Question Re 403B Plan and Foreign Tax redit

[KLD]

I receive a Canadian citizen living in Canada and receive a U.S. Social Security pension as the beneficiary of my late American husband. I'm clear on the rules regarding that; SS withholds 15% for the IRS and i can claim that as a foreign tax credit when I file my tax return with Canada Revenue.

However, I also was the beneficiary of his U.S. 403 B plan which I'm debating whether to start drawing on. If I take it as annuity payments, it would be subject to the same 15% withholding tax which would be eligible for the foreign tax credit. But, if I took the total amount (approximately $165,000 U.S.) as a lump sum, I understand that it would be subject to a 30% withholding tax, according to the terms of the U.S./Canada Tax Treaty. My question is: would the full 30% also be eligible for a CRA foreign tax credit - in other words, is there a limit on the amount a Canadian taxpayer can claim as a foreign tax credit? I phoned CRA and asked that question but the person I spoke to seemed confused and I didn't get a satisfactory answer. (She said it would depend on which province I lived in, but she couldn't explain that any further and couldn't say what the situation would be in B.C.) I had the feeling that she simply didn't know the answer.

I've googled the question, but I ended up thoroughly confused. I realize that I shall have to call back to CRA and make sure I speak to someone more knowledgeable but, in the meantime, does anyone know the answer to my question?

[nelsona]

First off, SS should NOT be withholding anything. Only canada should tax SS benefits for Cdn residnts.

I'll get back to you on the pension...

[nelsona]

US pensions for Cdn residents, if taken "periodically" get a 15% withhold rate for Cdn residents. THAT is what is in the treaty. Otherwise, lump-sums are whatever the IRS non-resident rate is (currently 30%).

Whatever you correctly pay in US for the pension will be eligible for use on your Cdn tax form towards the federal (first) and provincial (second) tax.

There is a limit of foreign tax credit, but this applies to income from foreign PROPERTY, not pensions.

[nelsona]

Now, to get back to your SS payment: The treaty is quite clear that Cdn residents are NOT to have any taxes withheld, nor have to report any SS income. This has been the case for nearly 20 years now, and even applies to US citizens.
You end up reporting 85% of the SS income on your Cdn return, and pay Cdn tax only accordlingly. In fact, if your spouse was collecting SS continuously since 1996, then you areentitled to even more deduction that the 15% the treaty grants. I'll explain this if this is your case.


The SS administration should know this. Perhaps it has not been made clear to them that you are a Cdn resident.

[jayroh]

Just to be clear--As a US citizen resident in Canada must I report any Social Security payments on my US tax return even though a SSA-1099 was issued? The implication from the previous post suggests this.

[nelsona]

You report the income, and you deduct it.

There are a few ways that have proven acceptable.

The simplest is to include the gross amount on line 20a and ZERO on 20b. IRS form 8833 is best sent to explain this use of Article XVIII (5).

The SSA is not supposed to withhold any tax from SS for Cdn residents, be they USC's or not. They know this.

[nelsona]

If any SSA tax is withheld, the remedy is to file a US retunr and get it back, not to include it as a foreign tax on your Cdn return.

[KLD]

I must apologize for giving you incorrect information. The SSA has NOT been withholding tax; I was confusing that with another small annuity I receive which has the 15% withheld and which I claim as a foreign tax credit. I'm sorry for confusing the issue when all I really needed to know is whether a 30% withholding will be eligible for the FTC and you have confirmed that it will.

Thank you so much for that information; it will help me make my decision.

[nelsona]

Yes. And the fact that you get that other anniuty will actually help you, as this will increase your US income, and soften the 30% tax on the lump-sum.

Soething else to consider is that taking the lump sum will only hit you in one year on the OAS clawback (presuming you are not already being clawed-back), so it is always a good idea in my opinion to take lump-sums of foriegn pensions if offered.

[patti]

Does the withholding rate on IRA withdrawals also depend on whether it is "lump sum" or periodic? I always thought that this was 15% withholding regardless of how its withdrawn (unless you're under age 59.5 in which case an additional 10% penalty tax applies). Your comments on US pensions has me wondering???