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taxation of a lump sum payment from an inheirted IRA to a canadian citizen

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Level 1

I have a Canadian citizen, resident of Canada.  She received a lump sum distribution fro an inherited IRA.  10% was withheld. I believe the withholding should have been 30% or may be 15%.  I think she needs to file a 1040-NR, compute the US tax on the distribution and pay the additional amount due. I am not sure if the tax should be computed using the tax rates or if it should be a flat 15% (the treaty rate on periodic payments, it appears that IRS regulations state that is immaterial weather the payment is made as a series of payments or in a single lump sum) 

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Level 11
Level 11

@itonewbie will give you the correct info, as soon as he can reply to your post.

like the commercial says " Your in good hands with itonewbie" 😁 

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Level 15

I think a call to @itonewbie was intended, but it is hard to get formatting done correctly. Maybe @The Real Halloween knows this one and can pay back some of the help received.

 


ex-AllStar
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@taxman144 @George4Tacks 

The US Canada treaty article XVIII seems to indicate that it is only 15% rate if it is a periodic payment.

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Level 15

@taxman144 wrote:

I have a Canadian citizen, resident of Canada.  She received a lump sum distribution fro an inherited IRA.  10% was withheld.

Based on your statement about possibly filing a 1040-NR, my presumption is that your client is neither a US citizen nor green card holder (although there are times when one could be).  Assuming she's not at least a green card holder, it sounds to me your client may have submitted a W-9 with an SSN she was issued at some point in her life rather than a W8-BEN as required.  That's the only reason why I can see 10% having been withheld.

I believe the withholding should have been 30% or may be 15%.  I think she needs to file a 1040-NR, compute the US tax on the distribution and pay the additional amount due. I am not sure if the tax should be computed using the tax rates or if it should be a flat 15% (the treaty rate on periodic payments, it appears that IRS regulations state that is immaterial weather the payment is made as a series of payments or in a single lump sum) 


Where in the regulations did you see that it "is immaterial weather the payment is made as a series of payments or in a single lump sum"?

How the payment is made makes all the difference in the world.  Before we go further, my assumption is that this is a traditional, not ROTH, IRA and that you have details of the basis.

Since pension distribution is generally considered FDAP, the taxable amount is normally subject to a flat 30% tax.  If, however, the distribution was part of a periodic payment (as defined in the Treas. Reg.), the amended protocol limits the tax the US can levy to 15% not on the taxable but gross amount - this is a crucial difference.  In the event the distribution was structured as an annuity, as defined under the Convention, the limit would be 15% of the taxable amount.

It is important to make sure your client does not overpay her US tax liability because the CRA will limit any credit to be claimed on the Canadian return to what is stipulated in the DTA.

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Still an AllStar