Canadian with 401k plan in the US

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Each year I help over 500 clients file their Canadian and US tax returns as well as plan for both their Canadian and US investment accounts. I also regularly help new US clients plan for their move to Canada.

Feel free to reach out via email at phil@philhogan.com or by phone or text here 250-661-9417.




Question

Hello

I worked in the US from 2001 to 2008 and contributed to a 401K plan. I moved back to Canada (I am a Canadian citizen) in 2008. I am now retired and mad a partial withdrawal this year from my Vanguard 401K plan. I gave them a W-8BEN form and they withheld the correct 15%.

However, Vanguard’s legal department subsequently reviewed the file and are now saying that the withholding should have been 30%. They are demanding that I repay the 15%. I know this is incorrect and that I could recover the 15% next year by filing a US 1040NR form but I do not want to do this since I am certain that they are incorrect.

I have tried pointing out the relevant parts of the tax code but they are not agreeing. They first claimed that it was a non-periodic payment until I pointed out that it was a periodic payment as defined by the tax code. They then said it was a lump sump payment which was also incorrect. They are now sending me by registered mail a “reclaim” letter and have deleted al the messages received and sent on the website concerning this matter.. I am not sure dhow to proceed. Does this letter have any legal status? Should I simply refuse to pay? Any advice would be appreciated. By the way, I phoned the IRS International Tax Department and the agent I talked to agreed with me.

Thank-you.

Answer

Hi

First, I’m going to assume that you are not a US citizen or green card holder. If this is incorrect please let me know.

We are seeing this more and more lately. The US brokerages and banks are deciding to withhold the maximum level of tax withholdings to non-residents of the US simply to decrease their overall risk. They might as well withhold the max on every distribution so they don’t get caught short.

If I were you I wouldn’t bother sending them the extra 15%, however it would be courteous to send them a copy of your tax return after it is filed showing them that you actually taxed the pension amounts. Now, this would only be the case if you were a US citizen or green card holder, which from your post above does not seem likely.

Cheers

Phil

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