty?
According to the Canadian Income Tax Act, the standard withholding tax rate for payments to non-residents is 25%. However, this rate can be reduced or waived under tax treaties, such as the Canada-US Tax Treaty. For example, for US residents, withholding tax can be reduced to 15% on dividends and 0% on interest in some cases. So while the standard tax rate is 25%, international tax treaties can significantly reduce this rate for different types of payments.
> Thank you @nelsona for your response. Aside, is there a standard table on
> what are the withholding taxes for various types of payments? Or is the
> standard position is 25% for all payments - with specific exceptions as
> outlined in the Canada-US Tax Treaty?
According to the Canadian Income Tax Act, the standard withholding tax rate for payments to non-residents is 25%. However, this rate can be reduced or waived under tax treaties, such as the Canada-US Tax Treaty. For example, for US residents, withholding tax can be reduced to 15% on dividends and 0% on interest in some cases. So while the standard tax rate is 25%, international tax treaties can significantly reduce this rate for different types of payments.