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Phil Hogan, CPA, CA, CPA (CO)
Cross-Border Tax and Investment Specialist
This is XXXXX XXXXX from the Americans Living in Canada FB page. I’m sure you’re busy this time of year, but I’m hoping you might be able to answer a question for me.
I live in BC, and my dad passed away last July in Seattle. I am due to receive a $10K US lump-sum death benefit from his teacher’s retirement (TRS). I completed the paperwork and followed their instructions to include a message that I live in a country that has a tax treaty with the US, so they should not withhold taxes from the payment. However, I finally got through to them today and it was confirmed by a manager that, because I am a US citizen, they are required by the IRS to withhold the taxes anyway. The representative first told me they needed the W-8BEN tax form, but then she realized this would not apply to me if I am a US citizen.
My fiancé and I need this money for a downpayment on a house that we’ve already agreed to purchase in June, and we were counting on the full $10K. TRS has their legal team looking into my situation, but it could still take weeks before I hear anything. Do you know if there is any way around this tax withholding? If not, can I file to get that money back from the US next year, since I pay all my taxes here in Canada and never go over the duel-tax threshold?
This is actually a $10K “death benefit” that is paid out to beneficiaries from the Teacher’s Retirement Plan. I suppose it’s from his pension, but it’s one-time lump sum. They said they are required by law to withhold 20% if I don’t opt to roll it over to an IRA, which I don’t want to do. Of course, if I’m NOT a US person for tax purposes, then I could file a form indicating that I live in a country with a tax treaty, and they wouldn’t have to withhold taxes.
The crummy thing is that I had planned to run down to the States back in September to have a bunch of documents notarized, but I cancelled my trip because I found a law office in Texas who assured me they could notarize everything online. I had to get the document from the retirement system notarized, among other things. They assured me up and down, backwards and forwards that they would help me, but when I finally got the documents together, signed them, and mailed them, the lawyer had changed her mind and refused to allow her office to notarize anything. This was probably because I didn’t need to hire them for my dad’s estate because it was too small. However, because of this I had to request all the paperwork again and wait for it to arrive, so I didn’t get it notarized until I was in the States at Christmas.
Unfortunately, this will now be a 2022 payment, so I’ll have to wait a year to get that money back. Had the lawyer helped me, it would have been a 2021 payment. In short, I guess I’ll get a 1099-R next year? Then do I need to report this as income in Canada next year, even though it’s a death benefit?
Thank you again,
Thank you so much for your time!
Thanks for the email and very sorry to hear about your Dad.
Technically they should be withholding 15% regardless on the payment. I’m assuming of course that the payment is a taxable US pension payment.
When you file your US tax return you’ll get credit for the withholdings.
Did you received a 1099-R for the payment yet, or did the payment happen in 2022?
Yes, in that case you’ll get a 1099-R in 2023 (for the 2022 tax year).
Even if you were not a US citizen they would have withheld 15% pursuant to the treaty between Canada and the US.
The payment is likely taxable in both Canada and the US, however you’ll get credit in Canada for any taxes you pay in the US on the death benefit.
Hope that helps.