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Canadian citizen, non-resident for tax purposes, NRA for US…

Canadian citizen, non-resident for tax...
Canadian citizen, non-resident for tax purposes, NRA for US tax purposes. Invested in US annuity. Cashed out annuity in 2017 and received 1099R, distribution code 7D. If he were reporting this income to Canada, it would be taxed at 15% but since it is not taxable in Canada due to his non-resident status, it seems it is fully taxable on his 1040NR with no treaty and no foreign tax credit. Or can he claim treaty since he would have been taxed at 15% IF it was reportable to Canada.
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Answered in 2 hours by:
3/16/2018
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,694
Experience: Taxes, Immigration, Labor Relations
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It looks that he provided incorrect information to the payer.

He filed W9 form instead of W8BEN as a nonresident.

If he files correct form - that distribution woudl be reported on from 1042S instead - and filing would not be required.

Please verify - if possible to contact the payer and make correction?

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Customer reply replied 1 month ago
Lev,
Per TP, while he was living in the US, he put funds in a revocable trust which accumulated for an eventual annuity, if he chose that option. In 2017, he withdrew the funds and 10% was withheld on the earnings. The 1099 came from a retirement service solutions company. I have an email into TP for further information. I asked him about signing a W9 instead of a W8BEN and I asked him if he was working in the US and the history of how the account came to be. Is there any other questions to help sort this out? It would seem he may owe 30% tax and have no treaty position since he only pays Canada on Canadian source income as a non-resident of Canada.

The tax treaty

https://www.irs.gov/pub/irs-trty/canada.pdf

page 26 ARTICLE XVIII Pensions and Annuities

1. Pensions and annuities arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State, but the amount of any pension included in income for the purposes of taxation in that other State shall not exceed the amount that would be included in the
first-mentioned State if the recipient were a resident thereof
.

3. For the purposes of this Convention, the term "pensions" includes any payment under a superannuation, pension or retirement plan, Armed Forces retirement pay, war veterans pensions and allowances and amounts paid under a sickness, accident or disability plan,

.

So far - the tax rate is limited by Canadian tax rate as you suggested - and if he were provided form W8BEN and claimed tax treaty benefits - he would get withholding using Canadian rates and reporting on form 1042S - and would NOT be needed to file the US tax return.

Then - he will be claiming a credit for US taxes on Canadian resident tax return.

If correction is not feasible - that may be done on the US tax return.

He still may claim tax treaty provisions.

.

Regarding revocable trust - that is ignored fro income tax purposes - and all income and deduction items realized by the trust are reported on grantor's individual income tax return.

The trust doesn't allow to defer the income from tax liability while an annuity does.

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Customer reply replied 1 month ago
ok, so bot***** *****ne, even though he files as a Canadian NON-RESIDENT, he can still claim treaty benefits and get the reduced rate of 15%. So if he doesn't want to hassle with trying to get a 1042-S, I can proceed with using 1099R, correct?

If he is a nonresident in Canada - then we need to know where he is a resident?

And we will start from that point...

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Customer reply replied 1 month ago
He is a resident of Mexico. He does not file a Mexican Tax Return.

For the Mexico resident - we need to look into a different tax treaty...\

https://www.irs.gov/pub/irs-trty/mexico.pdf

page 21

ARTICLE 19
Pensions, Annuities, Alimony, and Child Support
1. Subject to the provisions of Article 20 (Government Service):
a) pensions and other similar remuneration derived and beneficially owned by a resident of a Contracting State in consideration of past employment by that individual or another individual resident of the same Contracting State shall be taxable only in that State; and

.

Thus - taxed in Mexico and not in the US.

That clause is selected on the US nonresident tax return.

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Customer reply replied 1 month ago
Lev, sorry to drag this out, awaiting TP answer on what country he is a resident.

Sure - please keep me updated.
The residency will determined which treaty we may use.

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Customer reply replied 1 month ago
Lev,
Sorry to drag this out. He is a resident of Mexico. He inherited this money when he was living in the US under a G1 an subsequently G4 VISA. It appears from the treaty that we can file for a refund and it is not necessary to file form 8833 under the exception, but maybe it would be wise to file anyway to be safe. What is your opinion?Exceptions from reporting:
"That a treaty reduces or modifies the taxation of income derived by an individual from dependent personal services, pensions, annuities, social security, and other public pensions, as well as income derived by artists, athletes, students, trainees, or teachers"

form 8833 might not be needed.

We still may claim the US-Mexico treaty - based on residency.

See the article I referenced above.

To claim exclusion of retirement distribution - form 8833 is not required.

Lev
Lev, Tax Advisor
Category: Tax
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Customer reply replied 1 month ago
Thank you very much!!!!!!!!!!!!!
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