US withholding on partnership units, even in an RRSP

Why did the US withhold from my whole sale, not just my gain?

The withholding is a payment toward US tax that may be due on your gain, not the final tax. Under US law, before any treaty relief, a foreign investor's gain on selling units of a partnership that carries on a US trade or business is treated as effectively connected with that business, up to the business's gain on a deemed sale of its assets (section 1.864(c)(8)-1). Under section 1446(f), the broker generally withholds 10% of gross proceeds on a sale of publicly traded partnership (PTP) units and does not subtract your purchase cost (Publication 515, PTP interests). This applies to sales on or after January 1, 2023 (IRS partnership withholding).

Because the base is gross proceeds, withholding can exceed the tax ultimately due, including when you sold at a loss; a loss alone is not a broker exception. The final calculation uses your adjusted US tax basis (roughly what you paid, adjusted for your share of income and distributions) and the portion of gain connected with a US business.

Which investments are partnership units rather than ordinary stocks or ETFs?

The investment's US tax classification decides whether the partnership-transfer rule applies. An exchange listing or an ETF label does not establish it.

The IRS defines a PTP by the trading of its partnership interests in the W-8BEN instructions. Clues that you hold partnership units: the issuer sends a Schedule K-1 rather than a dividend slip; a Form 1042-S for a sale or distribution carries income code 57, 27 or 58; or the issuer's website has a tax area with qualified notices. The legal classification still decides, so ask the broker to confirm it.

Can I avoid or reduce the withholding before I sell?

Mostly not by your own choice. A broker skips the withholding only if an exception applies, mainly a qualified notice the partnership posts, a Form W-9 (US persons only) or your treaty certification covering the entire gain. Partnerships post notices in a dedicated area of their public website (section 1.1446-4(b)(4)).

These are broker exceptions under section 1.1446(f)-4(b). For a sale, the notice counts only if posted within the 92 days before it. The exception measures the partnership's hypothetical gains, not your own gain or share.

An exception skips the withholding, not the tax: a seller with US-connected gain still reports and pays it on the return (section 1.1446(f)-4(e)(1)). If a broker properly follows a notice that proves too low, the broker is not liable for the shortfall; the partnership is, if it made no reasonable estimate (section 1.1446(f)-4(b)(3)(i)).

A W-8BEN that merely identifies you as Canadian does not establish a full treaty exemption. It must be valid and complete, include a US taxpayer number (SSN or ITIN) if the partnership conducts a US business, and name the treaty article and each PTP on line 10 (W-8BEN instructions).

Under the Canada–US treaty, Article XIII(4) generally leaves gains from other property taxable only in the seller's country of residence, but Article XIII(2) lets the US tax gains on property forming part of a permanent establishment's business property. Article XIII(1) and (3) separately let the US tax US real property interests, which section 897(g) extends to the real-property share of a partnership sale (1040-NR instructions). Partnership assets can form part of the partnership's US permanent establishment (section 1.864(c)(8)-1(f)), so how much of a gain the treaty reaches depends on what the partnership owns. A partial treaty exemption does not qualify for this broker exception.

A broker decides which notice or certification it accepts for a given security and account. It generally cannot rely on a certification received earlier than 30 days before the sale (unless it already holds a valid form from you) or at any time after (section 1.1446(f)-1(c)). For tax already withheld, IRS Notice 2023-8 lets a broker rely, ahead of proposed regulations, on a late certification: a valid one received within 30 days after payment; one with a signed affidavit that it was accurate when paid, within one year; and after that, the affidavit plus documentary evidence for a treaty claim. A broker need not accept one.

Why was tax also withheld on distributions while I held the units?

PTP distributions can carry withholding on income connected with a US business under section 1446(a), separate from the section 1446(f) withholding on a sale.

The standard section 1446(a) rate for a noncorporate foreign partner is 37%, not an ordinary portfolio-dividend rate. Like the sale withholding, it is a payment toward your final US tax, claimed on Form 1040-NR with the Form 1042-S attached (1040-NR instructions). A partnership's qualified notice can split a distribution into portions subject to different rules. Without one, the payer withholds on the whole distribution at the highest rate, ignoring any treaty rate (section 1.1446-4(d)(1); Publication 515, PTP distributions). The part of a distribution above the partnership's cumulative net income can also carry the 10% section 1446(f) withholding, reported under income code 57 (section 1.1446(f)-4(c)(2)(iii)).

Does holding the units inside my RRSP or TFSA stop US withholding?

An RRSP or TFSA does not automatically switch off US partnership withholding. Canada's treatment of the account and the US treatment of the investment are separate questions.

Article XXI(2) of the Canada–US treaty exempts qualifying retirement arrangements' dividends and interest. Its words cover only income under Articles X and XI, and Article XXI(4) excludes income from carrying on a trade or business, so it does not clearly reach a sale of partnership units or business income passed through the partnership. A TFSA is not automatically a qualifying retirement arrangement either. The account name alone does not support an exemption from gross-proceeds withholding.

For registered accounts, who may claim the credit is the first open question. Section 1.1446(f)-4(e) sets credit rules for individuals and corporations and separate rules for partnerships, trusts and estates, but neither it nor Publication 515 mentions Canadian registered plans. The answer depends on how the US classifies the plan and who the Form 1042-S names as recipient. For other US withholding inside an RRSP or TFSA, see US tax withheld on payments to Canadians.

Canadian relief is also limited: foreign taxes on qualifying RRSP or TFSA investments do not count toward a personal foreign tax credit under CRA Folio S5-F2-C1, paragraph 1.69.

What do Schedule K-1 and Form 1042-S show, and which do I use?

Schedule K-1 describes your partnership tax allocations; Form 1042-S documents amounts reported by the broker or other payer and tax withheld. A refund calculation may need both, plus the partnership's sale information.

The K-1 instructions explain that partnership tax basis requires adjustments and is not simply a capital-account balance, and that part of a sale gain can be ordinary income rather than capital gain. Schedule P takes several lines from Schedule K-3, Part XIII.

On Form 1042-S, income code 57 identifies amounts realized under section 1446(f); code 27 identifies PTP distributions subject to section 1446(a); code 58 identifies undetermined PTP distributions. An amount reported as gross income can represent sale proceeds, not taxable profit. Some distribution reporting can overlap, so adding every gross amount across slips can overstate receipts. Verify the codes and withholding against the 1042-S instructions.

Do I need a US return and an ITIN to get money back, and by when?

For units held personally in a non-registered account, a Canadian who is a US nonresident generally uses Form 1040-NR to calculate final US tax and claim excess withholding; filing can be required even when no refund is due (section 1.1446(f)-4(e)(1)). Membership in a partnership conducting a US business can make you engaged in that business for US tax purposes (Publication 519), and the 1040-NR instructions require filing then even where income is treaty-exempt. For an RRSP or TFSA, who may claim the credit comes first (see above). Check state filing duties separately.

A return needs a US taxpayer number. If you are not eligible for an SSN and have no ITIN, you generally apply on Form W-7, usually with the return (W-7 instructions). The credit for tax withheld is claimed by attaching a Form 1042-S that includes your taxpayer number, so a slip without it needs resolving with the broker (section 1.1446(f)-4(e)(2)).

With no employee wages subject to US income-tax withholding, the usual Form 1040-NR deadline is June 15 of the following year, subject to extensions. A refund claim is generally due within the later of 3 years after filing the return or 2 years after payment; tax withheld during the year is treated as paid on the return due date (IRS refund time limits). US tax withheld on payments to Canadians covers the claim steps, the ITIN application and the time limits in full.

A late return can still claim the credit for tax withheld, but it recovers only tax treated as paid within three years before filing, plus any extension, so withheld tax is generally out of reach once the return is filed more than that after its due date (IRS refund time limits). Deductions and most other credits generally require a return filed within 16 months of its original due date, or sooner if an earlier return was also missed and the IRS has sent a notice; the IRS can waive the deadline for a good-faith failure (Regulations section 1.874-1). For missed years, see nonresident return for business income.

If you take the position that a treaty exempts all of the gain, the 1040-NR instructions say Schedule P, Part II is not completed when the gain is attributable to non-real-property assets outside a US permanent establishment and a protective return is filed on time under Regulations section 1.874-1(b)(6), meaning within the same 16 months. The position may also need disclosure on Form 8833, with a US$1,000 penalty for each failure to disclose unless the reportable items total US$10,000 or less.

What do I report in Canada for the units?

In a non-registered account, Canadian reporting follows Canadian rules, not the US withholding base; first establish whether Canada also recognizes the issuer as a partnership. Inside an RRSP or TFSA, Canadian relief is limited (see above) and Form T1135 excludes the holdings.

Section 96 of the Income Tax Act governs partnership income allocations, and income, losses and distributions also adjust Canadian cost base under section 53. US adjusted basis and Canadian cost base are separate calculations and often differ.

Foreign tax expected to be refunded, or exceeding the treaty-permitted amount, is excluded from the Canadian credit (CRA Folio S5-F2-C1, paragraphs 1.33–1.39), so coordinate the final US liability with the credit. For currency conversion, Forms T2209 and T2036 and the Quebec credit, see foreign income on a Canadian return.

An interest in a foreign partnership holding specified foreign property can require Form T1135 when your total specified foreign property's cost exceeds C$100,000 at any time during the year; RRSP and TFSA holdings are excluded (CRA's T1135 guidance). Exceptions and methods are in foreign-property reporting.

Example

A Canadian resident sells PTP units held personally in a non-registered account. All amounts are illustrative US dollars, with no selling costs or other adjustments.

• Gross proceeds are US$20,000. With no broker exception, withholding at 10% is US$2,000, leaving US$18,000 in cash.
• Assume the reconciled US adjusted basis is US$18,000. The gain is US$2,000, not the US$20,000 of proceeds.
• Suppose the completed US return, including partnership allocations, shows total US tax of US$600 and the only payment is the US$2,000 withheld. The return then shows US$1,400 withheld in excess of the tax.
• Instead assume a US basis of US$22,000. The broker still withholds US$2,000 because its calculation ignores cost, even though the sale was at a loss. Any US tax due, and any recovery, depends on the completed return.

The US$600 is an assumption, not a rate or a typical result. A registered-account sale needs a separate determination of who may claim the credit.

What should I gather before filing for a refund?

Gather records that show who owned the units, what was withheld and how the US tax basis changed. A broker's withholding letter starts the reconciliation; it does not replace the tax schedules.

• Account agreement and type (personal, RRSP or TFSA), with trustee details for a registered account.
• Broker withholding letter and all original and corrected Forms 1042-S, with the recipient name and taxpayer number each shows.
• Purchase and sale confirmations, cost history, reinvestments and account transfers.
• Every K-1, K-3, attachment and partnership sale schedule, including earlier holding periods.
• Distribution history, prior basis calculations and tax already paid or refunded.
• Copies of W-8 forms, any qualified notice and the broker's reply about an exception.
• Existing US taxpayer number, prior US and Canadian returns, and notices on the same holdings.

Resolve mismatched names, missing taxpayer numbers or missing schedules first; if a K-1 or Form 1042-S never arrived, ask the broker and the partnership. For a registered account or several unfiled years, take this package to cross-border tax review so who may claim, the filing duties and the remaining refund period can be settled together.

Different for you?

• Private US LLC or partnership interest: see Canadian partner in a US LLC.
• A partnership's own withholding or a Form 8805: PTP distribution withholding appears on Form 1042-S, as above; the partnership-side procedure is in foreign-partner withholding.
• Ordinary US fund distributions: see US fund distributions on a Canadian return.
• US citizen, green card holder or US tax resident under the substantial presence test, living in Canada: a broker need not withhold when it relies on a Form W-9 certifying non-foreign status (section 1.1446(f)-4(b)(2)); see Americans living in Canada and snowbirds and US residency.
• Units held by a Canadian corporation, trust or partnership: the filing forms and credit rules differ (section 1.1446(f)-4(e)(2)); cross-border tax review can sort out who owns what.
• You became a Canadian resident after buying the units: Canada may treat your cost as the market value on arrival (Income Tax Act, section 128.1); see your first year as a Canadian tax resident.
• RRSP or TFSA ownership, missing years, disputed withholding or a treaty claim: cross-border tax review can address who may claim the US credit and the coordinated Canadian treatment; bring the account documents, withholding forms and complete partnership history.