Non-resident alien backup withholding tax

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Fug1
Posts: 57
Joined: Sun Mar 09, 2014 12:00 pm

Non-resident alien backup withholding tax

Post by 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
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Non-resident alien backup withholding tax

Post by 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.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Fug1
Posts: 57
Joined: Sun Mar 09, 2014 12:00 pm

Re: Non-resident alien backup withholding tax

Post by 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
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Non-resident alien backup withholding tax

Post by nelsona »

Unusual that THEY would refund you rather than IRS, but if that is the case, good for you.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Fug1
Posts: 57
Joined: Sun Mar 09, 2014 12:00 pm

Re: Non-resident alien backup withholding tax

Post by 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
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Non-resident alien backup withholding tax

Post by nelsona »

Well, that is good news. I guess they never sent the withholding in the first place.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
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