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.
I’m dealing with a CRA review of my T1 foreign tax credit claim and it’s driving me nuts. Hopefully you have a good idea on how to fix this mess. Here’s the situation.
I lived in the US for a few years and during that time earned some accumulated 401k money. I’ll be drawing out of the account over the next few years. This year I withdrew $40,000 from the 401k and they withheld 20% US tax. I reported the full amount of the payment on my Canadian return in Canadian dollars and claimed a foreign tax credit for the US withholdings.
CRA subsequently disallowed my 20% claim and asked me to submit a US 1040 tax return transcript as proof of the tax. The problem is that I didn’t file a US tax return and not sure if I actually need to file. Now I’m left with a CRA bill or $8,000 and no idea how to resolve the situation.
Is this something you can help with?
Thanks for the email and I’m sorry to hear about the challenges you’re having with CRA. It will be difficult to properly assess the proper outcome without addition facts, but I’ll do my best to flush out the situation based on the information above.
Assuming you’re not already a US citizen or current green card holder (more on this below) the 20% that was originally withheld on the 401k distribution is incorrect. Under the Canada-US tax treaty pension payments (401k) made from the US to a Canadian resident should only attract a 15% withholding tax. Therefore, CRA should allow at least 15% of the 20% tax that was withheld, but you’ll need to recover the additional 5% from the IRS. To do so you’ll need to file a 1040NR non-resident tax return. Assuming you already have a US tax ID that should be relatively straight forward.
Now, if you are in fact a US citizen or current green card holder the answer will be different. US citizens are taxable on their worldwide income regardless of where they live in the world. Therefore if this is the case you’ll need to file a US tax return reporting 100% of your annual income and you’ll receive a foreign tax credit based on the actual amount of taxes you paid to the US. That being said, the credit you receive cannot exceed 15% pursuant to the treaty.
As mentioned above I don’t have enough information to properly assess which path to take so please give me a call at 250-381-2400 and we can discuss you situation in more detail.