NRA - 1042-S 30% Withholdings (Lump-Sum) FTC denied by CRA

[Chkronos]

Hi there !

Here's my issue : CRA doesn't recognise one of my clients a 30% withheld tax for the purpose of the foreign tax credit in Canada on a Form 1042-S. (income code 15). (Lump-sum)

My client is an NRA he is the beneficiary of his deceased father Teacher's Retirement Plan (which is an annuity).

They are requiring my client to file a US. Tax return to determine his final tax liability.

An agent on the phone at CRA referred me to their position in the Income tax folio S5-F2-C1 :

1.33 :Any portion of a taxpayer’s foreign tax which is paid but which will be, or is, refunded to the taxpayer is not considered to be tax paid for the year. In other words, the foreign tax paid for the year for purposes of claiming a foreign tax credit cannot be more than the applicable finally-determined foreign tax liability.

The agent told me that according to the Tax Treaty (US-CA) Article 18 since my withholding rate is 30% they right off the bat consider my pension as being a lump-sum so they cannot apply the 15% in the tax treaty. But depending on the IRS interpretation he might be entitled to claim a reduction to 15% under tax treaty benefits.

Therefore, they are disallowing the FTC (line 431-433) of Form T2209 because he might get refunded if he files a US 1040NR, and afterwards they will allow his "finally-determined tax liability" on line 431 of Form T2209.

I'm pretty sure that his income is considered FDAP and therefore not effectively connected so no deductions would be allowed against his income anyway.

So I can't believe that they are requiring him to file a return.

Thoughts on that ?

[nelsona]

I agree with everything you said. However given the denial I woukd file a 1040NR and request the 15% rate on the NEC portion
Then you would either get the refund or have in writing that IRS denied the 15% rate