Reading an NR4 for Your 1040: Which Box Is Income, Which Is Withholding, and Where Each Goes

Short version: Part XIII Withholding Explained: Canada's Non-Resident Tax

The NR4 arrives in March, in a format no US tax software recognizes, and the US preparer's instinct to treat it like a 1099 produces the errors this guide exists to prevent. The slip's structure: an NR4 reports amounts paid or credited to a non-resident of Canada that were subject to Part XIII withholding — one slip per payer, with up to two lines of income per slip; each line carries an income code (a two-digit number identifying the type of income — RRSP payments, RRIF payments, pension benefits, dividends, interest, rents, royalties, estate or trust income, and the others), the gross income (the amount paid before withholding), the non-resident tax withheld (the Part XIII tax the payer remitted to the CRA), the currency code (the slip reports in the currency indicated — usually Canadian dollars, occasionally US dollars where the payer paid in USD), and the recipient's identification (a Canadian social insurance number or non-resident account number). Decoding the income code is the first step, because it decides where the income goes on the 1040: pension and RRSP/RRIF codes (the codes for periodic pension payments, RRSP withdrawals, RRIF payments, and lump-sum pension amounts) go to the 1040's pension and annuity lines — gross on line 5a, taxable amount on line 5b after any basis recovery for contributions that were not deductible for US purposes (the RRSP-distribution guides), with the treaty's pension provisions governing the taxable amount for RRSP and RRIF income; dividend codes go to Schedule B as ordinary dividends (Canadian corporate dividends are qualified dividends for US purposes where the treaty's conditions are met — generally yes for dividends from Canadian public and private corporations — taxed at preferential rates); interest codes go to Schedule B as interest; rent codes go to Schedule E (the gross rent, with the expenses the Canadian section 216 return claimed also deductible on Schedule E under US rules, and US depreciation computed on the US basis); estate and trust income codes go to the lines their character dictates (with the foreign-trust reporting the trust guides cover where a Canadian trust distributed to a US person); and CPP and OAS, if they appear on an NR4 (they usually appear on their own slips — the NR4(OAS) and the CPP T4A(P) equivalent for non-residents), go to the Social Security line, since the treaty taxes them as Social Security benefits for a US resident, with the provisional-income inclusion rules applying. Currency conversion: the gross amount and the tax withheld are converted at the rate for the payment date (or the annual average for periodic payments, consistently applied — the IRS accepts either for income received throughout the year, with the Treasury's published rates as one accepted source), and the same rate is used for the income and the tax withheld on the same line. The tax withheld is the second decoding step, and the largest source of error: the non-resident tax withheld is Canadian tax — a foreign income tax paid to Canada — and it goes on Form 1116 as a foreign tax credit (passive category for dividends, interest, rents, and most pension income under the current basket rules — the pension income's basket is analyzed under the general/passive rules for foreign pensions), never on the 1040's federal income tax withheld line (line 25), which is for US withholding reported on US forms; a preparer who enters the NR4's withholding as US federal withholding claims a refund of tax the IRS never received, which the IRS's matching catches as a discrepancy and reverses with interest and possible penalties — the most common NR4 error in this corridor. The credit's amount is the Canadian tax actually paid and not refundable: where the NR4 shows 25% withheld on income the treaty caps at 15% (a missing NR301 — the Part XIII guide), the creditable amount is the 15% the taxpayer was legally obligated to pay, and the excess 10% is recovered from Canada by a refund claim (Form NR7-R), not credited on the 1040 — the IRS's position that voluntary or refundable foreign tax is not creditable; where a section 216 or 217 election produced a Canadian refund of part of the withholding, the creditable amount is the net Canadian tax after the election. The third decoding step is the treaty: RRSP and RRIF income taxed by Canada at 15% on periodic payments is creditable against the US tax on the same distributions, with the US taxing the distribution net of basis recovery — the Form 8833 disclosure is not required for the credit itself (the RRSP-deferral procedure covers the treaty position), but the treaty's periodic-payment rate underlies the creditable amount; dividends withheld at 15% are creditable against the US tax at qualified-dividend rates, which at 15-20% plus NIIT roughly matches the credit — a near wash for most taxpayers; and rent withheld under the section 216 election's net computation is creditable against the US tax on the Schedule E net income. The three errors, named: entering Part XIII withholding as US federal withholding (the refund-of-nothing error); reporting RRSP/RRIF gross amounts as fully taxable without basis recovery (overstating income for anyone with non-deductible-for-US-purposes contributions); and crediting the 25% withheld when the treaty rate was 15% (claiming a credit for tax the taxpayer can recover from Canada). The workpaper that prevents them: per NR4 line — payer, income code and type, currency, gross amount, conversion, the 1040 destination, the withholding, the treaty rate that should have applied, the creditable amount (the lesser of withheld and treaty-rate tax, net of any Canadian refund or election), and the Form 1116 basket. The Canadian-side follow-up the NR4 also triggers: an NR4 showing 25% where 15% applies means an NR301 is missing at the payer — deliver it, file the NR7-R for the excess, and calendar the three-year renewal; an NR4 for rent means the section 216 return is due (or was filed — reconcile the credit to it); an NR4 for a lump-sum RRSP withdrawal means the section 217 election should have been tested (the 217 guide).

Key takeaways

• The income code decides the 1040 line: pension and RRSP/RRIF codes to lines 5a/5b with basis recovery; dividend codes to Schedule B as qualified dividends; interest to Schedule B; rent to Schedule E with US expenses and depreciation; CPP/OAS to the Social Security line.
• The tax withheld is a foreign tax credit on Form 1116 — never US withholding on line 25. Entering it as US withholding claims a refund of tax the IRS never received and triggers a matching reversal with interest.
• Creditable means legally owed and not refundable: 25% withheld where the treaty caps at 15% → credit 15%, recover the excess from Canada by NR7-R; a section 216 or 217 refund reduces the creditable amount to the net Canadian tax.
• Convert consistently: payment-date or annual-average rates, the same rate for the income and the withholding on each line.
• The treaty underlies the amounts: 15% on periodic RRSP/RRIF and pension payments and on dividends; the credit roughly offsets the US tax on qualified dividends and applies against the US tax on distributions net of basis recovery.
• The NR4 is also a Canadian to-do list: 25% on a line means a missing NR301 and an NR7-R; a rent line means a section 216 return; a lump-sum RRSP line means the 217 test.

The NR4 workpaper

Per line: payer; income code and type; currency; gross amount and conversion; 1040 destination (5a/5b with basis recovery, Schedule B, Schedule E, Social Security line); tax withheld and conversion; treaty rate that should apply; Canadian refund or election adjustment; creditable amount; Form 1116 basket. Totals into Form 1116 by basket. Canadian follow-ups listed (NR301, NR7-R, 216, 217). One page per year, and the page is the answer to the IRS matching notice that the 1042-S-style reporting of Canadian income sometimes generates.

Worked example

A retired couple in Scottsdale receive four NR4 lines: a RRIF payment (code for RRIF, C$36,000 gross, C$5,400 withheld — 15% with an NR301 on file); Canadian bank interest (C$3,000 gross, C$750 withheld — 25%, no NR301 at the bank); Canadian dividends (C$8,000 gross, C$1,200 withheld — 15%); and rent from a Kelowna condo (C$24,000 gross, C$6,000 withheld — 25% of gross, no NR6). The workpaper: the RRIF to lines 5a/5b — gross converted, taxable amount reduced by the basis recovery computed from their non-deductible-for-US contributions, the C$5,400 to Form 1116 (the pension's basket per the rules); the interest to Schedule B, with the creditable amount 0% (the treaty rate for arm's-length interest) — the C$750 is recovered from Canada by NR7-R, and an NR301 goes to the bank; the dividends to Schedule B as qualified dividends, the C$1,200 to Form 1116's passive basket; the rent to Schedule E with US expenses and depreciation, and the creditable amount set to the net Canadian tax after the section 216 return (filed that spring — the 216 computation on net income produced a refund of most of the C$6,000, so the credit is the small residual, not the withholding). Their prior US preparer had put all four withholding amounts (C$13,350) on line 25 as federal withholding — the IRS's matching reversed it two years later with interest — and had reported the RRIF gross as fully taxable. The workpaper's version: correct income, correct credits, an NR7-R refund of C$750 from Canada, a section 216 refund on the rent, and an NR301 that ends the 25% on interest going forward.

Official sources

The CRA explains that the NR4 slip reports amounts paid or credited to non-residents of Canada that are subject to Part XIII withholding, showing for each income type the income code, the gross amount, and the non-resident tax withheld, in the currency indicated on the slip. — Canada Revenue Agency, NR4 Statement of Amounts Paid or Credited to Non-Residents of Canada, https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/nr4.html

The IRS explains that "you can carry back for one year and then carry forward for 10 years the foreign tax you can't claim" for the current year, and that the credit is limited to the U.S. tax on foreign-source income figured separately for each category on Form 1116. — Internal Revenue Service, Topic No. 856, Foreign Tax Credit, https://www.irs.gov/taxtopics/tc856

Practitioner note

The NR4 is the slip US preparers most reliably misread, and the misreading is expensive in one specific way: Part XIII withholding entered as US federal withholding, claiming a refund of tax the IRS never received. Our NR4 workpaper decodes each line by income code, routes it to the right 1040 line with basis recovery where it applies, credits only the treaty-rate tax that was legally owed, and lists the Canadian follow-ups — the missing NR301, the NR7-R, the section 216 return — that the slip's own numbers reveal.

See also: For how to put US income on a Canadian T1, see how to put US income on a Canadian T1; and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the NR4 processing engagement — line-by-line decoding to 1040 destinations, basis recovery for RRSP/RRIF income, the Form 1116 credit computed on the treaty-rate tax net of Canadian refunds, and the Canadian follow-up actions the slip triggers. See cross-border pricing or book a call.