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My sister has a taxable brokerage account with Interactive Brokers and invested in GE stocks (which collapsed, resulting in a massive capital loss written off on Line 132 of Schedule 3 on her T1 return). However, I did not realize that the W8BEN form was not filled, therefore she faced 30% withholding (should be 15% under the Canada-US tax treaty) for dividends received.

T5 box 15 = 772.84
T5 box 16 = 231.85

So, the amount that is overwithheld ($115.92) automatically appeared on Line 232 of her T1 as "other deductions", but is this all she is going to get--a tax deduction for the amount paid, but not a tax refund? Is there a way to make the IRS refund the amount? Thank you.

In other words: My sister is a non-resident alien living in Canada and has no ties to the United States. She has US sourced qualified dividend income subject to 30% withholding, which should be 15% withholding under the US-Canada tax treaty. So, does she get a refund from the IRS for the excess tax paid, or is this a non-refundable withholding, for which only a tax deduction is available on the Canadian side? So, no point in filing a 1040NR?

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As far as I can see, the phrase "non-refundable withholding" doesn't return any hits on Google (there are plenty of pages involving some or all of those words, such as non-refundable credit, but not that exact phrase). I'm not a tax lawyer, but I really don't think there is such a thing. File a 1040NR, calculate the tax owed, then report the withholding as tax paid. Tax owed minus tax paid is then your payment due (or if negative, refund). You could also just wait until a later year where you owe money (i.e. have less withholding than your tax liability), then file a Schedule 5 and claim the excess withholding from 2018 towards the outstanding amount in the later year (there may be a time limit on this, if so, I don't know what it is, but I'd be very surprised to find it to be less than three years). Money that is withheld is money that the IRS has received towards tax. You can think of it as every time you have a tax liability, the amount of liability "consumes" the corresponding amount of withholding. If there's not enough withholding to cover the liability, then you owe a further payment at the end of the year. If there is withholding left over, then that money is "in your account" so to speak: it's money that available either for further liability or for a refund.

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If -- absent the massive capital loss -- she would have been due a US$500 refund from the IRS, why go through this two-step complication?

  1. Receive a US$500 "check" from the IRS.
  2. The IRS sends her another US$116.

Much simpler for them to just send her US$616.

Or am I completely misunderstanding you?

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  • If I've read OP correctly, she doesn't (net) owe the IRS anything, they (net) owe her. But if it's a (non-refundable) deduction, the IRS may (believe that it does) not owe her anything.
    – Kevin
    Mar 9, 2019 at 4:10
  • @Kevin I'll edit the answer.
    – RonJohn
    Mar 9, 2019 at 4:12
  • @RonJohn My sister is a non-resident alien living in Canada and has no ties to the United States. She has US sourced qualified dividend income subject to 30% withholding, which should be 15% withholding under the US-Canada tax treaty. So, does she get a refund from the IRS for the excess tax paid, or is this a non-refundable withholding, for which only a tax deduction is available on the Canadian side? So, no point in filing a 1040NR?
    – user2213307
    Mar 9, 2019 at 4:20
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    @user2213307 I added your comment to your question. If you think it detracts from the question, feel free to remove it.
    – RonJohn
    Mar 9, 2019 at 5:22
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    @RonJohn I'm probably misunderstanding your answer, but the woman has no reason except this extra withholding to file a US tax return. I think OP is asking if she has to file a US tax return in order to be refunded the extra withholding.
    – mkennedy
    Mar 9, 2019 at 18:19

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