Form 1042-S: How a Canadian Gets Back US Tax Withheld at 30% Instead of the Treaty Rate

Short version: Form 1042-S Explained: The U.S. Slip Canadians Receive

A US payer that makes a payment to a foreign person (dividends, interest, royalties, pension, rent, certain fees) must withhold US tax at 30% unless the payee has provided documentation of a lower treaty rate. The payer reports the payment and the withholding on Form 1042-S and gives the payee a copy. Canadians who never provided a Form W-8BEN to their US broker, or whose pension administrator did not apply the treaty, receive 1042-S slips showing 30% withheld on income the treaty taxes at 15% or 0%. The excess is recoverable, but only by filing a US return.

Key takeaways

• Form 1042-S reports US-source income paid to a foreign person and the tax withheld, by income code and by rate; the payee receives a copy by March 15.
• The default rate is 30%. The treaty reduces it to 15% on dividends, 0% on most interest, 0% on most royalties (10% on some), 15% on periodic pensions and annuities, and 0% on gains, but only if the payer has a valid Form W-8BEN (individuals) or W-8BEN-E (entities) on file.
• Recovery: file a Form 1040-NR reporting the income on Schedule NEC at the treaty rate and claiming the 1042-S withholding as a payment; the IRS refunds the difference. The return is due June 15 (no US wages) and can be filed for up to three years back.
• Prevention: give the payer a Form W-8BEN with the treaty article and rate claimed; it is valid for three years and must be renewed.
• Canadian side: the Canadian foreign tax credit is limited to the treaty rate, not the 30% withheld; the excess is recoverable only from the IRS.

Why 30% gets withheld

The withholding agent (a broker, a pension plan, a company paying royalties) must treat a payee as foreign and withhold 30% unless it has a W-8BEN establishing the payee's Canadian residence and treaty entitlement. Brokerages request the form at account opening, but it expires after three years and is often not renewed; pension plans and one-off payers (a US company paying a Canadian consultant, a casino, a lottery) rarely have it. The withholding is remitted to the IRS, and the payee receives a 1042-S in March showing the gross income, the withholding rate, and the tax withheld.

The treaty rates

• Dividends (Article X): 15% for individuals; 5% for a Canadian corporation owning 10% or more.
• Interest (Article XI): 0% for most interest; 15% for contingent interest.
• Royalties (Article XII): 0% for copyright, software, and certain other royalties; 10% for others.
• Pensions and annuities (Article XVIII): 15% on periodic payments; 30% on lump sums (US domestic rate applies).
• Social Security: 0% (taxable only in Canada).
• Independent personal services (Article VII): 0% absent a US fixed base.
• Capital gains (Article XIII): 0% except real estate.

The recovery

The payee files a Form 1040-NR for the year of the payment. Income subject to treaty rates is reported on Schedule NEC (not effectively connected) in the column for the applicable rate; the 1042-S withholding is entered as tax paid. The difference is refunded. Form 8833 is generally not required for a withholding-rate claim on Schedule NEC. An ITIN is required; a first-time filer applies on Form W-7 with the return. The return is due June 15 with an automatic extension available, and a refund claim can be made within three years of the original due date, so 2023's over-withholding can be recovered on a return filed by mid-2027.

Refunds on 1040-NR returns claiming 1042-S credits are slow; the IRS matches the claimed withholding against the payer's Form 1042 filing, and mismatches (a payer that reported under the wrong TIN, or not at all) delay the refund until resolved. Keep the 1042-S copy.

Prevention

A valid W-8BEN on file with the payer stops the over-withholding. The form identifies the payee as a Canadian resident, claims the treaty article and rate (Part II, with the article cited), and includes a foreign TIN (the Canadian SIN) or a US ITIN. It is valid until the end of the third calendar year after signature. Entities file W-8BEN-E with the limitation-on-benefits section completed. For pensions, the NR301 is the Canadian-side equivalent, filed with the Canadian payer to reduce Canadian withholding for US residents; it does not apply to US payers.

The Canadian credit

Canada allows a foreign tax credit for US tax paid, but limited to the tax that the treaty allows the US to charge. On dividends, the credit is limited to 15%; the other 15% withheld is not creditable in Canada and is recoverable only from the IRS. A Canadian who claims 30% as a foreign tax credit on the T1 will be reassessed.

Worked example

A Montreal resident holds US stocks through a US broker whose W-8BEN expired in 2022. In 2025 she received $12,000 of dividends with $3,600 withheld, and a $10,000 lump-sum payment from a former US employer's pension plan with $3,000 withheld.

• Dividends. Treaty rate 15%; tax $1,800; $1,800 over-withheld.
• Pension lump sum. Lump sums are not periodic; the treaty's 15% cap does not apply; 30% stands. No refund.
• 1040-NR. Schedule NEC reports the dividends at 15% and the pension at 30%; withholding of $6,600 claimed; refund $1,800. Due June 15, 2026; ITIN applied for with the return.
• Canada. T1 and TP-1 report both amounts; foreign tax credit limited to $1,800 on the dividends and $3,000 on the pension.
• Prevention. New W-8BEN filed with the broker.

Official sources

"Use Form 1042-S to report income and amounts withheld as described in the Instructions for Form 1042-S." — Internal Revenue Service, About Form 1042-S, https://www.irs.gov/forms-pubs/about-form-1042-s

"A nonresident alien individual who is not engaged in a trade or business in the United States and has U.S. income on which the tax liability was not satisfied by the withholding of tax at the source" must file a return. — Internal Revenue Service, Taxation of Nonresident Aliens, https://www.irs.gov/individuals/international-taxpayers/taxation-of-nonresident-aliens

"[T]he tax so charged shall not exceed: (a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company which owns at least 10 per cent of the voting stock of the company paying the dividends; (b) 15 per cent of the gross amount of the dividends in all other cases." — Canada-United States Tax Convention, Article X(2), https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-states-america-convention-consolidated-1980-1983-1984-1995-1997.html

Practitioner note

The 1042-S refund is the one most Canadians never claim because they do not know a return is possible, and the three-year window closes quietly. We review every client's 1042-S slips against the treaty rates, file the 1040-NR for the difference, and put a W-8BEN renewal on the calendar every three years.

See also: Planning a move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the 1040-NR refund claim with the 1042-S credits and ITIN application, the W-8BEN filings with each payer, and the Canadian return with the correctly limited foreign tax credit. See cross-border pricing or book a call.