What do I file to get back the tax withheld on my Canadian pension?
A return, specifically the elective one, filed for the year in which the pension was paid. Withholding on a Canadian pension paid abroad is taken at a flat rate on the gross amount; the elective return takes the same income and taxes it at graduated rates instead, and the difference between the two comes back on assessment. What goes with it is the payer’s annual statement for the year, showing what was paid to you and what was withheld from it, together with enough about your circumstances to support the graduated computation and the personal credits it allows. The return covers one year only, and it is filed again for each year you want treated this way.
Does the election cover all my Canadian pension income or just part?
All of it. The election is made for the year and takes in every item of eligible income for that year, not the one statement you had in mind. That is precisely why the arithmetic comes before the election rather than after. Adding the rest of the eligible income can change the answer, and for someone with several Canadian sources it sometimes changes it completely. We total the eligible income first, compute the tax at graduated rates on that total, compare it with what has been withheld at the flat rate on the gross amounts, and only then decide whether the election is worth making for that year.
Do I have to file this every year, or just once?
Each year stands on its own. The elective return is filed for a particular year and decided on that year’s numbers, so a year in which it clearly helps can be followed by one in which it does not, because of a lump sum, a change in the pension, or a different mix of Canadian income. The other route is separate. An advance application, made ahead of time, reduces the withholding at source for future years so that there is less to reclaim in the first place. Most retirees in this position end up using both, in sequence: returns for the years already withheld at the flat rate, and the application to deal with the years to come.
How do I stop the withholding for next year instead of claiming it back?
That is the advance application, and it is a different filing from the return. It is made before the income is paid rather than after the year has ended, and where it is accepted the payer withholds on a reduced basis, so the flat charge on the gross amount is not taken in the first place. The attraction is cash flow: nothing to reclaim and no wait for an assessment. It does not replace the return for years already past, which stay on the flat basis until an elective return is filed for each of them. The two filings are usually planned together, one looking forward and one looking back.
Is it ever better not to file the elective return?
Yes, and it is worth checking rather than assuming. The election puts your eligible income through the graduated rates, and for someone whose Canadian income is substantial the graduated result can be close to, or above, what the flat withholding on the gross amounts has already produced. Because the election applies to all the eligible income for the year, you cannot take it for the sources where it helps and leave it off the others. So the order of work is arithmetic first and election second: total the year’s eligible income, compute both outcomes, and file the elective return only where it is the better of the two.
My pension is small — is a return even worth filing?
Often it is, and the smaller the pension the more likely that becomes. The flat rate is charged on the gross amount however modest the total, whereas graduated rates start low and the personal credits the return allows come off the result. That is the whole reason the elective route exists. What you need in order to make the case is undramatic: the payer’s annual statement for the year showing the gross pension and the tax withheld, details of any other eligible Canadian income, and confirmation of your circumstances for the year. We run the comparison before anything is filed, so the decision rests on numbers rather than on a general impression.
How does a non-resident file a tax return?
On the non-resident form for that country, reporting only the income that country may tax. In the US that is the 1040-NR; in Canada it is a T1 restricted to Canadian-source amounts, plus the elective returns under sections 216 and 217 where withholding on rent or pension income exceeded the real tax. The commonest error is filing the resident form by default and reporting worldwide income to a country with no right to it. See Form 1040-NR.
Is double taxation illegal?
It is legal. Two countries can each have a valid claim on the same income — one because the income arose there, the other because you live there — and nothing prohibits both from exercising it. What exists instead is relief: tax treaties allocate the claim, and domestic law gives a credit for foreign tax paid. The relief is not automatic, though. It is claimed on a return, and unclaimed relief is simply lost. See how double taxation is relieved.
