Why was tax taken off my US dividends before I received them?
Because this kind of income is collected at source. Dividends, interest, rents and royalties from a US source that are fixed or determinable and paid periodically are taxed on the gross amount, and the payer is made responsible for withholding before the money leaves. Nothing about your own circumstances enters into that decision at the point of payment: the payer withholds on the strength of the documentation it holds. So if the rate applied looks too high, the useful question is what documentation the payer had, rather than whether the income was taxable at all.
Can I deduct expenses against FDAP income?
No, and this is the hardest feature of the category to accept. The tax is imposed on the gross amount, so interest costs, management fees, repairs and depreciation do not reduce it. The consequence is that income which is loss-making on any commercial measure can still bear tax, which is most visible with rents. Income connected instead with a trade or business in the United States is taxed on a net basis through a return, so in a marginal case the real question is which of the two regimes the income falls into rather than which deductions might be argued for.
How do I get the treaty rate on US royalties?
By putting the payer in a position to apply it before the payment is made. The payer withholds on the strength of the documentation in front of it, so a claim made afterwards is a refund exercise rather than a rate change. That means identifying the treaty article that covers the royalty, establishing residence to the payer's satisfaction for the right period, and getting the paperwork to whoever actually operates the withholding, who in a large payer is rarely the person who commissioned the work. Where payments recur, diarise the renewal before the documentation lapses.
What is the difference between FDAP income and business income?
The basis of tax and the mechanism. FDAP income is taxed on the gross amount at a flat rate collected by the payer at source. Income connected with a trade or business is taxed on net profit, reported on a return, with deductions allowed and the tax paid by the taxpayer rather than the payer. The same economic receipt can fall into either box depending on the activity behind it, and the classification decides whether costs matter, whether a return has to be filed, and who carries the exposure if the analysis turns out to be wrong.
Can I recover US tax that was over-withheld on my investment income?
Generally by filing for the year and claiming the difference between what was withheld and what the treaty or the law actually required. The claim is built on the payer's own reporting of what it withheld, so the first step is obtaining that documentation and reconciling it to the payments received; a mismatch there will hold the claim up far longer than the claim itself takes. Refunds of tax collected at source are slow, which is the argument for fixing the documentation with the payer for future payments at the same time as pursuing the past ones.
Is my US rental income FDAP income?
Rents fall within the category, so the default is gross-basis withholding with no deduction for mortgage interest, property taxes, agent fees or repairs. Whether that default can be displaced turns on whether the activity amounts to a trade or business in the United States and on the basis on which the income can properly be reported, which is a question about the scale and conduct of the letting rather than a matter of preference. The decision is worth taking early, because the gap between the two treatments is usually wider than any planning available inside either one.
I have not filed for several years while living abroad — what are my options?
Both countries have routes back, and using one before they contact you is what preserves the relief. On the US side there are procedures aimed at taxpayers whose failure was not wilful, including one designed for people living outside the country, and separate procedures for late account reports and information returns alone. Canada has its voluntary disclosures programme and taxpayer relief for penalties and interest. Filing quietly and hoping is the one approach with no protection attached to it. See catch-up filing.
How do I actually stop being taxed twice?
In this order. Fix your residence under each country's own rules, and if both claim you, apply the treaty tie-breaker. Identify where each type of income is sourced. Read the article that covers that income type, because it decides who taxes and at what maximum rate. Then claim the relief on the residence-country return, with proof of the foreign tax. Most of the tax people lose to double taxation is lost at the last step, not the first. See how double taxation is relieved.
