US Tax Withheld From a Canadian: Claim or Refund?

Why did a US payer withhold tax from my payment?

A US payer may have withheld because it treated the payment as US-source income subject to withholding and lacked documentation for a lower rate or exemption. Whether withholding applied depends on the payment type, its source and the relevant US rule. The usual rate for US-source dividends and other fixed or determinable annual or periodic income is 30%; a treaty or another rule can change the final tax (IRS Publication 515).

The kind of income matters more than the payer's location. Pay for personal services is sourced where the work is performed: work performed entirely in Canada is generally not US-source even when a US client pays for it. If part of the work was done in the US, the payment may need to be split (IRS: income sourcing). For when withholding applies and which form to give the payer, see when foreign owners owe US tax.

What is Form 1042-S, and what should I check on it?

Form 1042-S is the payer's report of income paid to a foreign recipient and any US tax withheld. It is evidence for a refund or foreign tax credit, but the form does not decide whether the withholding was legally due (IRS: Form 1042-S instructions).

Keep the form, payment statements, the Form W-8 given to the payer, proof of Canadian residence, and records showing where services were performed or where property was held. Ask the payer for an amended Form 1042-S if the recipient, income, withholding or repayment is reported incorrectly (IRS: Form 1042-S instructions).

Can the payer return tax withheld by mistake?

The withholding agent can sometimes repay excess chapter 3 withholding directly or offset it against later withholding for the same recipient. Ask immediately. The IRS Form 1042-S instructions say the usual adjustment period can end when the payer files or furnishes the form. The regulation states a different deadline, so the payer must check which procedure remains available.

Give the payer the missing or corrected evidence, such as residence and beneficial-ownership documentation, and request a revised Form 1042-S showing the repayment. Do not claim the same amount again from the IRS. If the payer cannot use an adjustment procedure, claim the excess on a US return (IRS: Form 1042-S instructions; IRS: Form 1040-NR instructions).

How do an individual and a corporation claim an IRS refund?

The refund form follows the recipient of the income and their US tax status. A Canadian resident who is a US nonresident individual normally files Form 1040-NR, while a Canadian corporation files Form 1120-F. A US citizen or US tax resident living in Canada generally follows US resident return rules; ask the payer to review a Form 1042-S that treats you as foreign. A noncitizen resident under both countries' laws who claims Canadian residence under the treaty instead files a timely Form 1040-NR with Form 8833 attached. Claim only tax the payer has not returned (IRS: Form 1040-NR instructions; IRS: Form 1120-F instructions).

An individual with no US trade or business or effectively connected income who files only to recover source withholding may qualify for the simplified Form 1040-NR procedure using Schedules NEC and OI. If a US return was already filed, claim the excess on Form 1040-X or an amended Form 1120-F, subject to the refund deadline (IRS: Form 1042 instructions).

A Canadian corporation with a US trade or business may have broader Form 1120-F filing duties; a withholding refund is only one part of that return (IRS: Form 1120-F instructions). See Canadian corporation US tax returns for those filing rules.

Do I need an ITIN or EIN to claim a refund?

An individual with neither a US Social Security number nor an ITIN who is ineligible for a Social Security number generally applies for an ITIN on Form W-7 with the Form 1040-NR refund return. Follow the Form W-7 instructions for identity documents and where to send the combined package; the return is not mailed separately in that case.

A Canadian corporation uses an employer identification number, or EIN, on Form 1120-F. If it does not have one, it must apply; the Form 1120-F instructions explain how to show an application pending on a paper return. The payer's EIN on Form 1042-S is not the corporation's EIN.

How long do I have to claim a US refund?

The general US refund-claim deadline is the later of three years after filing the return or two years after paying the tax; if no return was filed, the claim generally must be made within two years after payment. A separate lookback rule can limit how much the IRS may refund even if the claim itself is timely (26 USC 6511).

For chapter 3 or 4 withholding shown on Form 1042-S, the law generally treats the recipient as having paid the tax on the original return due date for that tax year, without extensions (26 USC 6513(b)(3)). The actual filing date, any extension, and the lookback limit can change the available refund. For an older payment, check the dates before assuming a late return will recover it.

Can I claim the US tax as a Canadian foreign tax credit instead?

Only final, qualifying US tax can enter a Canadian foreign tax credit calculation, and the credit cannot exceed the Canadian tax attributable to the same eligible US income. Tax that is refunded or refundable, or withholding above the treaty rate, is not creditable merely because it appears on Form 1042-S (CRA: Foreign Tax Credit Folio, paragraphs 1.33–1.35).

Canadian-source service income does not become US-source because a US customer paid it. The CRA locates service business income mainly where the services are performed and excludes Canadian business income from the US foreign-income calculation (CRA: Foreign Tax Credit Folio, paragraphs 1.48 and 1.53). Tax wrongly withheld on work done entirely in Canada therefore calls for a US correction or refund, not a Canadian credit for that payment. Individuals and sole proprietors can see foreign income on a Canadian return for Form T2209. A Canadian corporation calculates its qualifying credit on T2 Schedule 21: Part 1 for foreign non-business income, including dividends other than those from foreign affiliates, and Part 2 for foreign business income (CRA: T2 Schedule 21).

Why was the full rate withheld on my US dividends?

The general withholding rate is 30%, while Article X of the Canada–US treaty generally caps US tax on ordinary portfolio dividends beneficially owned by an eligible Canadian resident at 15%. A Canadian company that meets the treaty's voting-stock test may qualify for a different rate (Canada–US treaty, Article X(2)).

US REIT distributions have additional treaty conditions; check Article X(7)(c) before treating withholding above the ordinary portfolio rate as refundable (Canada–US treaty, Article X(7)). The payer may also have lacked valid treaty documentation. Check the Form W-8, the beneficial owner, and the Form 1042-S chapter indicator, income code and rate. Ask whether the payer can still correct the withholding. If not, an eligible recipient can seek the excess from the IRS on its refund return. The CRA does not credit the amount above the treaty rate (CRA: Foreign Tax Credit Folio, paragraph 1.35).

What if US tax was withheld inside an RRSP or TFSA?

Neither RRSP nor TFSA investment income or its foreign tax is included in a Canadian foreign tax credit calculation (CRA: Foreign Tax Credit Folio, paragraph 1.69).

A qualifying Canadian retirement arrangement can have its US dividends and interest exempt under Article XXI(2), subject to the treaty's conditions and proper documentation through the account's withholding chain. Check with the plan holder or intermediary whether the arrangement and payment qualify before treating withholding as refundable. If the Form 1042-S names the RRSP trust or an intermediary as recipient, ask its administrator or custodian to pursue a correction or refund; do not claim that tax on your personal return. A TFSA's tax-free savings purpose does not itself meet the treaty's pension, retirement or employee-benefit condition; US tax on its dividends may remain at the applicable treaty rate (Canada–US treaty, Article XXI(2) and (4)).

What if a US casino or lottery withheld tax?

US gambling withholding may be final or refundable in whole or part, depending on the game and allowable losses. The Canada–US treaty allows Canadian residents to deduct US wagering losses against gains taxable in the US to the same extent as US residents; it does not generally exempt all winnings (Canada–US treaty, Article XXII(3)).

For a Canadian resident not in the gambling business, eligible US-source wagering losses may reduce taxable US winnings on Form 1040-NR, Schedule NEC. For the tax year shown on this page, 26 USC 165(d) limits the deduction to 90% of those losses, capped by winnings. Equal winnings and losses may still leave US tax; keep records of both. The IRS says nonbusiness winnings from blackjack, baccarat, craps, roulette and big-6 wheel are not subject to US tax, so withholding on those games may be refundable (IRS Publication 515).

Ordinary lottery and recreational gambling winnings are generally not taxable in Canada; a gambling business can be different (CRA: Lottery and Gambling Winnings Folio, paragraphs 1.11–1.16). If Canada does not tax the winnings, there is no Canadian tax on that income for a foreign tax credit to offset.

Example

Illustrative US dollars: a Canadian resident receives US$10,000 of ordinary US stock dividends, and the payer withholds US$3,000. Assume the recipient qualifies for a 15% treaty rate and the payer cannot correct the slip. The final US tax is US$1,500, and the other US$1,500 is sought on Form 1040-NR with the Form 1042-S. For Canadian tax, the US$1,500 final tax may enter the foreign tax credit calculation, subject to Canada's limits; the refundable US$1,500 does not. The dividends and tax must be converted to Canadian dollars under the applicable Canadian rules.

Different for you?

• Tax was withheld when you sold US real estate: see Canadians selling US real estate.
• The payment was from a US 401(k) or IRA: see US retirement accounts in Canada.
• The payment was wages: see working across the border.
• You freelance for US clients: see Canadian freelancers with US clients.
• A corporation has US activity, treaty questions or missed returns: gather the 1042-S, W-8 copies, contracts, work-location records and prior returns, then see cross-border tax.